Circular flow of income Flashcards
What is national income?
refers to the income of an economy earned by all the workers and businesses over a period of time
What are the two types of variables?
flow and stock variables
What are flow variables
value depends on a period of time
What is a stock variable?
value is measured at a point in time
How can national income be calculated ?
- expenditure method
- income method
- output method
Explain expenditure method of measuring national income?
adding up all spending over a period of time
C + I + G + (X-M)
Explain income method of measuring national income?
adding up all incomes earned over a period of time:
- wages and salaries earned by those at work
- rent earned from those renting out land
- interest earned who invest capital in financial assets
- profits earned by companies
Explain output method of measuring national income?
adding up value of all output prodiced in the economy for a period of time for each sector of economy
What should all three methods of measuring national income be?
adds up to the same value
What does national income = ?
nation income = national expenditure = national output
What does real national income measure?
national income after removing the effect of price changes from its value
any increase in real income refers to increases in output and does not represent higher prices
What is nominal national income?
national income unadjusted for changes in prices
How do you calculate real national income?
nominal national income x (price level in Pyear / price level in Cyear)
How do you calculate real gdp?
nominal GDP x (price level in Pyear / price level in Cyear)
What are the uses of real national income?
- measure of how successful economy is (countries ranked by it)
- shows how well off a population is (national income per person)
- gov can estimate tax
What is the cicular flow of income?
a model of the economy where income and spending flow between households and firms
What are injections?
extra money placed into the circular flow of income
usually in form of investment by businesses
What are withdrawals?
money taken out of the circular flow of incomes
usually in form of household savings
What are the three injections?
investment, government expenditure, exports
What are the the three withdrawels from the circular flow of income?
- savings
- taxation
- imports
WHat do households give to firms?
consumption (buying goods and services)
what do firms give to households?
income (wages,rent)
What is macroeconomic equilibrium?
the level of national income where there is no tendency for the level to change
How will the circular flow of income stay in equilibrium?
planned injections is equal to planned withdrawels
I + G + X = S + T + M
What will happen if total injections are higher then total withdrawals?
national income will increase until a new equilibrium level of national income is reached
