Circular flow of income Flashcards
to produce the flow of national output, what must the economy posses?
a stock of physical capital goods, a stock of human capital, together with stocks of land and entrepreneurship. (factors of production)
examples of physical capital goods:
- roads
- airports
- telecommunications
- robots
- machinery
what is a stock variable
measured at one specific time, and represents a quantity existing at that point which has accumulated in the past
e.g. size of land owned, number of new employees
what is a flow variable
measured over an interval of time
e.g. new investment, national output, sales revenue
what is national capital stock?
stock of capital goods, such as buildings and machinery, in the economy that has accumulated over time. excludes consumer goods. national capital stock is part of national wealth.
what is national wealth?
stock of all goods that exist at a point in time that have value in the economy. consumer goods are a part of national wealth
what happens to the value of physical capital goods over time?
decreases due to physical depreciation, obsolescence or change in demand for the services of capital. worn-out capital reflects capital consumption. new investment is required to maintain or increase value of national capital stock, in order to produce more national output in the future.
what is investment?
expenditure by firms additional to the capital stock
what is net investment?
the extra investment needed to enlarge the capital stock
what is consumption?
total planned spending by households on consumer goods and services produced within the economy
what does consumption in the short-run mean
the easiest way to increase living standards is to boost current consumption
what does consumption in the long-run mean
a decision to sacrifice current consumption in favour of a higher level of future consumption means that more of today’s scarce resources go into investment or the production of capital goods, enabling the national capital stock to increase in size
difference between GNI and GDP
GNI is a measurement of a country’s income, which includes all income earned by a country’s residents and firms, regardless of where its produced. GNI takes into account income flows while GDP doesn’t.
GNP/GNI= GDP+ income from abroad- income sent abroad
what does national income measure?
measures the incomes received by labour and other factors of production
what does national output measure?
measures the actual goods and services produced by the economy
what does national expenditure measure?
measures the spending of incomes on goods and services
measuring national output:
national income= national output= national expenditure
what is circular flow model?
an economic model showing the flow of goods and services, the factors of production and their payments between households and firms within an economy
what is household expenditure?
payment that household make to buy goods and services
what is household income?
income of household from selling goods and services
what is revenue?
payment that firms receive from selling goods and services
what are costs of production?
payment that firms make to buy factors of production
what is withdrawal?
a leakage of spending power out of the circular flow of income into savings, taxation or imports
what is injection?
spending entering the circular flow of income as a result of investment, government spending and exports
when is national income in equilibrium?
when a total withdrawal is equal to total injection
savings + taxation + imports=
investment + government spending + exports
S+T+M=
I+G+X
shrinking circular flow=
if S+T+M>I+G+X, withdrawal is greater than injections a net leakage of demand out of the circular flow occurs
growing circular flow=
if S+T+M<i></i>
