chapter 6 Flashcards
Circular Flow of National Income
inner flow (households<>firms) :
- factor payments
- consumption of domestically produced g&s (C)
withdrawals/leakages (from households) :
- saving (S)
- net taxes (T)
- import expenditure (M)
injections (to firms) :
- investment expenditure (I)
- government expenditure (G)
- export revenue (X)
Economic agents
- firms
- households
- financial markets
- governments
- other countries
Circular Flow equilibrium
national output = national income = national expenditure
total injection = total withdrawal/leakages
Aggregate Demand (AD) definition
the total value of domestically produced final g&s demanded by all economic agents at each price level in a given time period
Factors affecting Consumption Expenditure (C)
- gvt. policies
- expectations
- changes in i/r
- accumulated wealth and current debt position
- income & wealth distribution
- lifestyle & attitudes
Factors affecting Investment Expenditure (I)
- changes in i/r
- expectations
- cost & efficiency of capital equipment
- prices & availability of imputs
- technological progress
- gvt. policy
- political stability
- level & availability of skills
Factors affecting Government Expenditure (G)
- gvt. policies
Factors affecting Export Revenue (X) & Import Expenditure (M)
- income (at home & abroad)
- relative prices
- relative quality of g&s
- exchange rate
Autonomous Changes definition
Changes in non-income & non-price factors leading to a change in AD
Aggregate Supply (AS) definition
the total value of domestically produced final g&s that firms would like to produce at different GPL
Factors affecting Short-Run Aggregate Supply (SRAS) ONLY
- change in cost of production/imput prices
- short-term supply shocks
Factors affecting both Short-Run and Long-Run Aggregate Supply (SRAS & LRAS)
- quantity of resources
- quality of resources
- technology
The Multiplier Effect
- the autonomous change in AD triggers a multiplier/reverse multiplier effect
- the rationale of muliplier, k, is based on the proposition that expenditure generates income and income generates expenditure
- this cycle repeats at each successive and at each successive round, the change in income becomes smaller and smaller due to leakages in the form of savings, taxes and imports
- this multiplier process ends when withdrawals = injection and the economy return to equilibrium
- this leads to a more than proportionate increase/decrease in RNY
Factors affecting magnitude of change in National Income
- size of initial change in AD
- size of multiplier
- initial state of the economy
Limitations of the Multiplier Principle
- does not measure actual increase in real output levels
- does not take into consideration of the impact of interest rates
- the multiplier of a country might be small due to its economy
