2.4 National Income Flashcards
what is the circular flow of income
a model to show how money flows between households and firms
what is the definition of national income
the value of the output of an economy over a period of time
what do injections do in an economy
add money to the circular flow of income and increase its size
what are the types of injections
increased government spending (G)
increased investment (I)
increased exports (X)
what do withdrawals/leakages do in an economy
remove money from the circular flow of income and reduce its size
what are the types of withdrawals
increased savings by households (S)
increased taxation by the government (T)
increased imports (M)
what is the multiplier effect
when an injection causes a final increase in national income much larger than the initial injection’s value
what idea is the multiplier process based on
one individual’s spending is another’s income
what is the definition of marginal propensity to consume (MPC)
the proportion of additional income that is spent
what is the equation for MPC
MPC =∆C / ∆Y
what is the definition of marginal propensity to save (MPS)
the proportion of additional income that is saved
what is the equation for MPS
MPS =∆S / ∆Y
what is the definition of marginal propensity to tax (MPT)
the proportion of additional income that is paid in tax
what is the equation for MPT
MPT =∆T / ∆Y
what is the definition of marginal propensity to import (MPM)
the proportion of additional income that is spent on imports
