How the economy works - C10

Question 1

what is national income?

Answer 1

flow of new output produced by an economy in a particular time period

Question 2

what is real national income?

Answer 2

actual value of goods and services that are produced

Question 3

what is nominal national income?

Answer 3

flow of output at the current price level within the economy

Question 4

what does the level of national income indicate?

Answer 4

the living standards within the country

Question 5

what is the rate of change?

Answer 5

economic growth/decline within the economy

Question 6

what is the rate of change used for?

Answer 6

Used to compare statistics with other countries

Question 7

what does national income equal?

Answer 7

national output

Question 8

what does national output equal?

Answer 8

national expenditure

Question 9

what are the 3 names for national income?

Answer 9

national output
national income
national expenditure

Question 10

what is a measure of economic output in the economy?

Answer 10

national income

Question 11

what is income? (calculated)

Answer 11

add together all of the incomes received by factors of production

Question 12

what is income approach?

Answer 12

adds factor incomes to factors of production

Question 13

what is output?

Answer 13

adding total goods and services within economy

Question 14

what is output approach?

Answer 14

adds the ‘value added’ by each of the industries within an economy (agriculture, financial…)

Question 15

what is expenditure?

Answer 15

how factor incomes end up being spent on goods/services in the economy

Question 16

what are the factor incomes?

Answer 16

wages and profits

Question 17

what is expenditure approach?

Answer 17

consumption + investment + gov spending + (exports – imports) = AD

Question 18

what is a closed economy?

Answer 18

economy with no international trade

Question 19

describe the circular flow

Answer 19

firms provide income to households in return for labour/factors. Households pay consumers (profit) in return for goods

Question 20

what are real flows?

Answer 20

generates money, flows of income, expenditure

Question 21

what markets does the circular flow cover (for just firms/households)?

Answer 21

goods and factor market

Question 22

what is the factor market?

Answer 22

firms demand factors of production supplied by households

Question 23

what is the goods market?

Answer 23

households demand goods/services supplied by firms

Question 24

what is saving?

Answer 24

income which is not spent

Question 25

what is a withdrawal?

Answer 25

a leakage of spending power out of the circular flow of income

Question 26

what is investment?

Answer 26

a total planned spending by firms on capital goods produced within the economy

Question 27

what is an injection?

Answer 27

spending entering the circular flow of income

Question 28

what is equilibrium national income?

Answer 28

income at which withdrawals from the circular flow of income = injections into the flow

Question 29

what is the other definition equilibrium macro? (AD/AS)

Answer 29

where AD = AS

Question 30

is equilibrium national income the same as income full employment?

Answer 30

no

Question 31

when is national income at equilibrium?

Answer 31

planned saving = planned investment S = I

Question 32

what is planned saving?

Answer 32

planned withdrawal of spending

Question 33

what is planned investment?

Answer 33

planned injection of spending into flow

Question 34

what happens when withdrawal > injection?

Answer 34

net leakage

Question 35

what happens when there's a net leakage?

Answer 35

output and income falls

Question 36

what happens when withdrawal < injection?

Answer 36

net injection

Question 37

what happens when theres a net injection?

Answer 37

output and income rises

Question 38

what is full employment income?

Answer 38

the level of income when the economy is producing on its PPF with no spare capacity

Question 39

what does saving/hoarding do?

Answer 39

causes a decrease in aggregate demand

Question 40

what is an open economy?

Answer 40

an economy open to international trade

Question 41

what are exports?

Answer 41

are where people that live in other countries buy from goods produced in the UK

Question 42

what are imports?

Answer 42

are where people in the UK buy goods produced in other countries

Question 43

what are the withdrawals out of circular flow?

Answer 43

saving, tax, imports

Question 44

what is the formula (in letters) for withdrawal?

Answer 44

S + T + M > I + G + X

Question 45

what are the injections into the economy?

Answer 45

investment, government spending, exports

Question 46

what is the formula (in letters) for the injections?

Answer 46

S + T + M < I + G + X

Question 47

when does national income not rise or fall?

Answer 47

saving + tax + imports = investment + government spending + exports

Question 48

what is Keynes' theory if there is deficient aggregate demand?

Answer 48

If planned saving (household) > planned investment (firms) = deficient AD causes economy to shrink as it falls

Question 49

how does Keynes propose to fix deficient aggregate demand?

Answer 49

increasing gov spending when the private sector isn’t spending enough

Question 50

what is a free market approach to deficient aggregate demand?

Answer 50

When AD falls --> rate of interest falls, restores quality between saving/investment

Question 51

what is an economic model?

Answer 51

small scale replica of real world events (simplified)

Question 52

how are models made?

Answer 52

Keeps the essential details and uses maths and algebra

Question 53

what are some dangers of using models?

Answer 53

can be over simplified, cannot explain the real world properly, lots of assumptions are made when making models, may provide conflicting events/stories as the model can be interpreted in many different ways

Question 54

when are models used in economics?

Answer 54

used to predict likely events

Question 55

what is empirical testing?

Answer 55

branch of the subject econometrics -> using real world evidence to test weather a theory is correct

Question 56

what was the Philip's machine?

Answer 56

machine used to predict the national income in the 1950's was within 4% each time (accurate for the time)