Circular flow of income Flashcards
What does national income measure
The flow of new output produced by an economy within a specific time frame
What does nominal national income measure
The flow of output an the current price level
Ways to measure flow of output
Income - sum the factor incomes to the factors of production
Output- add up the value added by each industry to the economy
Expenditure- use AD equation
Flow of income is between
Households and firms
Closed economy
One with no international trade , represented by the simple circular flow diagram
If planned saving equals planned investment then what happens to national income
National income is in equilibrium
Full employment income
The income when the economy is producing on its possibility frontier with no spare capacity
What can savings cause to aggregate demand
A deficit of aggregate demand because a fraction of income isn’t spent. This reduces the demand to buy the output the economy is producing , firm as don’t sell us much, so reduce output and national income falls
If all savings are lent e.g to banks or other consumers what happens to national income
National income stays in equilibrium
Withdrawals from the circular flow of income
Saving , taxation , imports
Injections to the circular flow of income
Investments , gov spending, exports
Reflationary policies
Policies which increase AD , with the intention of increasing real national output and employment
Why does the AD line slope downwards
Because at lower price levels , exports become more price competitive in the international market leading to an increased line of spending and therefore increased AD.
What does the upward slope of the AS line assume
- all firms aim to maximise profits
-in the short run, the cost of producing extra units of output increases as firms produce more output.
LRAS - long run aggregate supply
Real output able to be supplied when the economy is working on its production possibility frontier .
