2.4.1 - National Income

Question 1

What is the circular flow of income

Answer 1

The flow of goods and services between households and firms

Question 2

What’s the difference between a basic circular flow model and a circular flow model with an external trade sector

Answer 2

• Circular flow model with an external trade sector includes exports and imports
• imports are a leakage and exports are an injection into the circular flow

Question 3

What is income

Answer 3

Income is a flow of money going into factors of production

Question 4

What is original income

Answer 4

Income from jobs, private pensions and interest from savings

Question 5

What is gross income

Answer 5

Original income and cash (welfare) benefits

Question 6

What is disposable income

Answer 6

Gross income minus direct taxes

Question 7

What is post tax income

Answer 7

Disposable income minus indirect taxes

Question 8

What is the difference between money and real income

Answer 8

• income is money received as payment for work
• money income measures income at current prices - nominal income
• real income means income adjusted for inflation, real income measures true purchasing power of someone’s income
• real income is measured at constant prices s

Question 9

What’s the formula to convert between money and real values

Answer 9

Real value = (nominal value / current price index) x 100

Question 10

What is wealth

Answer 10

The value of stock of assets owned by someone or society as a whole

E.g…
• savings in bank accounts
• ownership of property
• shares/stocks in businesses