2.4 - National Income

Question 1

What is the circular flow of income?

Answer 1

Demonstrates how money moves from firms to households and back again in an endless loop

Question 2

What is the difference between income and wealth?

Answer 2

• Wealth is the total value of an individuals assets minus their liabilities e.g. savings and property.
• Income is a flow concept - the money or earnings that an individual or household receives regularly over a specific period, typically on a recurring basis,

Question 3

What are injections and withdrawals (circular flow of income)?

Answer 3

• Injections are variables in an economy that add to the circular flow of income (increase AD)
• Withdrawals are variables in an economy that leak out of the circular flow of income (decrease AD)

Question 4

Examples of injections and withdrawals

Answer 4

Injections- Investment (I), Government Spending (G), Exports (X)

Withdrawls- Savings (S), Taxation (T), Imports (M)

Question 5

Who owns the factors of production and what do the get in return for them?

Answer 5

Households and they receive factor payments such as rent, wages, profit, interest

Question 6

What is the impact of changes in withdrawals and injections?

Answer 6

• If injections exceed withdrawals, then the circular flow of income will expand. And so national income will rise.
• If leakages exceed injections, then the circular flow of income will shrink. And so national income will fall

Question 7

How do AS/AD diagrams show equilibrium real national output?

Answer 7

• The intersection between the AD and AS curves shows the equilibrium price level (vertical axis) and real national output (horizontal axis) of the economy.
• At a low price level, firms have little incentive to produce, but consumers are willing to buy.
• As the price level rises (inflation), AS rises and AD falls until equilibrium is reached

Question 8

What is the multiplier ratio?

Answer 8

The ratio of change in equilibrium real income to the injection that created the change

Question 9

What are the equations for the multiplier?

Answer 9

1/1-MPC or 1/MPW

Question 10

Whys is the multiplier important?

Answer 10

• The importance of the multiplier is that if there is any change in an economy, the final impact on incomes will be much greater than the initial impact.
• The greater the leakages, the smaller the multiplier

Question 11

What is the significance of the multiplier for shifts in AD?

Answer 11

• The larger the value of the multiplier, the greater the shift in AD
• An increase in leakages, for example because imports rise, will have a larger negative impact on AD, according to the size of the multiplier