2.4 National Income

Question 1

What are the two main economic agents in an economy?

Answer 1

Households and firms

Question 2

Describe what the circular flow of income, expenditure and output is

Answer 2

A model of the economy which shows the movement of goods and services between households and firms and their corresponding payment in money terms.

Question 3

Draw a simple circular flow model

Answer 3

Search up

Question 4

Providing the circular flow of income is a closed system, what are three ways of measuring total amount of economic activity?

Answer 4

• Total incomes paid out by firms
• Total output that is produced
• Total expenditure

Question 5

How is the data published by ONS on GDP and why this way?

Answer 5

The ONS measures it using all 3 ways and calculates an average.
This is because all 3 values are different, as it is impossible to measure them with complete accuracy.

Question 6

What does the expenditure-side estimate of GDP tell us about the economy?

Answer 6

What proportion of society’s resources are being used for consumption

Question 7

What does the income-side estimates on GDP show us?

Answer 7

The balance between rewards of the different factors of production.

Question 8

What does the output-side estimate of GDP focus on?

Answer 8

The economic structure of the economy, such as the balance between primary, secondary and tertiary sectors.

Question 9

What are the main two causes of withdrawals and leakages in the circular flow?

Answer 9

• Economic activities of the government

- International trade

Question 10

What are the three main injections into the circular flow of income?

Answer 10

• Investment by firms
• Government spending
• Export revenue

Question 11

What are the three main withdrawals from the circular flow of income?

Answer 11

• Expenditure on imports
• Savings
• Taxation

Question 12

There are connections between injections and withdrawals, give an example of this.

Answer 12

Household savings go into financial markets and firms borrow from financial markets in order to finance investment expenditure.

Question 13

How does investment play an important role in the economy?

Answer 13

Firms add to the productive capacity of the economy, which enables economic growth to take place

Question 14

Define income

Answer 14

Income is a flow concept- the amount of money that is earned over a period

Question 15

What is wealth?

Answer 15

It is a stock concept, the accumulation of assets, such as property or shares

Question 16

What can inequalities in wealth lead to?

Answer 16

Inequality in income

Question 17

Define the multiplier

Answer 17

The ratio of a change in the equilibrium real income to an injection into the circular flow of income. Initial injection stimulates further rounds of spending.

Question 18

How is the multiplier calculated?

Answer 18

1/MPW

Question 19

How do you calculate the marginal propensity to withdraw (MPW)?

Answer 19

MPW = MPS + MPT + MPM
MPS= Marginal propensity to save
MPT= Marginal propensity to tax
MPM= Marginal propensity to import

Question 20

What is the alternative way of calculating the multiplier?

Answer 20

1/ (1 - MPC)

Question 21

Who pointed out the multiplier effect and what did he say about it?

Answer 21

John Maynard Keynes

One person’s spending is another person’s income.

Question 22

What does the size of the multiplier depend on?

Answer 22

The MPC in the economy, as if it is low, the multiplier will be smaller.

Question 23

What does the multiplier effect often lead to?

Answer 23

Equilibrium output increasing by a larger amount than the initial increase from the injection.

Question 24

Define the MPM

Answer 24

The proportion of additional income that is spent on imports of goods and services.

Question 25

Define the MPT

Answer 25

The proportion of additional income that is taxed

Question 26

Define the MPW

Answer 26

The proportion of additional income that is withdrawn from the circular flow.

Question 27

What may affect the size of the withdrawals and why?

Answer 27

The domestic elasticity of supply. If supply is inflexible and AD increases, supply will not be able to meet demand, so more of the additional income will instead be spent on imports, thus diluting the multiplier effect.