Macro 4 - National Income Flashcards
Define the term income
Income is a monetary inflow over a period of time
Define the term wealth
Wealth is the total value of all the assets owned by individuals or firms in an economy
What is the circular flow of income?
The circular flow of income is the flows of spending and income within an economy
Explain what the circular flow of income describes
- Firms produce goods and services and all of these goods and services make up the national output
- The households in a country provide the factors of production used to produce the national output. The money paid to households by firms for these factors of production is the national income
- Households spend the money from the national income on goods and services firms create, the value of this spending is the national expenditure.
- All this creates a circular flow of income
Draw a diagram showing the circular flow of income
See page 130 in the revision guide
Define the term injections in terms of the circular flow of income
Injections are additions of money into the circular flow of income
What are the 3 injections into the circular flow if income?
- Government spending
- Investments
- Exports
Define the term withdrawals in terms of the circular flow of income
Withdrawals are leakages of money out of the circular flow of income
What are the 3 withdrawals out of the circular flow of income?
- Taxes
- Savings
Imports
What are the 3 withdrawals out of the circular flow of income?
- Taxes
- Savings
- Imports
What state is an economy in if injections into the circular flow of income and withdrawals are equal?
If injections and withdrawals are equal then the economy is in equilibrium
What state is an economy in if injections into the circular flow of income are greater than withdrawals?
If injections are greater than withdrawals this means that expenditure is greater than output so firms will increase output. As a result the economy will grow
What state is an economy in if withdrawals into the circular flow of income are greater than injections?
If withdrawals are greater than injections this means that output is greater than expenditure so firms will reduce output. As a result the economy will contract
What is the multiplier effect?
The multiplier effect is when a change in an injection or withdrawal leads to an even bigger change in real GDP
What does the size of the multiplier effect depend on?
The size of the multiplier effect depends on how quickly money from the initial injection leaks out of the circular flow of income.
The bigger the leakages the quicker money will leave the circular flow and the smaller the multiplier effect will be
What is the effect on a shift in aggregate demand caused by the multiplier effect?
A large multiplier effect causes AD to shift again even further to the right than the original shift. The bigger the multiplier the greater the shift in AD
Draw a diagram showing the initial rise is AD due to government spending and then a final rise in AD due to the multiplier effect
See page 10 in pack 4
Define the term marginal propensity to consume (MPC)
The marginal propensity to consume is the proportion of any extra income that is spent on the consumption of goods and services
Define the term marginal propensity to save (MPS)
The marginal propensity to save is the proportion of extra income that is saved
What is the formula used to calculate the multiplier from the marginal propensity to consume (MPC)?
Multiplier = 1 / 1-MPC
When calculating marginal propensities should money in calculations be in pounds or pennies?
Pounds
What is the formula used to calculate the Marginal propensity to consume?
MPC = Change in consumption / Change in income
What is the formula used to calculate the Marginal propensity to save?
MPS = Change in saving / Change in income
Define the term marginal propensity to withdraw (MPW)
The marginal propensity to withdraw is the proportion of any new income that is withdrawn from an economy
What is the formula for calculating the marginal propensity to withdraw (MPW)?
MPW = MPS + MPT + MPM
Define the term marginal propensity to save (MPS)
The marginal propensity to save is the proportion of any new income that is saved
Define the term marginal propensity to tax (MPT)
The marginal propensity to tax is the proportion of any new income that is paid as taxes
Define the term marginal propensity to import (MPM)
The marginal propensity to import is the proportion of any new income that is used to import goods
What must the sum of MPC and MPW always be equal to?
MPC + MPW = 1
What is the formula used to calculate the multiplier from the marginal propensity to withdraw (MPW)?
Multiplier = 1 / MPW
