2.4 national income Flashcards
What is meant by the circular flow of income?
Model of the economy in which major exchanges are represented through flows, a money, goods and services, closed circuit
What is wealth?
Value of the total assets worth owned by an individual, firm or country. Stock concept and can be measured at a particular point in time. Stock of assets.
What is income?
Flow of money received by factors of production, measured over a period of time. Flow of money
Income and wealth?
There is a strong correlation between income and wealth
What is an injection?
Changes to the flow of income occur when there is a change in injections
What injections are there?
Investment, government spending, exports
How does investment lead to a increase in the circular flow of income?
Spending by businesses on capital, creates jobs and provides income for households, can then be spent
What might lead to a rise in investment?
Lower interest rates, greater business confidence, greater profit levels
How does government spending lead to a increase in the circular flow of income?
Spending by central and local government can create spending power for households can also go to educations, healthcare
What might lead to a rise in government spending?
Active decision to spend more, shift from a more free market government to a more interventionist government, increases spending and taxation
How does exports increase the circular flow of income?
Spending by foreign consumers on domestic goods and services, creates greater profits and requires greater production levels, creating more jobs
What might lead to a rise in exports?
Lower currency value, more competitive/ desirable, export goods, low inflation
What is a withdrawal?
Leakages out of the circular flow of income
What withdrawals are there?
Saving, taxation, imports
How does saving reduce the circular flow of income?
Money not spent by households, reduces the amount of money that households spend, reduces revenue/profits for firms
What might lead to a rise in savings?
Higher interest rates, lower consumer confidence
How does taxation reduce the circular flow of income?
Paid to the government by households and firms, taxation removes money from circular flows, income tax reduces disposable income, cooperation tax reduces net profits
What might lead to a rise in taxation?
Aim to reduce a budget deficit might involve higher taxes, free market government to interventionist government, increases taxation and spending
how does imports reduce the circular flow of income?
spending by households and firms abroad, money spent leaves the domestic circular flow of income, less revenue/profits for domestic businesses
what might lead to a rise in imports?
stronger domestic currency, imports appear cheaper, high inflation, goods less competitive
what is the multiplier effect?
an increase in one of the components of aggregate demand which leads to an even greater increase in national al income
what does the multiplier show?
the amount by which a change in an injection or leakage causes total income to change
what is the multiplier effect a result of?
income being re-spent in the economy having second round and successive effects
how is the multiplier calculated?
multiplier = change in real GDP / change in injection
1/1-MPC = 1/MPS+MPT+MPM= 1/MPW
when is the multiplier ratio relevant?
whenever there is a change in injection
what is MPC?
marginal propensity to consume, the proportion of extra income that is spent, rise in the MPC will increase the value of the multiplier
how will the changes in MPC affect the multiplier?
rise in MPC will increase the value of the multiplier
MPC and the multiplier
Higher the value of MPC, higher the value of the multiplier, greater impact of an increase of an injection on GDP
What is MPS?
Marginal propensity to save, proportion of an increase in income which is saved
MPS and the multiplier
Higher the value of MPS, lower the value of the multiplier, any change in injection has a smaller impact on overall level of spending
What is MPT?
Marginal propensity to tax, proportion of an increase in income which is taxed
MPT and the multiplier
Higher the value of MPT, lower the value of the multiplier, any change in injection has a smaller impact on the overall level of spending
What is MPM?
Marginal propensity to import, proportion of an increase in income which is spent on imports
MPM and the multiplier
Higher value of MPM means lower value of multiplier, any change in injection will have smaller impact on overall level of spending
What is MPW?
Marginal propensity to withdraw, proportion of extra income that is withdrawn
MPW and the multiplier
Rise in MPW will decrease the value of the multiplier
Equation for MPC?
MPC= change in consumption/ change in income
Equation for MPS?
MPS= change in saving / change in income
Equation for MPT?
MPT= change in tax/ change in income
Equation for MPM?
MPM= change in imports/ change in income
What’s the significance of multiplier for shifts in demand?
Change in any injections or withdrawals means that total effect on an economy as a whole will be much greater than original change, multiplier magnifies change, bigger the value of the multiplier
How can the multiplier effects have an impact on the future GDP of an economy?
Larger the value of the multiplier, greater the impact on national income
