Chapter 19 Flashcards
Leakages
where money flows out a circular flow in the form of savings, taxation and imports
Injections
where money flows into a circular flow in the form of investment, government spending and exports
Injections (government)
the government spends money on goods and services. For example, it might spend on the provision of public goods, and has to pay to carry out government obligations. What are the other imports?
Injections (exports)
Foreign residents buy goods and services produced in the home economy. From an economic point of view, these are exports of goods and services which are associated with the inflow of expenditure from the rest of the world. What are the other imports?
Injections (investment by firms)
frims undertake expenditure when they buy capital goods, such as machinery, factory buildings or transport equipment. This is seen as an investment as it involves obtaining goods that will be used for future production. What are the other imports?
Leakages (taxes raised by the government from households)
The government raises taxes in order to finance its spending, these include direct taxes such as income tax and indirect taxes such as VAT and customs duties. What are the other leakages?
Leakages (spending on imports from the rest of the world)
Residents in a domestic economy buy goods and services from abroad, in the form of imports. This is a leakage from the system because simply it is an expenditure that is not going on home-produced goods. What are the other leakages?
Leakages (house hold savings)
The savings activity carried out by households also affects the circular flow of income as income is saved instead of b being spent on goods and services. What are the other leakages?
There is a balance is an overall economy when?
Planned injections are equal to planned leakages
What is Gross Domestic Product (GDP)
The total level of economic activity carried out In a given economy during a given period
What are the 3 ways of calculating GDP
By measuring: National Income, National Output, National Expenditure
How to measure National Income
Y (income) = w (wages) + i(investment) + r(rent earned on land) + p(profits earned on entrepreneurial talent). It estimates the way households earn their income. The balance between reward and labour(wages/salaries), capital (interest like on a house), rent, enterprise (profits) and so on.
How to measure National Expenditure
expenditure = C(consumption) + I(investment) + G(goverment spending) + (X - M)(Exports - Imports). It describes how resources are being used.
How to measure National Output
= O(what is produced) - values of goods/services used up in producing these outputs (inputs or intermediate consumption) + T(taxes on products e.g. VAT) - S(subsidies)
What is Real GDP
The measure of total economic activity carried out in an economy during period by residents living on its territory, adjusted to price changes.
Aggregate Demand
The total amount that economic agents wish to spend
What is the formula for Aggregate Demand
AD = C + I + G + (X-M)
What is consumption
the use of goods and servives to satisfy wants - in the circular flow this is represented by consumer expenditure
What is disposable income
the income that households have to devote to consumption and savings, taking into account payments of direct taxes and transfer payments. This is influenced by the level of consumption
Other influences of consumption
Wealth of a houshold
Further knowledge that might affect consumption
It doesn’t only depend on current income alone, consumption also depends on the permanent income hypothesis. depends on the income they expect to receive in a time period. Lifetime incomes… Interest rates as they affect whether they can afford a loan to consume soothing such as a car or holiday or dinner out
What are interest rates
the cost of borrowing and the reward of lending
What is consumption function
The relationship between consumer expenditure and disposable income is a positive gradient. Though this is assuming other factors are constant certeris paribus, such as interest rate and expected inflation.
What is investment
in the circular flow, expenditure is undertaken by firms to add to the capital stock. It leads to an increase in the productive capacity of the economy. Such capital stock can be machinery, vehicles and equipment
Factors affecting investment
Interest rates - If interest rates are high, firms would be discouraged from investment as the cost of borrowing money to invest in capital stock will be higher.
If interest rates were low, a company is more likely to invest as the price of borrowing money is less. Therefore a company would spend more on investment. Also, profits can be used.
Inflation - Expectations for the future economy, inflation can be very damaging for an economy as if there is a high rate of inflation it can cause uncertainty, therefore discouraging investment. Though tough if inflation is low, and an improvement in business confidence then more investment would be undertaken at any given interest rate.
Why are expectations in an economy important
Both consumption and investment expenditures are affected by expectations. for example if expectations are pessimistic about the future course of the economy then there would be lower aggregate demand (households might save more), or firms may not invest as much if demand isn’t expected to grow in the future .
Factors affecting government expenditure
Economic times,
Factors affecting Net exports
Exchange rates (increase in exchange rates, pound is valued less makes increases imports and decreases exports), inflation
What is the aggregate demand curve
the relationship between the level of aggregate demand and the overall price level - shows all planned expenditure at any given possible overall price level
What is the wealth effect
an effect by which an increase in the average price level reduces the purchasing power and therefore the quantity of real output demanded
What shifts the aggregate supply curve in the long run
Technology advancements/increased investment in technology, changes in relative productivity, changes in education and skills, changes in government regulations, demographic changes and migration, competition policy
What shifts an aggregate supply curve in the short run
changes in costs of raw materials and energy, change sin exchange rates, changes in tax rates
what shifts an aggregate demand curve
change in real incomes and employment, changes in government spending taxation and borrowing, changes in monetary policy interest rates and supply of credit, changes in the external value of a country’s exchange rates, changes in the rate of economic growth of trading partner nations, and finally fluctuations in consumer and business confidence
What is the circular flow of income
A model of the economy that shows the movement of goods and services between households and firms and their corresponding payments in terms of money.
