2.4 national income Flashcards
withdrawals into the circular flow of income
-savings
-taxes
-imports
injections into the circular flow of income
-investment
-government spending
-exports
distinction between income and wealth
income - a flow of money that goes to the factors of production e.g wages, profits, dividends
wealth - a stock of assets e.g savings, shares, property, bonds
what is an injection
money which enters the economy in the form of government spending, investment and exports
what is a withdrawal
money which leaves the economy this can be from taxes, savings and imports
net injections
there will be an expansion of national output
net withdrawals
there will be a contraction of production so output decreases
equilibrium real national output
-the economy reaches a state where the rate of withdrawals = the rate of injections
-equivalent to the point where ad = as
price changes
-at a price above equilibrium, there will be excess supply
-at a price below equilibrium, there will be excess aggregate demand in the short run
shifts in ad
-if firms have less confidence or there is a recession, ad might shift inwards causing the price level to fall
-if ad increases the price level and level of national output both increase
the multiplier ratio
-the ratio of the rise of national income to the initial rise in ad
the multiplier process
-occurs when there is new demand in an economy
-leads to injection of more income in the circular flow of income leading to economics growth
-meaning more jobs created, higher average incomes, more spending and eventually more income created
marginal propensity to consume
-the proportion of each additional pound of household income that is spent
-higher the mpc the bigger the size of the multiplier
-governments can influence this by changing the rate of direct tax
marginal propensity to save
-the consumers mps plus mpc is equal to 1
-if consumers save more than they spend, the size of the multiplier will be small
marginal propensity to tax
-the proportion of each pound taxed by the government
-higher the rate of tax, the lower disposable income
marginal propensity to import
-if consumers spend income on imports rather then domestic goods and services this reduces the size of the multiplier as income is withdrawn from the circular flow of income
formula for calculating the multiplier
1 / 1-mpc or 1 / mpw*
*mpw = mps + mpt + mpm
significance or the multiplier to shifts in ad
-if there is lots of spare capacity, extra output can be produced quickly and at little extra cost
-this means as is elastic and the size of the multiplier will increase
-small increase in ad will lead to a large increase in national income
-best shown on the keynesian curve
reverse multiplier
-withdrawal of income from the circular flow of income which could lead to an even larger decrease in income for the economy
-could decrease economic growth and lead to a decline in the economy
