2.4.1 - national income

Question 1

What does wealth represent?


Answer 1

The value of assets owned by a household, including houses, shares, and bonds

Question 2

What does income represent?

Answer 2

The reward to households that flows from employing the four factors of production, measured over a period of time

Question 3

What does the equation ‘output = expenditure = income’ signify

Answer 3

All three measures are interconnected and represent the same circular flow of income

Question 4

What does national income refer to?

Answer 4

The income paid by firms to households in return for factors of production

Question 5

How is national expenditure calculated?

Answer 5

C [consumer spending] + I [investment] + G [GOV spending] + (X-M) [net exports]

Question 6

What does national output represent?

Answer 6

The value of the flow of goods and services produced in an economy in a year

Question 7

What are the three ways of measuring the level of economic activity in this model?

Answer 7

National output, national expenditure, and national income

Question 8

How can firms and the government also inject money into the economy?

Answer 8

Firms and the government inject money through investing in capital goods

Question 9

What is international trade?

Answer 9

Imports from households flowing to exports in firms

Question 10

What is the balance of trade?

Answer 10

Difference between the level of imports and exports

Question 11

How to foreign markets impact the economy?

Answer 11

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.

Question 12

What is investment?

Answer 12

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

Question 13

What is savings?

Answer 13

Savings is disposable income that is not spent on goods and services.

Question 14

How do financial services affect the economy?

Answer 14

Financial services withdraw money when consumers or producers save (S) and inject money through investment (I).

Question 15

What are transfer payments?

Answer 15

Transfer payments are taxes used to pay households in the form of benefits and welfare.

Question 16

What is a budget deficit?

Answer 16

A budget deficit occurs when government spending exceeds government revenue (from taxation and other activities) in one fiscal year.

Question 17

What is budget surplus?

Answer 17

When GOV revenue exceeds GOV spending in one fiscal year

Question 18

What does GOV do with money in the economy?

Answer 18

The government withdraws money through taxation from households (T) and injects this same money through spending (G)

Question 19

Why is the two-sector model considered too simplified to represent the actual economy?

Answer 19

It does not account for government and financial services’ roles in the economy.

Question 20

What is meant by ‘enterprise’ in the context of factors of production?

Answer 20

The willingness and ability to take risks to combine the other factors of production to make a product or service

Question 21

What is meant by ‘capital’ in the context of factors of production?

Answer 21

All the man-made resources that are used to produce goods or services in the future, such as machines, factories, and offices

Question 22

What is meant by ‘labour’ in the context of factors of production?

Answer 22

All production human effort, both physical and mental, paid and unpaid

Question 23

What is meant by ‘land’ in the context of factors of production?

Answer 23

All the natural resources used in production such as raw materials, minerals, land, and produce of the sea

Question 24

What constitutes real flow in the circular flow of income model?

Answer 24

Goods and services from firms to households and factors of production (land, labour, capital, enterprise) from households to firms

Question 25

What constitutes money flow in the circular flow of income model?

Answer 25

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

Question 26

What are the components of the most basic form of the circular flow of income model?


Answer 26

• Two sector economy: households and sellers
• Money flow
• Real flow

Question 27

What are exogenous variables?

Answer 27

Variables that influence the model but are determined by factors outside the model

Question 28

What are endogenous variables?

Answer 28

Variables that are explained within a model

Question 29

What does the circular flow of income model illustrate?

Answer 29

The flow of income between the household, firm, financial services, government, and international trade sectors (the economic growth/GDP can be measured)