2.4 National Income Flashcards
What is the circular flow of income?
This is a model where all income = output in an economy, and all money is traded back and forth between firms and households.
What is the distinction between income and wealth?
Income is a flow concept - the value of money earned over time. Wealth is stock, the total value of assets at any given time.
What are injections into the circular flow?
These flow into the circular flow, comprising of investment, government spending and exports
What are withdrawals (leakages) from the circular flow?
These flow out of the circular flow, and comprise of savings, tax and imports
What is the effects of injectons and withdrawals?
Net injections speed up the economy and increase its value, whereas net leakages slow it down and decrease it. If leakages = injections, there is no growth.
What is the equilibrium level of real national output? Does this ever change?
This is where AD = AS
It changes if AD or AS shifts, causing changes in price level as well as output.
What is the multiplier ratio?
This is the ratio of a change in real income (GDP) to an autonomous change (the injection). In other words, this expresses how much GDP increases by compared to the initial injection into the economy.
What is the formula for the multiplier?
1 1
________ OR ________
MPW 1 - MPC
What is MPW?
This is the marginal propensity to withdraw. It is a measure of how much of any extra pound is withdrawn.
What is the formula for MPW?
MPW = MPS (save) + MPT(tax) + MPM(import)
What is MPC?
This is the marginal propensity to consume, and is 1 - MPW, as it is how much of any extra pound earned is spent within the economy.
