2.4 National Income Flashcards
What is the circular flow of income?
A model of the economy which shows the flow of goods and services and their payments around the economy between households and firms
What are injections?
Where money flows into the circular flow of income through, investment, government spending and exports
What are withdrawals?
Where money flows out of the circular flow of income through, savings, taxation’s and imports
What are the 3 injections into the circular flow of income?
- investment
- government spending
- exports
What are the 3 withdrawals from the circular flow of income?
- imports
- saving
- tax
How does economic growth occur?
When injections are bigger than withdrawals
How does GDP fall in the economy?
When withdrawals are bigger than injections
What is income?
The amount that is earned during a period
What is wealth?
An accumulation of assets, such as property or shares
In the circular flow of income, what should be equal?
Total expenditure should be equal to total income and total output
Where does the equilibrium point occur in a macro-economy?
The equilibrium point should equal the point of real national output
What is the multiplier ratio?
The rate of change in national output compared to the injection that caused it
How do you calculate the multiplier?
1 / MPW
What is the MPM?
Marginal Propensity to Import
What is the MPT?
Marginal Propensity to Tax
What is MPW?
Marginal Propensity to Withdraw
How do you calculate the multiplier using the marginal propensity to consume?
1 / (1-MPC)
What is the MPS?
Marginal Propensity to Save
MPW is equal to what?
MPW = MPS + MPT + MPW
A positive multiplier?
An injection will cause economic growth
A negative multiplier?
An injection will cause a fall in real. GDP
A large, positive multiplier would have what effect on the economy?
An injection would lead to a big increase in real GDP
A large multiplier ratio, will have what effect on the shift of the AD curve?
A large multiplier ratio will shift AD significantly more to the right than a smaller multiplier ratio
