National income Flashcards
Explain how income flows between households and firms within a closed economy
- From firms to households. Firms three households for the use of the factors of production in the form of wages, rent, interests and profits. This payment is known as income.
- From households to firms households use their income to purchase goods and services produced by firms generating revenue for firms
What are withdrawals?
I’ll portions of income that I’ve taken out of the economy is circular flow, reducing the total economic activity. The main types of withdrawals are;
-Savings
-Taxes
What are injections?
Injections are money flowing into the circular flow of the economy and as a result of the circular flow of income increases. Examples of these are
- Investments.
- Government spending
Explain injections and withdrawals in an open economy
- Injections.
In an open economy, goods and services sold to other countries increase national income . (Money from exports). Along with the investments and government spending is, which can also be found in a closed economy. - Withdrawals.
In an open economy, goods and services purchase from other countries reduce national income (spending on imports) along with savings and taxes, which can also be found in a closed economy
Evaluate the implications of imbalances and balances between injections, and withdrawals
- When injections are equal to how to draw is, the circular flow of income is in equilibrium
- When injections are greater than withdrawals, there is economic growth
- When was Joe is a greater than injections economy is in disequilibrium and the economy contracts
Explain the multiplier effect in INJECTIONS
The multiplier effect refers to the phenomenon in which an injection of new money into the economy, generates a larger increase in national income and output than the initial injection.
The multiplier affect arises because an injection of new money, stimulate demand for goods and services, which, in turn increases the production of those goods and services, who then spend earnings on more goods and services, and so on
Explain the multiplier effect in WITHDRAWALS
The reduction in spending has a compounded negative effects. For instance, if how tall is Steve Moore, and spend less businesses, slower sales and me cut back on production or nay. After workers, this decreases income further leading to reduce spending and deeper cuts in production reduction on income and spending plan spiral leading to a larger overall contraction in economic activity.
Summarise what happens when injections exceed withdrawals.
Economic activity tends to increase, potentially leading to economic growth the multiplier effect and provides the impact of initial spending leading to broader economic expansion. This causes increased aggregate demand.
Summarise what happens withdrawals exceeds injections
Economic activity tends to decrease potentially leading to a recession the multiplier affect exacerbates the impact of reduced spending resulting in a more severe economic contraction. This causes aggregate demand to decrease.
Identify the four phases of the economic cycle through changes in the GDP
- BOOM. Real GDP of a country is growing rapidly.
-RECESSION. Real GDP slows down or becomes negative. - SLUMP. Real GDP hits its lowest level.
- RECOVERY. Real GDP starts to grow again
Distinguish between the four phases of the economic cycle
Boom- the moon phases when the economy is doing very well
Recession- a recession is when the economy starts to slow down
Slump - a slump is the lowest point in the economic cycle
Recovery - the recovery phase is when the economy starts to improve
During the boom what is experienced?
- High consumption levels as people are confident in spending
- Businesses, invest more due to high confidence and profit expectations
- Unemployment is low due to business is hiring to meet demand
- Government taxes are high due to increased economic activity
- Inflationary pressures are high as demand exceeds supply, causing higher prices
Explain what is experienced during recessions
- decrease in consumption as people become cautious about spending
- Decreases in investments as businesses cut back
- Increases in unemployment as companies lay off workers
- Decrease in government tax due to reduced economic activity
- Decrease in inflationary pressures as demand falls
Explain what is experienced during slumps
- very low consumption
- Very low investment
- Low inflationary pressures and possible deflation
-Low government tax revenue, leading to potential budget deficits - Very high unemployment as many people are laid off
Explain what is experienced during recovery
- consumption starts to increase as confidence returns
- Investment increases as businesses anticipate better times ahead
- Tax revenue increases as economic activity picks up
- Inflationary pressures begin to pick up
- Unemployment slowly decreases as companies begin to hire again
