Macro 3.2.2 Circular flow of income Flashcards
define the difference between real and nominal income
real income is adjusting nominal income for inflation
define national capital stock
the stock of capital goods such as buildings and machinery that has accumulated over time
define circular flow
movement of money between households and firms
how mnay assumption does the basic circular flow of income consist of
consists of 6 assumptions - savings, taxation, imports, exports, gov spending, investment
circular flow diagram
what are the 4 factors of income
wages, rent, profit, interest
define injections and leakages and what are their components
injections - add money to the circular flow of income, which can lead to economic growth (investments, government spending, exports)
leakages/withdrawals - take money out of the circular flow of income, which can lead to to economic slowdown (savings, taxation, imports)
what are the components of aggregate demand
investment + consumer spending + gov spending + net exports
AD = C + I + G + (X-M)
different types of economic growth in the circular flow of income
injection > leakage = increase
injection < leakage = decrease
injection = leakage = macroeconomic equilibrium
if injections are greater than leakages, what happens to the size of the economy
the economy grows
methods to measure GDP
output: measure value of goods and services
income: measure total value of all factors of income
expenditure: I + C + G + (X-M)
what is the two sector circular flow of income model
- economy only consists of two sectors: household and firms
- housholds spends all income(Y) on goods and servcies or consumption(C) - no saving(S)
- all output(O) produced by firms is purchased by households through their expenditure(E) no-disequilibrium
- no financial sector
- no government sector
- no overseas sector
what is the concept of equilibrium national income
national income is in equilibrium when planned saving = planned investment
S=I
what happens to national income if S>I, S<I, S=I
- S>I rate of national income decreases
- S<I rate of national income increases
- S=I rate of national income is in equilibrium
what is the multiplier effect
- when an initial injection into the cirular flow causes a bigger final increase in real nation income
- additional amount of AD injected after inital injection
- one persons spending is another persons income
- injection demand may come from rise in exports, investment or gov spending
how to calculate the multiplier effect
- overall increase AD / initial injection
- 1 / 1 - MPC
define MPC and how to calculate
- every additional pound paid how much will be used for consumption
- change in spending / change in income
