National Income

Question 1

Wealth

Answer 1

A stock Concept which refers to the total value of assets in an economy at any given time
Wealth effect - effect on incomes or spending when asset values change

Question 2

Income

Answer 2

Refers to the amount of income earned during a period of time, flow concept

Question 3

Circular flow of income

Answer 3

Households to firms- factors of production
Firms to households- goods and services
Injections - investment, government spending , exports
Withdrawals- savings, tax, imports
If injections> withdrawals the economy will grow

Question 4

Causes of actual economic growth

Answer 4

Shift outwards in AD
Increase in consumption, government spending, investment, x-m
Increase in AS

Question 5

Causes on increased potential economic growth

Answer 5

Discovery of new natural resources
Increased investment
Increased size of the labour force
Increased productivity

Question 6

Constraints on economic growth

Answer 6

Labour market problems- shortage of skilled labour, fixes= increased immigration, high birth rates
Access to credit- if banks do not loan or interest rates are extremely high investment decreases
Deficiency in infrastructure-poor water, energy, transport, communication
External factors- global recession, fear of terrorism

Question 7

Difference between positive and negative output gap

Answer 7

Positive is when economy is working above trend, this can come from people working extra hours, not possible in the long term
Negative is when economy is growing below trend, meaning there is spare capacity in the economy

Question 8

Characteristics of a boom

Answer 8

High income, high consumption,higher tax revenue, falling unemployment, inflation due to outwards shift of AD

Question 9

Characteristics of recession

Answer 9

Falling income and consumption, improvement in the balance of trade, rising unemployment, decreasing inflation, lower tax revenue

Question 10

Benefits of economic growth

Answer 10

Consumers- increased income and wealth, people feel confident and can afford to save
Firms- increased profits
Government- as incomes are rising so does tax revenue, cooperation tax also rises due to increase profits
Current and future living standards- people are richer so feel better, consume more
Government spend more on increasing living standards for everyone

Question 11

Negatives of economic growth

Answer 11

Income inequality
Opportunity cost- in the short term living standards could drop if resources are used in production of capital goods instead of consumer goods
Environmental problems- co2 emissions
Inflation
Monopoly power- large firms take over smaller ones
Increased stress and social dislocation- working longer hours
Balance of payments - more imports, less likely to export

Question 12

Injections into the economy

Answer 12

Exports
Goverment spending
Invesrment

Question 13

Withdrawls from the economy

Answer 13

Imports
Taxation
Savings

Question 14

Circular flow of income

Answer 14

firms pay households for factors of production
Households give firms resoruces ( labour)
Households pay firms for goods and services
Firms give households goods and sevice

Question 15

outwards shift of AD in classical LRAS

Answer 15

AD shift out causes an increase in price and output, this additional output leads to a positive output gap and over employment
over employment causes firms to bid wages up in order to attract the best workers increasing production costs causing SRAS to move inwards back to the original level of output just at an inflated price

Question 16

outwards shift of AS in classical LRAS

Answer 16

equilibrium pint where AD = LRAS (vertical)
if LRAS shifts outwards price level decrease and output increases
classical economist prefer supply side policies over demand side policies

Question 17

multiplier equation

Answer 17

1/MPW = multiplier

MPW + MPC = 1

Question 18

what is the multiplier

Answer 18

is a factor that shows the change in GDP in comparison to an initial injection

Question 19

marginal propensity to withdraw components

Answer 19

marginal propensity to tax, save, import

Question 20

characteristics of a boom

Answer 20

real GDP is rising at a faster rate than the long run trend of economic growth
falling unemployment, rising real incomes, consumption, higher tax revenue
if boom is caused by AD high inflation as well
shortage of labour and raw materials as they are being used in production

Question 21

characteristics of recession

Answer 21

2 quarters of negative economic growth
this fall in GDP can be associated with: falling real incomes and consumption, an improvement in the balance of trade, rising unemployment, decrease in inflation ( lack of AD), budget deficit due to lower tax revenues