10.1 - Circular flow of income

Question 1

What does national income measure?

Answer 1

flow of new output produced by an economy in a particular period (ie year)

Question 2

What is the difference between nominal and real income?

Answer 2

flow of output is real
nominal –> measures the flow of output at the current price level within the economy (ie; takes into account the rate of inflation)

Question 3

How can flow of output be measured within the economy?
(national output / product)

Answer 3

1. adding incomes received by different factors of production (capital and labour)
2. adding totals of the actual goods/services produced by the economy

Question 4

How can flow of output be measured within the economy?
(national expenditure)

Answer 4

how factor incomes (wages + profits) end up being spend on goods and services within the economy

Question 5

What is the income approach? (of measuring the flow of output)

Answer 5

sums the factor incomes to the factors of production

Question 6

What is the output approach? (of measuring the flow of output)

Answer 6

adds the ‘value added’ by each of the industries in the economy (how much extra is added on at each intermediate stage)

Question 7

What is the expenditure approach? (of measuring flow of output)

Answer 7

sums consumption + investment + government spending + (exports - imports) –> this makes aggregate demand

Question 8

what is GVA?

Answer 8

gross value added

Question 9

What is the circular flow of income?

Answer 9

the flow of income between the different economic groups

Question 10

What is a closed economy?

Answer 10

an economy with no international trade

Question 11

What is saving?

Answer 11

Income that is not spent

Question 12

What is a withdrawal?

Answer 12

a leakage of spending power out of the circular flow of income into savings, tax or imports

Question 13

What is investment?

Answer 13

total planned spending by firms on capital goods produced within the economy

Question 14

What is an injection?

Answer 14

spending entering the circular flow of income as a result of investment, government spending and exports

Question 15

what is an example of a withdrawal out of the economy?

Answer 15

saving

Question 16

What is an example of an injection into the economy?

Answer 16

government spending

Question 17

What is equilibrium national income?

Answer 17

level of income at which withdrawals from the circular flow o income equals injections into the circular flow

Where AD = AS

Question 18

What is full employment income?

Answer 18

the level of income when the economy is producing on its PPF, no spare capacity

Question 19

What happens if a withdrawal is greater than an injection in the economy?

Answer 19

net leakage out of the economy

Question 20

what happens if the injection is greater than the withdrawal?

Answer 20

net income will rise

Question 21

in the two sector circular flow model when is national income?

Answer 21

when planned saving = planned investment (S = I)

Question 22

What is an open economy?

Answer 22

an economy open to international trade

Question 23

when will national income neither rise nor fall?

Answer 23

saving + tax + imports = investment + government spending + exports

Question 24

what causes national income to fall in the circular flow?

Answer 24

S + T + M > I + G + X

Question 25

what causes national income to rise in circular flow?

Answer 25

S + T + M < I + G + X

Question 26

What did Keynes believe about deficient aggregate demand?

Answer 26

that when planned leakages of demand from the circular flow of income exceeded planned injections of demand, level of income/output falls to restore equilibrium deficient AD was cause of recessions

Question 27

what is the danger with economic modelling?

Answer 27

that it can be over-simplified and not all factors are taken into account properly. Models may also generate conflicting predictions (e.g. labour market when supply of labour increases)