2.4 National Income

Question 1

• Draw the Basic Circular Flow Model
• Draw Circular Flow with an external trade sector

Answer 1

• Household -> Firms: Land, Labour Capital (Factors of Production)
  Firms -> Household: Rent, Wages, Profit (Factor income - Income method)
  Firms -> Household: Output of Goods and Services
  Household -> Firms: Payment for Goods and Services (Expenditure Method)
• see diagram in textbook

Question 2

What factors are withdrawals from from the circular flow?

• What factors are injections into the circular flow?
• What’s the difference between Income and Wealth?

Answer 2

• Savings, Imports, Taxes (S.I.T)
• Government Spending, Investment, Exports (G.I.X)
• Income: a flow of money going to factors of production
  Wealth: the accumulation of assets

Question 3

• How does the Equilibrium National Income work?
• Effects from a fall in LRAS

Answer 3

• occurs when injections = leakages
• Natural disasters, political conflict, ageing population, persistent recession - negative net capital investment

Question 4

• What is the multiplier effect?
• What does this lead to?
• What is the formula to find the Multiplier?

Answer 4

• an initial change in an injection/leakage can have a greater final impact on equilibrium national income - “one person’s spending is another’s income”
• increased national income
• Multiplier = 1/MPS (to save)
  Multiplier = 1/1-MPC

Question 5

• Draw Multiplier Effect diagram
• What are Factors affecting the Multiplier Value
• Explain Evaluation of Multiplier

Answer 5

• see diagram in textbook
• MPC, Leakage, Degree of spare capacity, Time Frame
• Impossible to predict
  Time lag
  Sufficient spare capacity
  Injections can target the biggest MPC to increase multiplier value