2.4.1 - national income Flashcards
What does wealth represent?
The value of assets owned by a household, including houses, shares, and bonds
What does income represent?
The reward to households that flows from employing the four factors of production, measured over a period of time
What does the equation ‘output = expenditure = income’ signify
All three measures are interconnected and represent the same circular flow of income
What does national income refer to?
The income paid by firms to households in return for factors of production
How is national expenditure calculated?
C [consumer spending] + I [investment] + G [GOV spending] + (X-M) [net exports]
What does national output represent?
The value of the flow of goods and services produced in an economy in a year
What are the three ways of measuring the level of economic activity in this model?
National output, national expenditure, and national income
How can firms and the government also inject money into the economy?
Firms and the government inject money through investing in capital goods
What is international trade?
Imports from households flowing to exports in firms
What is the balance of trade?
Difference between the level of imports and exports
How to foreign markets impact the economy?
Foreign markets impact the economy by adding money through exports (X) when foreigners buy local products and withdrawing money through imports (M) when locals buy foreign products.
What is investment?
Investment is spending money on capital goods by firms to aid the production of goods and services.
It is also an injection into the circular flow of income that increases the capital stock of the economy to raise the productivity of the economy and shift out the LRAS curve
What is savings?
Savings is disposable income that is not spent on goods and services.
How do financial services affect the economy?
Financial services withdraw money when consumers or producers save (S) and inject money through investment (I).
What are transfer payments?
Transfer payments are taxes used to pay households in the form of benefits and welfare.
What is a budget deficit?
A budget deficit occurs when government spending exceeds government revenue (from taxation and other activities) in one fiscal year.
What is budget surplus?
When GOV revenue exceeds GOV spending in one fiscal year
What does GOV do with money in the economy?
The government withdraws money through taxation from households (T) and injects this same money through spending (G)
Why is the two-sector model considered too simplified to represent the actual economy?
It does not account for government and financial services’ roles in the economy.
What is meant by ‘enterprise’ in the context of factors of production?
The willingness and ability to take risks to combine the other factors of production to make a product or service
What is meant by ‘capital’ in the context of factors of production?
All the man-made resources that are used to produce goods or services in the future, such as machines, factories, and offices
What is meant by ‘labour’ in the context of factors of production?
All production human effort, both physical and mental, paid and unpaid
What is meant by ‘land’ in the context of factors of production?
All the natural resources used in production such as raw materials, minerals, land, and produce of the sea
What constitutes real flow in the circular flow of income model?
Goods and services from firms to households and factors of production (land, labour, capital, enterprise) from households to firms
What constitutes money flow in the circular flow of income model?
It refers to factor income from firms to households and consumption expenditure/revenue from households to firms
Factor income:
* Wages earned by labour
* Rent earned by owners of land
* Interest earned by lenders of capital/financial assets
* Profits earned by entreperneurs/business owners
What are the components of the most basic form of the circular flow of income model?
- Two sector economy: households and sellers
- Money flow
- Real flow
What are exogenous variables?
Variables that influence the model but are determined by factors outside the model
What are endogenous variables?
Variables that are explained within a model
What does the circular flow of income model illustrate?
The flow of income between the household, firm, financial services, government, and international trade sectors (the economic growth/GDP can be measured)
