Theme 2.4 - National income

Question 1

2.4.1 - What is national income?

Answer 1

the value of all the final goods and services produced in an economy during an accounting period of time generally one year

Question 2

2.4.1 - What is wealth and income?

Answer 2

• Wealth is a stock of assets - things people own eg house

- Income is a flow of assets - money people receive eg wage

Question 3

2.4.1 - What is the circular flow of income?

Answer 3

the flow of money in society can be described through the circular flow of income
- the foundation of transactions that build an economy

Question 4

2.4.1 - What does the circular flow of income assume?

Answer 4

Households own all the wealth and resources so provide firms with land, labour, capital and in return receive rent, wages, interest and profits
- National output = national expenditure = national income

Question 5

2.4.1 - What are the evaluations of the circular flow of income diagram?

Answer 5

too simplified to represent the actual economy

• governments need to be added
• so do financial services and foregin markets

Question 6

2.4.2 - What are injections within the circular flow of income?

Answer 6

Injections are monetary additions to the economy

• Government spending (G)
• Investment (I)
• Exports (X)

Question 7

2.4.2 - What are withdrawals in the circular flow of income?

Answer 7

Withdrawals or leakages are where money is removed from the economy

• Taxes (T)
• Savings (S)
• Imports (M)

Question 8

2.4.2 - What happens to national income when injections and withdrawals change?

Answer 8

National income remains the same when injections and withdrawals are equal
- if the sum of injections is greater than the sum of withdrawals then the economy will grow whilst if injections are smaller than withdrawals it will shrink

Question 9

2.4.4 - What is the multiplier process and ratio?

Answer 9

• The multiplier process is the idea that an increase in AD because of an increased injection can lead to a further increase in national income
• The multiplier ratio is the final change in income to the initial change in injection and the figure multiplied by the original injection to find the final change in income

Question 10

2.4.4 - What are the effects of the multiplier of the economy?

Answer 10

• Growth can occur quicker as any injections lead to a bigger increase in national income
• A time lag between the increase in income and the full effect of that increase as not everyone will spend money straight away
• Overall effect will depend on the change in AD and the elasticity of the AS curve
• In general the multiplier will have a big effect when there is plenty of spare capacity in the economy and where MPW is low and MPC is high

Question 11

2.4.4 - What does the effect of the multiplier depend on?

Answer 11

• the effect of the multiplier depends on the shape of the AD curve and whether it is the short run or long run

Question 12

2.4.4 - What is the formula for the multiplier?

Answer 12

multiple = 1/(1-MPC) = 1/MPW

Question 13

2.4.4 - What are the effects of the marginal propensities?

Answer 13

• MPC - increase in consumption following an increase in income
• MPS - increase in savings following an increase in income
• MPT - increase in taxation following an increase in income
• MPM - increase in imports following an increase in income
• MPW - increase in leakages/withdrawals following an increase in income
  MPW=MPS+MPT+MPM