Circular flow of income Flashcards
Real GDP def?
The monetary value of the total output of an economy with the effects of inflation removed
Nominal GDP def?
The monetary value of the total output of an economy that has not been adjusted for the effects of inflation
Difference between income and wealth?
Wealth accounts for value within possessions whereas income is the actual money received by worker
Define circular flow of income?
Movement of money between firms, households, government and trade
What are the four factors within the circular flow of income?
Households
Firms
Government
Trade
What is another name for leakages?
Withdrawals
Provide an example of a leakage?
An individual decides to reduce their spending now to increase the amount of savings they have in the bank - this represents money leaving the economy to sit in a bank
What do injections do?
Add money to circular income
injections economics example?
if the government decides upon expansionary fiscal policy and increases government spending
How do we measure GDP output method?
Goods and services produced within an economy
How do we measure GDP income method?
Factor incomes such as savings, incomes and taxation
What does GDP stand for?
gross domestic product
What is gross domestic product (GDP)?
total monetary value of all the finished goods and services produced within a country in a specific time period
How do we measure GDP expenditure method?
Investment
Consumer spending
Gov spending
Net imports (imports-exports)
AD=?
C+I+G+(X-M)
What consists of the two sector circular flow of income model?
Firms and households
what are the six assumptions in the two sector circular income model?
- The economy consists of two sectors: households and firms.
- Households spend all of their income (Y) on goods and services or consumption (C). There is no saving (S).
- All output (O) produced by firms is purchased by households through their expenditure (E). no-disequilibrium
- There is no financial sector.
- There is no government sector.
- There is no overseas sector.
Who carries out the investment in the two sector circular income model?
There are NO injections in the two sector model
Why are savings ‘income induced’?
Because many people divert some income towards savings. More income - > more saved
What is the concept of equilibrium national income?
National income is in equilibrium when planned Saving = planned Investment
Example of equilibrium national income?
If savings are hoarded or are funds being saved that can be lent for others to spend. that means that a fraction of income is not spent.
However, if all savings are lent, via banks for firms and consumers to spend, planned saving may end up equalling planned investment.
Multiplier effect def?
when an initial injection into the circular flow causes a bigger final increase in real national income
MPC (marginal propensity to consume) DEF?
How much of an income a person will use in consumption eg. paid a pound and use 40p on goods and services
MPC formula?
change in spending/change in income
