Unit 9 Flashcards
Circular flow of income
Shows income and spending moving around an economy.
Closed economy
An economy that does not import or export goods or services.
Open economy
An economy that participates in international trade.
Leakages are…
Sometimes income doesn’t instantly flow from housholds to businesses.
Leakages include…
Savings, Taxation, Imports
Injections are…
Boosts circular flow of income
Injections include…
Investment, Government Expenditure, Exports
An economy is in equilibrium when…
RATE OF Injections = RATE OF Leakages
When they’re unequal, it is called disequilibrium.
Multiplier
Shows the relationship between an initial change in spending and the final rise in GDP.
Happens because a rise in expenditure (or AD) will generate incomes, some of which will in turn be spent and create other incomes.
Aggregate Expenditure
The total amount that will be spent at different levels of GDP in a given time period.
It is made of:
- consumption (C),
- investment (I)
- government spending (G)
- net exports (X-M).
Income determinaton
Where aggregate expenditure is equal to output. For example, when aggregate expenditure is higher than output, firms will increase their output. Vice Versa.
Inflationary gap/positive output gap
Occurs when aggregate expenditure exceeds potential output.
Deflationary gap/negative output gap
Occurs when aggregate expenditure is lower than potential output.
What is autonomous investment and is it income elastic or inelastic?
An increase in investments leads to an increase in income due to determinants such as population increase, new resources, increased labor force, etc. Income inelastic
What is economic growth
The increase in an economy’s output.
Difference between short term econ growth and long term econ growth?
Short-term growth is the annual % change in real national output while long-term growth shows an increase in potential GDP.
Actual growth
When output increases as a result of greater utilisation of existing resources.
Draw actual growth (short run)
Finished
Real growth
Increase in output must be faster than an increase in population.
Potential growth
Increase in productive capacity
Factors contributing to actual growth:
- An increase in consumers’ confidence
- A reduction in income tax
- Increase in Gov’t spending
- A fall in the exchange rate
Factors contributing to potential growth:
- An increase in the quantity of resources available
- An increase in the quality of resources available
What is economic development?
Process of improving people’s economic well-being and quality of life.
