2.4 National Income Flashcards
What are the two sectors in basic circular flow of income?
Firms, Households
How does a basic circular flow of income work?
Households own all the wealth and resources so provide land, labour and capital in return for rent, wages and profits, this money is used to buy goods and services produced by firms.
Difference between wealth and income?
Wealth is a stock asset whilst income is a flow.
What are the 3 injections to an economy?
1)Government spending(G)
2)Investment(I)
3)Exports(X)
What are the 3 leakages/withdrawals to an economy?
1)Taxes(T)
2)Savings(S)
3)Imports(M)
Why would a shift of the AD curve not affect long run national output and only affect price levels?
As the classical LRAS curve is perfectly inelastic and classical economists believe that the economy will always return to full employment level and therefore there will be no unemployment in the long run.
What is the multiplier process?
The idea that an increase in AD because of an increased injection can lead to a further increase in national income.
What is the multiplier determined by?
How much of an increase in income people will spend, the marginal propensity to consume.
What is the negative multiplier effect?
A withdrawal from the economy could lead to an even further fall in income, decreasing economic growth and possibly leading to a decline in the economy.
What is marginal propensity to consume?
The increase in consumption following an increase in income.
What is marginal propensity to save?
The increase in savings following an increase in income.
What is marginal propensity to tax?
The increase in taxation following an increase in income.
What is marginal propensity to import.
The increase in imports following an increase in income.
What is the multiplier formula?
Multiplier=1/(1-MPC)=1/MPW
What is marginal propensity to withdraw?
The increase in leakages following an increase in income.
