[2.4] National Income

Question 1

What is the difference between income and wealth?

Answer 1

Income is a flow of money that usually goes toward factors of production (e.g. rent income, wages to labour, or interest payments, e.t.c.).

Wealth is the total value of assets and money held by a person/organisation at a given point in time.

Wealth is static, whereas income is a ‘flow’.

Question 2

What are the injections into the circular flow of income?

Answer 2

• Exports
• Government spending
• Investment into firms

Question 3

What are the withdrawals out of the circular flow of income?

Answer 3

• Savings
• Taxes
• Exports

Question 4

When is the economy operating at an equilibrium in terms of injections and withdrawals?

Answer 4

When the rate of withdrawals = rate of injections

Question 5

What is the equilibrium of real national output?

Answer 5

This is the point where Aggregate Demand = Aggregate Supply - the point of intersection.

Question 6

What is the multiplier ratio?

Answer 6

The ratio of the rise in national income to the initial rise in aggregate demand.

In other words, the number of times a rise in national income is larger than the initial injection into AD (e.g. increased consumer spending, increased government spending).