2.4 national income - definitions Flashcards
The extended circular flow model.
The flows of income and spending in a whole economy. Made up of consumer expenditure or consumption (C) and total factor income payments (Y) flow from firms to households (wages, rents, profits/dividends and interest).
Injections
Additions to investment (I), government spending (G) or exports (X) that boost the circular flow of income (increase Aggregate Demand).
Withdrawals
Increases in savings (S), taxes (T) or imports (M), reducing the flow of income that lead to a contraction/shrinking of output (decrease in Aggregate Demand).
Investment
Spending by firms on capital goods, used to increase their future production. An injection in the circular flow.
Exports (X)
Goods sold by UK firms to consumers in other countries. An injection into the circular flow.
Government Spending (G)
Spending by the Government. An injection into the circular flow.
Saving (S)
When households choose to save some of their disposable income. A withdrawal from the circular flow.
Imports (M)
Spending by UK households on Goods/service produced by foreign firms. A withdrawal from the circular flow.
Taxation (T)
UK government taxes UK households. A withdrawal from the circular flow.
The Multiplier
Measures the number of times an original injection into the circular flow (or an increase in AD) is multiplied to become an even bigger increase in national output or national income. Multiplier = 1 / 1 – MPC
MPC
How much of any increase in household incomes is consumed or spent. The higher the MPC, the bigger the multiplier in the economy.
MPS
The proportion of any increase in income that is saved instead of spent.
MPM
The proportion of any increase in income that gets spent on imports instead of domestically produced goods.
MPT
The proportion of any increase in income that gets taxed.
