Circular flow of income Flashcards
to produce the flow of national output, what must the economy posses?
a stock of physical capital goods, a stock of human capital, together with stocks of land and entrepreneurship. (factors of production)
examples of physical capital goods:
- roads
- airports
- telecommunications
- robots
- machinery
what is a stock variable
measured at one specific time, and represents a quantity existing at that point which has accumulated in the past
e.g. size of land owned, number of new employees
what is a flow variable
measured over an interval of time
e.g. new investment, national output, sales revenue
what is national capital stock?
stock of capital goods, such as buildings and machinery, in the economy that has accumulated over time. excludes consumer goods. national capital stock is part of national wealth.
what is national wealth?
stock of all goods that exist at a point in time that have value in the economy. consumer goods are a part of national wealth
what happens to the value of physical capital goods over time?
decreases due to physical depreciation, obsolescence or change in demand for the services of capital. worn-out capital reflects capital consumption. new investment is required to maintain or increase value of national capital stock, in order to produce more national output in the future.
what is investment?
expenditure by firms additional to the capital stock
what is net investment?
the extra investment needed to enlarge the capital stock
what is consumption?
total planned spending by households on consumer goods and services produced within the economy
what does consumption in the short-run mean
the easiest way to increase living standards is to boost current consumption
what does consumption in the long-run mean
a decision to sacrifice current consumption in favour of a higher level of future consumption means that more of today’s scarce resources go into investment or the production of capital goods, enabling the national capital stock to increase in size
difference between GNI and GDP
GNI is a measurement of a country’s income, which includes all income earned by a country’s residents and firms, regardless of where its produced. GNI takes into account income flows while GDP doesn’t.
GNP/GNI= GDP+ income from abroad- income sent abroad
what does national income measure?
measures the incomes received by labour and other factors of production
what does national output measure?
measures the actual goods and services produced by the economy
