Y1 assessment- circular flow of income Flashcards
Flows
Physical- ‘real things’ land, labour, capital, goods services (straight arrows)
Monetary- money used to pay for real things (curved arrows)
Injections + Withdrawals
-Circular flow suggests as long as households keep spending what they earn (fixed savings ratio), and firms spend revenues on production the national output wont change
-Injections in the form of exports, investment and gov spending go directly to firms
(higher than output -> output increases)
-Withdrawals come in the form of imports, savings and taxes, made by either firms or households (if output greater than expenditure -> output reduces)
Multiplier Effect
-States that when an injection is made into the circular flow the actual change in national income is greater than initial injection
-Size of multiplier affected by leakages (how fast money leaves the system), therefore smaller
Components of AD
C - Consumption
I- Investment
G- Government Spending
(X-M)- Exports- Imports
Determinants of Consumption and Saving (65%)
-Income
-Interest Rates
-Consumer Confidence
-Wealth Effects
-Taxes
-Unemployment
(edit)
Investment (15%)
Gross vs Net
Gross- all investment spending
Net- only investment that increases production capacity
Eg. 3 old trucks replace with 5 new
G= 5, N= 2
Determinants of Investment
-Risk
-Government Incentives + Regulation
-Interest + Credit availibility
-Technical Advances/ Progress
-Business Confidence
(edit)
Government Spending
Budgets
Budget Deficit- spending greater than revenue (injection)
Budget Surplus- spending is less than revenue (withdrawal)
Try to balance budget in the long run to ensure it doesnt harm economic growth (surplus) or create a large national debt (Deficit)
Determinants of Imports + Exports
-Exchnge Rate
-World Economy
-Protectionism (quotas, regulation)
-Non-Price factors
AD Analysis- movement along, down
Price Rise
Y axis- represents average level of prices in the economy (CPI)
Downward Slope- lower the price level the more output demanded as consumers hold more purchasing power
Rise in price = output fall:
-Domestic consumption reduced
-Demand for exports reduce, domestic goods therefore less competitive
-Demand for imports increase as cheaper in comparison
OPPOSITE FACTORS FOR OUTPUT INCREASE OFC
AD Analysis- shift right
Shift:
-Rise in consumption
-Investment
-Gov Spending
-Net Exports
Leads to- rise in demand for labour due to it being derived from demand of additional output needed to be produced
AD Analysis- shift left
X axis- Real GDP
Shift:
-Rise in interest Rates
-Strong Currency (more m than x)
-Tax
Leads to- fall in demand for labour due to it being derived demand from lost output at lower prices
Multiplier Effect and AD
-Injection shifts AD curve to the right
-Multiplier effect states money goes round in the circular flow of income before it’s all leaked out
Average Propensity to Consume or Save
Proportion of national income thats spent or saved
APC= C/Y
APS=S/Y
Y=Income
Marginal Propensity to Consume
MPC- proportion of ‘extra’ income thats spent on consumption
=/\C / /\Y