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Macro Economics > 2.4 National Income > Flashcards

2.4 National Income Flashcards

1
Q

What is income ?

A
  • a flow on money earned by people
    1. wages & salaries
    2. profits flowing to shareholders
    3. rental income
    4. interest from savings
    5. money received from welfare benefits
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2
Q

What is wealth ?

A
  • a measure of the value of assets owned by someone
    1. savings held in bank accounts
    2. shares/ stocks in businesses
    3. property eg. land or houses
    4. wealth held in bonds
    5. pensions & life assurance schemes
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3
Q

Why is wealth important ?

A
  • wealth generates income for people who own land, shares and other assets in the form of rent, profits and dividends
  • an increasing proportion of GDP is earned in this way rather than through wages
  • wealth can be passed onto children
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4
Q

How is income and wealth distributed in the UK ?

A
  • between 2013 and 2018 income of the poorest 5th in the UK fell by 1.6% to £12,798 where as the average income of the richest 5th rose by 7.7% to £69,126
  • wealth is distributed even more unequally than income, the richest 10% own 44% of all the wealth, whereas the poorest 50% own just 9% of all wealth
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5
Q

What is the circular flow of income ?

A
  • a model of the economy in which major exchanges are represented as slows of money, goods and services
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6
Q

What are injections into the circular flow ?

A

brings money into the economy
- exports of goods & services (X)
- investments (I)
- govt spending on public services (G)

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7
Q

What are leakages of the circular flow ?

A

withdrawal of money from the economy
- savings (S)
- taxation (T)
- imports (M)

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8
Q

What is the aim for the circular flow ?

A

✅ want injections > leakages as the level of national income will rise
❌ do not want injections < leakages as the level of national income will contract
- when injections = leakages the circular flow is in balance

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9
Q

What is equilibrium national income ?

A
  • occurs when injections = leakages
    ie. I+G+X = S+M+T
  • can also say equilibrium occurs when AD=AS
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10
Q

How is the potential output of the economy measured ?

A
  • the application of statistical techniques that differentiate between short term ups and downs and long term trends
  • uncertainty as the gap can only be estimated
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11
Q

What shifts causes national income to fall ?

A
  • decrease in AD
  • decrease in AS
    ➡️ lower equilibrium
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12
Q

What shifts causes national income to rise ?

A
  • increase in AD
  • increase in AS
    ➡️ higher equilibrium
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13
Q

What is the multiplier effect ?

A
  • an increase in spending (C, I, G or net X) in an economy will lead to a larger overall increase in GDP than the initial change in spending
  • as the increase in spending as a result will lead to further increases in private spending throughout the economy
    ❗️ size of the multiplier effect depends on how quickly income leaks out from the circular flow
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14
Q

Why does the multiplier effect occur ?

A
  • a change in one of the components of AD can lead to a multiplied final change in the equilibrium level of GDP
  1. the multiplier effect comes about because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending “one person’s spending is another’s income”
  2. this leads to a bigger final effect on national output and also total employment in the labour market
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15
Q

What is the multiplier ratio ?

A
  • total change in real GDP = injection x multiplier
    ❗️ the bigger the multiplier, the bigger the change in real GDP
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16
Q

What is a positive multiplier ?

A
  • when an initial increase in an injection (or a decrease in a leakage) leads to a greater final increase in GDP
17
Q

What is a negative multiplier ?

A
  • when an initial decrease in an injection (or an increase in a leakage) leads to a greater final decrease in real GDP
18
Q

Formula for multiplier (closed economy w/no govt)

A

Multiplier = 1 / (MPS)
OR
Multiplier = 1 / (1-MPC)

19
Q

Formula for multiplier (closed economy w/government)

A

1 / (marginal propensity to save + marginal rate of tax)

20
Q

Formula for multiplier (open economy w/government)

A

1 / (propensities to save + tax + import)

21
Q

❗️Formula for multiplier

A

Multipler = 1/(1-MPC)
OR
Multipler = 1/(MPS + MPT + MPM)

22
Q

What does marginal propensity to consume mean (MPC) ?

A
  • what proportion of extra income is spent by consumers
23
Q

What does marginal propensity to save mean (MPS) ?

A
  • the proportion of additional income that is saved
24
Q

What does marginal propensity to import mean (MPM) ?

A
  • the proportion of additional income that is spent on imports
25
Q

What does marginal propensity to tax mean (MPT) ?

A
  • the proportion of additional income that is paid to the govt as tax
26
Q

What does marginal propensity to withdraw mean (MPW) ?

A
  • the proportion of additional income leaving the circular flow ie. the sum of the MPM, MPS, MPT
27
Q

Multiplier effect explained (example…)

A

❗️focus on the extra demand and factor incomes created + create chains considering the impact of an increase in AD

eg. the UK govt injects £200m in a project to build thousands of affordable new houses:
- building project injects £200m of extra demand and output into the economy
- many businesses benefit directly eg. building supply industries, engineers, architects ect
- constructing houses generates an extra flow of factor incomes, including higher wages and profits
- will the extra incomes stay inside the circular flow ?
- if so the multiplier effect is likely to be strong and the final impact on GDP could be large

28
Q

Importance of MPC ?

A

MPC = change in total consumption/ change in gross income
eg. if income increases £5,000 and spending rises by £4,000, the MPC= 4000/5000 = 0.8

29
Q

Importance of MPS ?

A

MPS = change in total savings / change in gross income
- if rise in gross income = £5,000 and rise in C = £4,000, change in saving = £1,000
- Therefore, MPS = £1,000 / £5,000 = 0.2

30
Q

When is the multiplier value high?

A
  • economy has plenty of spare capacity (i.e. a negative output gap) to meet higher AD
  • MPM and MPT is low
    (important leakages)
  • high MPC any extra income
    (i.e. a low marginal propensity to save)
31
Q

When is the multiplier value low ?

A
  • economy is close to it’s capacity limits e.g. during a boom phase of the economic cycle
  • high MPM ➡️ means extra demand leaks from circular flow
  • higher inflation causes rising interest rates which then dampens the other components of AD
32
Q

What is the accelerator effect ?

A
  • happens when an increase in national income (GDP) results in a proportionately larger rise in capital investment spending
  • ie. we often see a surge in capital spending by businesses when an economy is growing quite strongly

Macro Economics (13 decks)

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