Circular Flow Of Income Flashcards
Income flows
Between firms and households
Formula of circular flow of income
National output = national income = national expenditure
There are injections and…
…withdrawals from the flow of income
Injections
Export, investment and government spending
Withdrawals
Imports, savings, taxes
What effect do injections have on the circular flow
A multiplier effect
Wealth is
Different to income
Equation for MPC
Change in C/change in Y
Equation for MPS
Change in S/Change on Y
MPW=
MPS+MPT+MPM
MPC+MPW=
1
Factors that determine the marginal propensity to consume?
Income levels
Interest rates
Consumer confidence
Propensity is…
…the tendency to behave in a particular way
High levels of income are…
…unlikely to spend any marginal income
E.g. £100 given to a millionaire unlikely to spend, but homeless person would spend all
The accelerator effect
An increase in national income results in a proportionately larger rise in investment
The accelerator effect examines the effect on levels of…
…investment from a change in economic output. Function of output known as induced investment
An injection causes the multiplier effect to help C….
…this effect is then “accelerated” by increased I. If national income is growing at an increasing rate then net investment will also grow, but even more rapidly (providing business confidence) leading to a rise in real GDP
What may cause large fluctuations in the trade cycle when interacted with each other?
Multiplier and accelerator
When may firms not need to invest, but what could encourage this?
1) When firms have spare capacity, no need for I to increase to meet the increased AD
2) May be encouraged by government subsidies
