2.4 NATIONAL INCOME Flashcards
The Circular Flow
The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents.
National Income
Level of total output in an economy
National Output (O)
The value of flow of goods and services from firms to households.
National Expenditure (E)
The value of spending by households on goods + services.
National Income (Y)
The value of the income paid by firms to households in return for land, labour and capital.
The Simple Circular Flow Realism
The simple circular flow can be made more realistic with the addition of withdraws and injections.
Three Injections Into The Flow (not from households)
Investment - is spending my firms on new capital, equipment, factories, offices, machinery and stocks of goods + services.
Government Spending - spending by governments
Exports - spending on goods + services made in UK
Three Withdrawals
Saving - money not spent by households.
Taxes - taxes paid to government
Imports - is spending by households on foreign goods and services.
The Multiplier Theory
If there is an increase in an injection to an economy this can lead to an increase in national income greater than the initial injection.
John Maynard Keynes argued in his book, The General Theory of Employment, Interest and Money in 1936 that multiplier effect is the cause of this.
Definition Of Multiplier
The multiplier effect is the number of times bigger the rise in national income is than the increase in injections that caused it
MPC
Marginal propensity to consume = change in C / change in Y
MPW
Marginal propensity to withdraw
MPW Calculations
MPW = 1 - MPC
MPW = MPT + MPS + MPM
MPS
Marginal Propensity To Save (change in savings / change in income)
MPT
Marginal Propensity To Tax (change in tax / change in income)
