2.4 National Income

Question 1

Define national income

Answer 1

The monetary value of the flow of goods and services during a time period

Question 2

Define the circular flow of income, expenditure and output

Answer 2

A model that shows the movement of goods and services between household and firms and their corresponding payments in money terms

Question 3

Define withdrawals

Answer 3

Where money flows out of the circular flow in the form of savings, taxes, and imports

Question 4

Define injections

Answer 4

Where money flows into the circular flow in the form of investment, government spending, and exports

Question 5

Define income

Answer 5

The amount earned during a period of time

Question 6

Define wealth

Answer 6

The accumulation of assets such as property or shares

Question 7

What do households provide to firms in the circular flow of income?

Answer 7

Factors of production (labour), money spent on goods and services

Question 8

What do firms provide to households in the circular flow of income

Answer 8

Goods and services, and wages; rent; profits

Question 9

Name 3 ways to measure the level of economic activity

Answer 9

National output, national income, national expenditure

Question 10

Is income or wealth a stock or flow concept?

Answer 10

Income - flow

Wealth - stock

Question 11

What happens to the economy if injections are greater than withdrawals?

Answer 11

Economy grows

Question 12

What happens to the economy if injections are less than withdrawals?

Answer 12

Economy shrinks

Question 13

What is the equilibrium of the circular flow of income?

Answer 13

When injections = withdrawals and national income remains the same

Question 14

Define the multiplier

Answer 14

When an increase in AD can lead to a further, greater increase in national income.

Question 15

How do you calculate the final change in GDP after the multiplier effect?

Answer 15

= Injection x multiplier

Question 16

How do you calculate the multiplier? (3 ways)

Answer 16

1/1-MPC or 1/MPS+MPT+MPM or 1/MPW

Question 17

Define the negative multiplier effect

Answer 17

When a withdrawal from the circular flow of income leads to an even larger reduction in GDP

Question 18

Name 2 causes of a low multiplier

Answer 18

No spare capacity (boom)

High inflation causes rising interest rates which decreases rate of growth of AD

Question 19

Name 2 reasons for a high multiplier

Answer 19

Spare capacity

Low MPM/MPT/MPS

Question 20

Name 4 criticisms of the multiplier

Answer 20

MPC changes over time and with different people (multiplier assumes it is constant)

Doesn’t allow for time lags

Ignores knock-on effects to investment

Other things aren’t constant e.g confidence meaning AD may not shift as expected

Question 21

Define MPM (marginal propensity to import)

Answer 21

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

Question 22

Define MPT (marginal propensity to tax)

Answer 22

The proportion of additonal income lost to taxes

Question 23

Define MPW (marginal propensity to withdraw)

Answer 23

The proportion of additional income that is withdrawn from the circular flow – the sum of the marginal propensities to save, import and tax