National Income

Question 1

What is national income

Answer 1

National income is the total value of goods and services produced in an economy over a one year period.

Question 2

what does national income measure

Answer 2

It measures the rate of economic growth, when compared with the previous year.

Question 3

what is the real flow of national income

Answer 3

an economy consists of firms (producers) and households (consumers).

Households own the factors of production

Households provide these factors to firms in return for the goods and services these firms produce using these factors.

Question 4

what is the money flow of national income

Answer 4

Money flows between households (consumers) and firms (producers).

All households contain consumers. In return for providing factors of productions to firms these households receive monetary rewards

• in return for providing land they receive rent;
• in return for providing labour they receive wages;
• in return for providing capital they receive interest;
• in return for providing enterprise they receive profit.

This money is then spent by the households back to the firms in return for the goods and services consumed.

Question 5

what is the circular flow of national income

Answer 5

the circular flow of national income combines the real and money flows

Question 6

what are injections

Answer 6

Investment by firms, government spending and exports are all injections into the circular flow of income. This is money going into firms but was not earned by domestic consumers.

Question 7

what if the effect of an injection

Answer 7

injections have the effect of increasing the circular flow of income

Question 8

what are the kinds of injection

Answer 8

• Investment - is the term given to the spending by firms on capital, e.g. new plant or an extension to their factory. The main factor which determines the level of investment is interest rates. This is because firms usually need to borrow money to invest.
• Exports - is the term given to the value of goods and services demanded by firms and individuals overseas. The main factors which determine the level of exports is the price and quality of UK goods and services.
• Government - spending is the value of expenditure by the state in the economy. This is spending by central and local government. It includes public sector salaries and the building of NHS hospitals and is mainly determined by the policy of Government at that time.

Question 9

what is a withdrawal

Answer 9

A leakage is a withdrawal of funds from the circular flow. It is money which households have earned but does not return to firms in the form of consumer spending.

Question 10

what are the kinds of withdrawal

Answer 10

• Savings - is the term given to the amount of money a consumer does not spend from his income. The main determinants of savings are income and interest rates.
• Imports - is the term given to the amount spent by resident firms and individuals of a country on goods and services produced overseas. The main determinants are income levels and the price and quality of goods produced.
• Taxation - is the amount of revenue collected by central and local governments from consumers. This is mainly determined by the size of incomes and level of spending in the economy.

Question 11

what is the average propensity to save

Answer 11

The proportion of total income saved is known as the average propensity to save (APS). If someone earns £500 a week and a saves £50 their APS is 0.1.

Question 12

what is the average propensity to consume

Answer 12

The proportion of total income spent is known as the average propensity to consume (APC). If someone earns £500 a week and saves £50, spending £450, their APC is 0.9.

Question 13

what is the national income equlibrium

Answer 13

Equilibrium level of national income occurs when total injections into an economy are equal to the total leakages from an economy and total spending in the economy is equal to total income. This is a theoretical position which would rarely be achieved.

Question 14

what is real national income

Answer 14

Real national income is when national income has been adjusted to take account of inflation.

It is measured at constant prices.

An increase in real national income means that a real increase in output has been achieved. An increase in real national income means that there has been an increase in the volume of goods and services produced.

Question 15

what is nominal national income

Answer 15

Nominal national income does not take account of any changes in prices over a period of time.

It is calculated using the prices at that time, i.e. current prices.

Nominal national income can therefore be misleading as inflation might disguise the real value of output achieved.

Question 16

how do you convert nominal national income to real national income

Answer 16

Real national income=

Nominal national income ×
Price index of base year/Price index of current year

Question 17

what is the multiplier effect

Answer 17

when an increase in investment causes an increase in national income larger than the investment

e.g. a £10bn investment in a new factory will end up as an increase in incomes for all the workers involved in planning and building the factory. Incomes will rise by £10 bn but this extra income will also be spent and consumption would rise by £10 bn.

This spending will also end up as extra income and this in turn will also be spent. The total increase in national income will be many times the initial £10 bn.

Question 18

what does the size of the leakages in the multiplier effect determine

Answer 18

how much income is passed on to firms during each round of spending and so the increase in national income in total;

the size of the multiplier effect.