9.1 The circular flow of income Flashcards
Economic growth
in the short run an increase in a country’s output and in the long run an increase in a country’s productive potential
Output gap
a gap between actual and potential output
National income
the total income for an economy
Gross national income (GNI)
the total output produced by a country’s citizens wherever they produce it
Money GDP
total output measured in current prices
Real GDP
total output measured in constant prices
Shadow economy
the output of goods and services not included in official national income figures
Multiplier
a numerical estimate of a change in spending in relation to the final change in spending
Open economy
an economy that is involved in trade with other economies
Closed economy
an economy that does not trade with other economies
Circular flow of income
a simple model of the process by which income flows around the economy
Marginal rate of taxation
the proportion of extra income taken in tax
Marginal propensity to import
the proportion of extra income spent on imports
Marginal propensity to save
the proportion of extra income which is saved
Aggregate expenditure
the total amount spent in the economy at different levels of income
Average propensity to consume
the proportion of income that is consumed
Dissaving
spending financed from past saving or from borrowing
Saving
income minus consumption
Marginal propensity to consume
the proportion of extra income that is spent
Consumption
spending by households on goods and services
Disposable income
income minus direct taxes plus state benefits
Consumption function
the relationship between income and consumption
Saving function
the relationship between income and saving
Average propensity to save
the proportion of income that is saved
Investment
spending by firms on capital goods
Government spending
the total of local and national government expenditure
Net exports
exports minus imports
Injections
additions to the circular flow of income
Withdrawals
leakages from the circular flow of income
Paradox of thrift
where the fact of people saving more results in a fall in saving due to lower spending and income
Inflationary gap
the excess of aggregate expenditure over potential output (equivalent to a positive output gap)
Deflationary gap
a shortage of aggregate expenditure so that potential output is not reached (equivalent to a negative output gap)
Autonomous investment
investment that is made independent of income
Induced investment
investment that is made in response to changes in income
Accelerator theory
a model that suggests investment depends on the rate of change in income
