2.4 - National Income Flashcards
Circular flow of income
A model that illustrates how money, goods, and services move between households and firms in an economy
Households in the circular flow of income
Households provide factors of production (labor, land, capital) to firms and receive income (wages, rent, profit)
Firms in the circular flow of income
Firms produce goods and services, which households buy, creating expenditure
Income
The money received by individuals, households, or businesses from various sources, such as wages, rent, interest, and profits, over a period of time, meaning it is a flow concept
Wealth
The total value of an individual’s or economy’s assets, including property, savings, investments, and other valuables, minus any liabilities (debts), meaning it is a stock concept
Injections
Additional spending that enters the circular flow of income, increasing aggregate demand, which includes investment, government spending and exports
Withdrawals
Money that leaves the circular flow of income, reducing aggregate demand, which includes savings, taxes and imports
Multiplier process
Idea that an increase in AD because of an increased injection (exports, government spending or investment) can lead to a further increase in national income
Multiplier ratio
The factor by which a change in an injection (investment, government spending, or exports) leads to a larger change in national income
Marginal Propensity to Tax
The proportion of an additional unit of income that is paid as tax
Formula for Marginal Propensity to Tax
Change in taxes / Change in income
Marginal Propensity to Import
The proportion of an additional unit of income that is spent on imports
Formula for Marginal Propensity to Import
Change in imports / Change in income
Formula for the multiplier
- 1 / 1 - Marginal Propensity to Consume
- 1 / Marginal Propensity to Withdraw (Marginal Propensity to Save + Marginal Propensity to Tax + Marginal Propensity to Import)
