2.4 National Income Flashcards
What is meant by circular flow of income?
A way of analysing the flows of money around an economy between households and firms
Accounts for injections and withdrawals
What is the difference between income and wealth?
Income is a flow of money E.g Wages,Benefits,Interest,Rent
Wealth is a stock of money E.g Savings,Shares,Property
How does Investment increase circular flow of income?
Spending by businesses on capital creates jobs and provides incomes for households
How does government spending increase the circular flow of income?
Injections from gov
Transfers such as benefits provide spending power for households
How does exports increase circular flow of income?
Spending by foreign consumers on domestic goods and services
How do savings reduce circular flow of income?
Money not spent by households and is therefore reducing profits and revenues for firms
How does taxation reduce circular flow of income?
Removes money from circular flow
e.g income tax and corporation tax
How do imports reduce circular flow of income?
Households and firms spend on goods/services from abroad
Define and give equations for the multiplier effect
An increase in one of components of AD which leads to an even greater increase in national income
1/1-MPC OR 1/MPW
What is MPC?
Proportion of extra income that is spent
How will changes in MPC affect the multiplier?
Rise will lead to more spending and greater return on injection
Vice Versa
What is MPS?
Proportion of extra income that is saved
What is MPT?
Proportion of extra income that is taxed
What is MPM?
Proportion of extra money that is spent on imports
What is MPW?
MPS + MPT + MPM
How will changes in MPW affect multiplier?
Rise in MPW will decrease value of multiplier and less return on injection
Vice Versa
How can multiplier effect impact future GDP of an economy?
Initial injection will boost AD and raise GDP
multiplier effect should mean overall impact on GDP is greater than injection
Size of multiplier determines impact
Rise in any of withdrawals will reduce multiplier
Explain how a negative multiplier effect can lead to downward spiral for an economy
Any initial withdrawal could lead to a reduction in multiplier effect and therefore there will be fewer jobs, fewer incomes and less spending
What is equilibrium real national output?
The economy reaches a state where the rate of withdrawals = the rate of injections
What is the multiplier ratio?
The rise of national income in relation to the initial rise in AD
