2.4 Natonal Income Flashcards
What is the multiplier and the ratio formula
A factor that measures how a change in one economic variable effects other related variables
K = 1 / MPW
K - Multiplier co-efficient
MPW - Marginal propensity to withdraw (Leakage)
What is the multiplier ratio and the multiplier process
The ratio of change in real income to the injection that created the change. Its based on the idea that one individual spending is another individuals income.
An increase in C immediately increases AD
- Store owners who have benefited from the extra consumption now have extra income
- They spend some of that income on goods / services
- Their expenditure is now income for the next tier of individuals
What des the size of the multiplier depend on
The size of withdrawals or leakages that occur during the process. The higher the leakages the smaller the multiplier
The initial injection shifts AD to the right
The multiplier can also work in reverse when injections are reduced
What factors impact the multiplier (4)
Unemployment
Economic growth
Inflation
Exchange rates
What are the marginal propensities
The proportion of the next additional money earned that a consumer saves, consumers, is taxed or purchased imports with.
They are calculated for economies and provide insights into how each additional money of income is alllocated
What is the MPC, MPS, MPT and MPM
MPC: The proportion of income (the margin) that will be spent on consumption rather than being saved
MPS: The proportion if additional income that is saved. If IR are high then C may not rise significantly as additional income may be saved rather than spent
MPT: The proportion of additional income that is paid in tax (Taxes are withdrawals). If tax rates are high then consumers will be deterred from spending or simply have less disposable income.
MPM: The proportion of additional income that is spent on imports. If we receive increases in disposable income, but this is spent on imported goods, then this would count as a withdrawal or leakage from the circular flow of income and national income would not rise as much as anticipated
What is the circular flow of income
An economic model showing the flow of goods and services, the factors of production and their payments between households and firms with the economy.
Explain the 4 steps of the simple model of circular flow
- Firms provide households with goods and services
- Households spend their income on the goods and services produced by firms
- Households also provide firms with factors of production: Land, Labour, Capital, Entrepreneurship
- In order to pay for these factors services, firms pay households rent, wages, interest and profit
What do households, businesses, government and external forces do / happen to them in the circular flow
Households: Receive income through wages and salaries from their jobs investments and they then buy goods and services supplied by firms. (Consumer spending)
Businesses: Hire land, labour & capital inputs when making products for which they pay wages and rent. Firms receive payments from consumers. (Creating revenues and profits)
Government: Collects taxes to fund spending on public services such as education, healthcare and defence. (State spending (government))
External sector: The UK buys imports from other countries and overseas businesses and consumers buy UK products. (Exports)
List 3 injections and 3 leakages in the circular flow
Injections:
- Investments
- Exports of goods and services
- Government spending
Leakages:
- Saving
- Imports of goods and services
- Taxation
How do leakages and injections work within the circular flow
Leakages: Not all income will flow from businesses to households directly. The circular flow shows that some part of household income will:
- Be put aside for future spending (savings)
- Be paid to the government in taxation (income tax)
- Be spent on foreign made goods and services (imports)
Leading to a multiplied contraction of production
Injections: They are additions to investment, government spending or exports so boosting the circular flow of income leading to a multiplied expansion of output.
- Capital spending by firms (investment eg new technology)
- The government (government expenditure eg NHS)
- Overseas consumer buying UK goods and sevices (UK export expenditure)
Define and explain wealth and income along with their relationship
Wealth is a stock concept
- Assets owned (buildings, savings, land)
- Human wealth (skills and education)
Income is a flow concept
- Money generated from wealth (wages, rent)
Income and wealth re correlated, there is a dependancy between them. As incomes flows from the stock of assets a nations income and wealth are directly correlated.
An increases in income will have a direct impact on wealth, providing the finance for investment. Investing in the productive capacity of the economy will increase the stock of physical assets, therefore increasing wealth.
This will lead to economic growth and higher income in the future.
