7.1 The circular flow of income Flashcards
What are the 3 methods of calculating national income within an economy?
Income Method
Output Method
Expenditure Method
How do you calculate national income through the expenditure method/How do you calculate expenditure?
C+I+G+(X-M)
Consumption (C)
Investment (I)
Government expenditure (G) - doesn’t include welfare benefits
Net exports (X-M)
How do you calculate national income through the income method?
Adding up all income earned over a period of time.
These can include:
Wages and salaries earned by those in work
Rent earned by those who allow their land and property to be used by others
Interest earned by those who invest capital in financial assets
Profits earned by companies trading goods and services
How do you calculate national income through the output method?
Totalling the value of all output produced in the economy for a period of time for each sector of the economy. Steps need to be taken to avoid double counting.
What is the difference between nominal and real national income?
Nominal does not take into account inflation as real takes into account inflation
How do you calculate real national income?
Nominal national income/average price level
How is short run economic growth measured?
Annual percentage change in real national output, real national income or real GDP
Technically, why are real national income and real GDP not the same variable?
Some UK national income comes from incomes earned outside the UK but still belonging to UK citizens.
What is GNI and what’s the difference between GNI and GDP?
Gross national income (real GNI) includes incomes from overseas assets. However, the difference between GDP and GNI is small and these terms are often used interchangeably.
Why is RNI useful? (3)
It measures how successful an economy is
It shows how well off the population is - incomes per person
It allows a government to see estimate how much can be collected in taxation - most taxes are placed on incomes and expenditure which are both measure of national income
What is the definition of 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 within an economy.
What’s the difference between an open and a closed economy?
In a closed economy there is no foreign trade and no government influence
Which means there is only 2 groups:
Households
Firms
What are the 4 steps of the simplified circular flow fo income?
1) Firms provide households with goods and services
2) Households spend their income on the goods and services produced by firms
3) Households also provide firms with factors of production:
Land, Labour, Capital & Entrepreneurship
4) In order to pay for these factor services, firms pay households rent, wages, interest and profit
What are the assumptions made about the simplified model of the circular flow of income? (4)
Households spend all their income on goods and services
Firms spend all their income on factors of production
There is no government
There is no foreign trade
What are the injections in the circular flow of income?
Government Expenditure
Investment
Exports
