2.4 National Income Flashcards
Definition: Equilibrium National Output
The level of output where aggregate supply in an economy is equal to the aggregate demand.
Injections vs Withdrawals
An injection is the addition of money and additional spending into the circular flow of income.
Exports (X), Government Spending (G) and Investment (I).
A withdrawal is the outflow of money from an economy that reduces the overall spending and demand in the CFOI.
Imports (M), Taxes (T) and Savings (S).
Definition: Circular Flow of Income
An economic model that illustrates how money moves throughout an economy and interacts between different economic agents in a closed loop (except from injections and withdrawals).
Forms of Injections into the CFOI
- Investment Expenditures by businesses on capital goods improves the productive potential and leads to higher output.
- Government Spending Expenditures by the government on public services and welfare that can impact both AD and AS, increasing output.
- Exports The sale of domestic goods and services internationally, causing money to flow into the economy.
Forms of Withdrawals from the CFOI
- Savings Money that households choose not to spend on consumption can be saved, taking money out of the CFOI and reducing demand.
- Taxes Money paid by households and businesses to the government which reduces disposable income for consumption/investment
- Imports Expenditures on foreign goods and servies that takes money out of the economy and doesn’t contribute to domestic production.
Definition: The Multiplier
The idea that a change in the amount of money in the CFOI changes income for businesses, a proportion of which would be spent, promoting multiple rounds of spending, further changing AD.
It is the idea that a small change has larger knock on effects on real output (GDP) depending on the size of the multiplier value.
The Multiplier Value
The multiplier value is the ratio of a change in GDP to the initial injection/withdrawal that brought it about.
The multiplier is inversely proportional to the marginal propensity to withdraw which impacts how much additional income would be spent.
The multiplier value k = 1/MPW or 1/(1-MPC)
The larger the multiplier value, the greater the change in AD.
Marginal Propensity to Consume (Definition and Factors)
The marginal propensity to consume (MPC) is the proportion of additional income that a household consumes rather than saves.
- Affected by factors that change consumer confidence and/or change the marginal propensity to withdraw.
Marginal Propensity to Save
(Definition and Factors)
The marginal propensity to save (MPS) is the proportion of additional income that a household saves rather than consumes.
* Affected by factors such as changes in demographic, consumer confidence and interest rates that change saving habits.
Marginal Propensity to Import
(Definition and Factors)
The marginal propensity to import (MPM) is the proportion of additional income that a household chooses to spend on foreign goods rather than domestic products.
* Affected by factors such as changes in exchange rates, trade barriers and regulation that change the accessibility/competitiveness of imports.
Marginal Propensity to Tax
(Definition and Factors)
The marginal propensity to tax (MPT) is the proportion of additional income that a household must spend on paying tax to the government and/or a local authority..
* Affected by factors such as changes in fiscal policy, tax bracket changes that change the amount of money that has to be paid.
Definition: Marginal Propensity to Withdraw
The proportion of additional income that is not consumed (i.e. spent on taxes, savings or imports).
MPW = MPT + MPS + MPM
MPW= 1- MPC
