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Economics > 2.4 national income > Flashcards

2.4 national income Flashcards

1
Q

What is meant by the circular flow of income?

A

Model of the economy in which major exchanges are represented through flows, a money, goods and services, closed circuit

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2
Q

What is wealth?

A

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.

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3
Q

What is income?

A

Flow of money received by factors of production, measured over a period of time. Flow of money

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4
Q

Income and wealth?

A

There is a strong correlation between income and wealth

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5
Q

What is an injection?

A

Changes to the flow of income occur when there is a change in injections

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6
Q

What injections are there?

A

Investment, government spending, exports

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7
Q

How does investment lead to a increase in the circular flow of income?

A

Spending by businesses on capital, creates jobs and provides income for households, can then be spent

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8
Q

What might lead to a rise in investment?

A

Lower interest rates, greater business confidence, greater profit levels

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9
Q

How does government spending lead to a increase in the circular flow of income?

A

Spending by central and local government can create spending power for households can also go to educations, healthcare

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10
Q

What might lead to a rise in government spending?

A

Active decision to spend more, shift from a more free market government to a more interventionist government, increases spending and taxation

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11
Q

How does exports increase the circular flow of income?

A

Spending by foreign consumers on domestic goods and services, creates greater profits and requires greater production levels, creating more jobs

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12
Q

What might lead to a rise in exports?

A

Lower currency value, more competitive/ desirable, export goods, low inflation

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13
Q

What is a withdrawal?

A

Leakages out of the circular flow of income

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14
Q

What withdrawals are there?

A

Saving, taxation, imports

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15
Q

How does saving reduce the circular flow of income?

A

Money not spent by households, reduces the amount of money that households spend, reduces revenue/profits for firms

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16
Q

What might lead to a rise in savings?

A

Higher interest rates, lower consumer confidence

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17
Q

How does taxation reduce the circular flow of income?

A

Paid to the government by households and firms, taxation removes money from circular flows, income tax reduces disposable income, cooperation tax reduces net profits

18
Q

What might lead to a rise in taxation?

A

Aim to reduce a budget deficit might involve higher taxes, free market government to interventionist government, increases taxation and spending

19
Q

how does imports reduce the circular flow of income?

A

spending by households and firms abroad, money spent leaves the domestic circular flow of income, less revenue/profits for domestic businesses

20
Q

what might lead to a rise in imports?

A

stronger domestic currency, imports appear cheaper, high inflation, goods less competitive

21
Q

what is the multiplier effect?

A

an increase in one of the components of aggregate demand which leads to an even greater increase in national al income

22
Q

what does the multiplier show?

A

the amount by which a change in an injection or leakage causes total income to change

23
Q

what is the multiplier effect a result of?

A

income being re-spent in the economy having second round and successive effects

24
Q

how is the multiplier calculated?

A

multiplier = change in real GDP / change in injection

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

25
Q

when is the multiplier ratio relevant?

A

whenever there is a change in injection

26
Q

what is MPC?

A

marginal propensity to consume, the proportion of extra income that is spent, rise in the MPC will increase the value of the multiplier

27
Q

how will the changes in MPC affect the multiplier?

A

rise in MPC will increase the value of the multiplier

28
Q

MPC and the multiplier

A

Higher the value of MPC, higher the value of the multiplier, greater impact of an increase of an injection on GDP

29
Q

What is MPS?

A

Marginal propensity to save, proportion of an increase in income which is saved

30
Q

MPS and the multiplier

A

Higher the value of MPS, lower the value of the multiplier, any change in injection has a smaller impact on overall level of spending

31
Q

What is MPT?

A

Marginal propensity to tax, proportion of an increase in income which is taxed

32
Q

MPT and the multiplier

A

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

33
Q

What is MPM?

A

Marginal propensity to import, proportion of an increase in income which is spent on imports

34
Q

MPM and the multiplier

A

Higher value of MPM means lower value of multiplier, any change in injection will have smaller impact on overall level of spending

35
Q

What is MPW?

A

Marginal propensity to withdraw, proportion of extra income that is withdrawn

36
Q

MPW and the multiplier

A

Rise in MPW will decrease the value of the multiplier

37
Q

Equation for MPC?

A

MPC= change in consumption/ change in income

38
Q

Equation for MPS?

A

MPS= change in saving / change in income

39
Q

Equation for MPT?

A

MPT= change in tax/ change in income

40
Q

Equation for MPM?

A

MPM= change in imports/ change in income

41
Q

What’s the significance of multiplier for shifts in demand?

A

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

42
Q

How can the multiplier effects have an impact on the future GDP of an economy?

A

Larger the value of the multiplier, greater the impact on national income

Economics (20 decks)

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