Chapter 7 - national income

Question 1

problems of using NI as an indicator of living standards

Answer 1

• Not all goods/services bought at market value
• No distinction between consumer/capital goods
• Economic growth (EG) through population growth
• EG creating non measured environmental problems
• EG may not reach the average person
• PL increase may = NI increase

Question 2

definitions of:
national income
gdp
gnp

Answer 2

NI = measure of goods and services produced in a year
GDP = market value of final goods and services produced within an economy
GNP = GDP + net property income (NPI) from abroad

Question 3

consumer spending equation

Answer 3

Consumer spending = a + bY

where a = autonomous consumption, b = marginal propensity to consume, Y = national income

Question 4

injections and leakages of circular flow

Answer 4

Injections into circular flow = investment spending, government expenditure

Leakages from circular flow = savings, taxation, imports

Question 5

macroeconomic equilibrium

Answer 5

Macroeconomic equilibrium is when E = Y, when injections = leakages

Question 6

reasons for fall in NI

Answer 6

• Reduction in planned expenditure = encourages firms to cut output and employment from lower AD
• Decrease in demand from increases in saving, tax, imports

Question 7

reasons for rise in NI

Answer 7

• Increase in planned expenditure
• Encourages firms to increase output and employment to meet higher AD
• Increase in demand from investment, government spending and exports

Question 8

mpc and autonomous consumption definition

Answer 8

mpc = a measure of the proportion of extra income that is spent on consumer goods

autonomous consumption = notdependent upon current level of income (savings, welfare benefits)

Question 9

investment spending

Answer 9

investment is spending on creating new assets for the economy

(doesn’t mean purchase of financial assets like shares)

Question 10

how does the economy influence investment

Answer 10

lower IR = higher I

because its cheaper to finance

Question 11

explain marginal efficiency of investment

Answer 11

only efficient to use capital to finance investment if the returns > cost of finance

so if cost of finance (IR) is lower = I rises

Question 12

what other factors affect investment

Answer 12

• increase in relative cost of labour compared to capital (pay rises)
• improved productivity of capital
• fall in price of capital goods
• expectations of higher demand for products in future

Question 13

what are the determinants of exports

Answer 13

• competitiveness of domestic industries
• income in foreign countries
• exchange rate

Question 14

multiplier

Answer 14

small increase in injections = bigger increase in NI

Question 15

multiplier formula

Answer 15

1 / 1 - MPC

Question 16

change in NI formula

Answer 16

1 / 1 - MPC x rise in injections