The circular flow of income Flashcards
What is national income, and what is the difference between nominal and real income?
-Nominal income is measured at current prices, without adjusting for inflation
-Real income is adjusted for inflation, reflecting the true purchasing power and making it a better indicator of economic performance
What is the circular flow of income, and what does the equation income = output = expenditure mean?
The circular flow of income is a model showing how money moves through an economy between households and firms.
-Income = output = expenditure indicates that the value of all goods produced (output) equals the income earned by producing them, which equals total expenditure on those goods.
-Equilibrium is reached when total spending (expenditure) equals total output, with no unplanned changes in inventories.
-Full employment income occurs when all resources are fully employed in the economy.
What are injections and withdrawals in the circular flow of income, and how do changes in these affect national income?
-Injections add money to the economy, including investment, government spending, and exports
-Withdrawals (or leakages) take money out, including savings, taxes, and imports
If injections increase or withdrawals decrease, national income rises as more money circulates. Conversely, if withdrawals increase or injections decrease, national income falls due to reduced spending and economic activity.
