2.4 - National Income Flashcards
(45 cards)
What is national income?
National income is the total value of all the goods and services produced by a country in a year.
Illustrate the Circular flow of income between Households and firms
Goods and services flow from firms to households
Consumer expenditure flows from households to firms
Wages rent and dividends flow from firms to households
Factors of production (Capital, land, labour and enterprise) flow from households to firms
Define wealth
Wealth is the value of the total assets of worth owned by an individual, firm or country. It is therefore a stock and can be measured.
(stock of assets)
Define Income
Income is a flow of money received by factors of production, e.g. wages, rent, profit and profit. It is measured over a period of time.
What is the relationship between income and wealth?
There is a strong correlation. The ownership of wealth is able to generate income such as rent or interest. When there is a change in the value of wealth, there is an impact on peoples spending.
What is an injection?
Injections are additions to the circular flow of income.
What are the 3 injections to the circular flow of income?
1- Investment: an increase in capital stock (assets)
2 - Government expenditure: when the government spends money to provide goods and services.
3 - Exports: This is when businesses sell goods and services to other countries.
What is a withdrawal?
Withdrawals are leakages out of the circular flow of income.
What are the 3 withdrawals from the circular flow of income?
1- Savings: when people save money it means there is less spending in the current time period.
2- Taxes: When the government imposes taxes, money leaks out of the circular flow because it is no longer available to spend by consumers or businesses.
3- Imports: money flows out of the country, meaning income is withdrawn from the domestic circular flow.
What is the Equilibrium Real National Output?
The equilibrium real national output is the level of GDP where aggregate demand (AD) equals aggregate supply (AS). At this equilibrium, there is no tendency for the economy to change its output level; all produced goods and services are sold, and there is neither excess supply nor excess demand.
What are the characteristics Equilibrium Real National Output.
Price Stability: Prices are stable, with no inflationary or deflationary pressures.
Full Employment: The economy operates at full employment, meaning all available resources are utilized efficiently.
Sustainable Output: The output level is sustainable in the long run without causing imbalances.
What does an increase in AD do to the equilibrium position?
Results in a rightward shift of the AD curve.
Leads to a higher price level (inflation) and an increase in real national output.
What does a decrease in AD do to the equilibrium position?
Results in a leftward shift of the AD curve.
Leads to a lower price level (deflation) and a decrease in real national output.
What does an increase in AS do to the equilibrium position?
Results in a rightward shift of the AS curve.
Leads to a lower price level and an increase in real national output.
What does a decrease in AS do to the equilibrium position?
Results in a leftward shift of the AS curve.
Leads to a higher price level and a decrease in real national output.
What does the multiplier describe?
The multiplier describes the process by which a change in an injection (government expenditure, investment or exports) causes a more than proportionate change in national income.
How can the multiplier be calculated? (with RGDP and injections)
Multiplier = change in RGDP / change in injections
Explain the multiplier process
An initial increase in spending (e.g. government, investment, export demand) injects money into the economy. This spending becomes income for households and firms, who then spend a portion of this income. The subsequent spending generates additional income for others, continuing the cycle. Each round of spending is smaller due to withdrawals (savings, taxes, imports), eventually tapering off.
What is a real life example of the multiplier effect?
If the government spends $1 billion on infrastructure, this money pays workers and suppliers, who then spend their income on various goods and services, creating additional rounds of spending.
How does the Multiplier effect cause economic expansion?
The multiplier amplifies the effects of initial spending increases, leading to greater overall economic growth.
Job Creation: Increased demand for goods and services requires more labour, reducing unemployment.
Income Growth: Higher demand raises incomes, enhancing living standards.
How does the multiplier effect cause a contraction in the economy?
A reduction in spending can have a multiplied negative impact, leading to deeper recessions.
Increased Unemployment: Lower demand reduces the need for labour, increasing unemployment.
Decreased Income: Reduced economic activity leads to lower incomes and consumption.
Illustrate the multiplier effect on a Keynesian AS AD diagram.
Increase in AD from AD1 to AD2, then there is an additional increase from AD2 to AD3 thus showing the multiplier effect.
What is the estimated range of a value for the multiplier effect within the UK (from the IMF)
0.9 to 1.7
Why is the UKs multiplier relatively low?
Because the UK has a high marginal propensity to import.
