topic 13 - theme 2 Flashcards
national income
what is the circular flow of income?
a model of the economy which shows flow of expenditure into firms and income into households
what does expenditure of the circular flow diagram mean?
the C component of AD. it is spending by households on consumer goods produced within the economy
what does household income of the circular flow diagram mean?
the collective wages/salary of all workers within the economy
what does labour/enterprise mean of the circular flow diagram?
what households offer to firms in exchange for household income
how can we measure the output of an economy or GDP?
- income
- output
- expenditure
what are withdrawals from the circular flow diagram?
S + T + M
- S (saving) -> a leakage as its income not spend
- T (tax) -> leakage as it directly leaves the circular flow to go to the government who choose how much to put back into economy
- M (imports) -> leakage from expenditure as they are spending diverted away from spending on UK goods/services
what are injections into the circular flow?
G + I + X
- will add to the circular flow and increase growth
- G (gov spending)
- I (investment)
- X (exports)
what does income mean and what kind of concept is it?
a flow concept; money paid to individuals
what does wealth mean and what kind of concept is it?
a stock concept; the accumulation of assets, such as property or shares
why is wealth considerable less evenly distributed than income?
as wealth can be inherited or acquired through other means
what is the multiplier?
an increase in an ‘autonomous variable’ such as investment leads to a proportionately greater increase in real national output
what does the marginal propensity to import mean?
the proportion of additional income that is spent on imports of goods and services
what does the marginal propensity to tax mean?
the proportion of additional income that is taxed
what does the marginal propensity to withdraw mean?
the proportion of additional income that is withdrawn from the circular flow
how do you work out the marginal propensity to withdraw (MPW)
the sum of the marginal propensities to save, import and tax
what does the size of the multiplier depend on?
the size of withdrawals/leakages
what happens to the economy is the sum of injections are greater than the sum of withdrawals?
-> S + T+ M > G + I + X
economy is growing
what happens to the economy if the sum of withdrawals are greater than injections?
-> G + I + X > S + T + M
economy is shrinking
