2.4 - National Income Flashcards
Give the three methods to measure GDP.
- Output method
- Expenditure method
- Income method
Define the circular flow of income.
The circular flow of income is a method involving the relationship between output, income and expenditure. It shows the circular flow of goods, services, payments and the factors around the economy.
O = I = E
What is the stock of money?
The stock of money is the money which flows around the economy from household to household in exchange for the produced goods from a household.
What are withdrawals (leakage)?
These are spending which doesn’t flow from households to firms.
What happens if the injections > withdrawals (leakage)?
This will cause expenditures > output, therefore, firms will increase their output which will cause income to also rise. This results in economic growth.
What happens if the injections < withdrawals (leakage)?
This will cause expenditures < output, therefore, firms reduce their output which will reduce income as well. The GDP will decrease as a result.
What happens if the injections = withdrawals (leakage)?
If injections are equal to withdrawals (leakage), then the expenditures now equal the total output produced. This results in equilibrium in the economy.
Define wealth.
Wealth is the stock of assets of monetary value.
What is income?
Income is the flow of earnings from employment (earned income) and investment (unearned income).
What is the multiplier ratio?
The multiplier ratio is the change in equilibrium real income to the injection that brought it about.
Define the multiplier.
The multiplier is where the injection into the economy leads to a even higher rise in national output than the initial injection.
What is positive multiplier?
A positive multiplier occurs when there is an increase in the injection into the economy, a decrease in the leakage, leading to a greater final increase in the real GDP.
What is negative multiplier?
A negative multiplier occurs when there is a decrease in the injection into the economy, an increase in the leakage, leading to a greater final decrease in the real GDP.
Describe the multiplier process.
The main principle of the multiplier process is that one person’s spending is another person’s income. For example if there is an injection into the export revenue of an economy, this can boost exports and AD. Some of the money made by businesses selling goods will go to the workers, and this can in turn increase incomes of the workers. With increased income, a proportion of the income is now spent in the economy while the rest is withdrawn from the circular flow of income. This causes a second rise in AD, leading to an upwards multiplier effect of the initial injection.
What is MPC?
The Marginal Propensity to Consume (MPC) is the change in consumption following a change in gross income (change in consumption / change in total income)
