2.4 National Income

Question 1

What’s the accelerator theory?

Answer 1

The theory that an increase in income over a period of time will increase investment

Question 2

What’s the acceleration theory equation?

Answer 2

I(t)=a(Y(t)-Y(t-1))
In the year ‘t’
a - acceleration coefficient, or the capital-output ratio: the ratio between how capital and output produced, so like the efficiency

Question 3

4 ways how economies become more interconnected (globalisation)

Answer 3

Proportion of international trade of an economy increases
ever-increasing ownership of assets (shares or loans) owned by foreign actors
increased migration
tech interconnection increasing

Question 4

primary income

Answer 4

net flow of profits, interest and dividends from production abroad

Question 5

dividends

Answer 5

profit to shareholders

Question 6

secondary income

Answer 6

mainly gov transfers to and from overseas organisations
consists of all transfers which are not capital, so invisibles

Question 7

What are the 3 injections into the economy?

Answer 7

Government spending (G)
Investment (I)
Exports (E)

Question 8

What are the 3 withdrawals out of the economy?

Answer 8

Savings (S)
Taxation (T)
Imports (M)

Question 9

Who believes in the multiplier and what is it?

Answer 9

Its Keynesian ideology. In John Maynard Keynes argued in his famous book that national income will increase more than what is invested, due to the multiplier.

Question 10

Marginal Propensity to Withdraw (MPW)

Answer 10

The proportion of the withdraws in the economy. (The 3 withdraws of the economy)
MPW = MPS + MPT + MPM
S=Save
T=Tax
M=import
MPW + MPC = 1

Question 11

Why might national income be inaccurate?

Answer 11

statistical inaccuracies
the hidden economy
the public sector is hard to calculate

Question 12

Purchasing power parties (PPP)

Answer 12

Money exchanged, even at the market exchange rate, will buy you different amounts of stuff in different countries.
E.g you could survive off £2 in Kenya
So there are purchasing power parties, that allow different currencies to buy the same amount of goods.
E.g if a €2 basket = £1 basket, then the purchasing power parties exchange rate is €2:£1

Question 13

What does withdrawals mean?

Answer 13

Leakages’ of national income in the circular flow

Question 14

What are the 2 types of inflation?

Answer 14

Demand-pull inflation
- When demand rises for a product, so equilibrium shifts price higher, leading to inflation
Cost-push inflation
- When costs increase, so firms put it on consumers, increasing price, leafing to inflation