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Economics > 2.4 National Income > Flashcards

2.4 National Income Flashcards

1
Q

What is the circular flow of income?

A

an economic model that illustrates money flow in an economy between households and firms

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2
Q

What is the role of households in the circular flow of income?

A
  • households own the wealth in the economy, the factors of production
  • they supply the factors of production to firms and receive income as a reward
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3
Q

What are the 4 ways households receive income?

A
  • rent from land
  • wages for labour
  • interest for capital
  • profit for enterprise
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4
Q

What do households use income for?

A

To purchase goods/services from firms

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5
Q

What is the role of firms in the circular flow of income?

A
  • purchase factors of production from househoilds
  • use the resources to produce goods/services
  • sell the goods/ services to receive sales revenue
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6
Q

What is national income?

A

the value of the output of an economy over a period of time
- expenditure = income

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7
Q

What is the difference between wealth and income?

A

income - flow in the economy
wealth - stock of assets used to generate income

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8
Q

What are injections

A

money going into the circular flow of income, increasing its size

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9
Q

What are the injections into the circular flow of income (3)?

A
  • increased government spending (G)
  • increased investment (I)
  • increased exports (X)
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10
Q

What are withdrawals?

A
  • also known as leakages
  • money removed from the circular flow of income reducing its size
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11
Q

What are examples of withdrawals?

A
  • increased saving by households (S)
  • increased taxation by the government (T)
  • increased import purchases (M)
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12
Q

How does the size of injections and withdrawals impact the size of the economy?

A
  • injections > withdrawals = economic growth
  • withdrawals > injections = fall in real GDP
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13
Q

What is the relationship between multiplier effect and injections?

A

causing the economy to grow by a greater amount than the size of the injections

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14
Q

When does real national output equilibrium occur?

A

When AD intersects with AS

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15
Q

What is the multiplier ratio?

A

the ratio of change in real income to the injections that created the change

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16
Q

What idea is the multipliers process based on?

A

one individuals spending being another persons income
- consumption increasing increases AD as store owners benefitting from consumption have extra income
- spend the income goods/services
- this expenditure becomes income for the next their of individuals

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17
Q

What happens to the injections within the successive rounds of spending?

A

the final increase in national income is much larger than the initial injections

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18
Q

What is the size of the multiplier dependent on?

A

the size of leakages that occur during the processes
- the higher the leakages the smaller the multiplier

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19
Q

What is the effect of injections on AD?

A

injections shift ad to the gist (increases)

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20
Q

What is the result of the multiplier process?

A

A second movement of AD
- if the multiplier were 2 the movement may be double the initial movement

21
Q

What is the downward multiplier effect?

A

Reverse multiplier effect
- when injections are reduced

22
Q

What is the marginal propensity?

A

the proportion of the next $ earned that a consumer saves, consumes, is taxed, or purchases imports with

22
Q

Why are marginal propensities calculated?

A

for economies to provide an insight into how each additional $ of income is allocated

23
Q

What are the four marginal propensities?

A
  • .. to consume
  • .. to save
  • .. to tax
  • .. to import
24
Q

What does MPC stand for?

A

Marginal propensity to consume

25
Q

What does MPS stand for?

A

Marginal propensity to save

26
Q

What does MPT stand for?

A

Marginal propensity to tax

27
Q

What does MPM stand for?

A

marginal propensity to import

28
Q

What is the MPC?

A

the proportion of additional income that is spent

29
Q

How is the MPC calculated?

A

MPC = change in consumption / change in income

30
Q

What is the MPS

A

Proportion of additional income that is saved

31
Q

How is the MPS calculated?

A

MPS = change in savingsq / change in income

32
Q

What is the MPT?

A

th proportion of additional income that is paid in tax

33
Q

how is the MPT calculated?

A

MPT = change in tax / change in income

34
Q

What is the MPM?

A

the proportion of additional income that is sent on imports

35
Q

How is the MPM calculated?

A

MPM = change in imports/ change in income

36
Q

What are the 2 ways the multiplier can be calculated by?

A
  • focusing on the MPC
  • focusing on withdraws that occur on each additional $ of income
37
Q

What’s the marginal propensity to withdraw (MPW)?

A

All withdrawals together
- MPM + MPS + MPT

38
Q

How is the multiplier calculated, focusing on the MPC?

A

multipler = 1/(1-MPC)

39
Q

How is the multiplier calculated focusing on withdrawals?

A

multiplier = 1/MPW = 1/(MPM + MPS + MPT)

40
Q

What is the relationship between the multiplier and withdrawals?

A

the greater the withdrawals, the smaller the value of the multiplier

41
Q

What is the relationship between the multiplier and the MPC?

A

the greater the MPC, the greater the value of the multiplier

42
Q

What are the 4 factors that effect disposable income?

A
  • taxes
  • interest rates
  • exchange rates
  • confidence
43
Q

What is the relationship between the multiplier and taxes?

A

tax increases the value of the multiplier reduces

44
Q

What is the relationship between the multiplier and interest rates

A

interest rates increase, savings increase, consumption decreases, multiplier reduces

45
Q

What is the relationship between the multiplier and exchange rates?

A

exchange rate appreciates, the Lebel of imports increase, multiplier increase

46
Q

What is the relationship between the multiplier and confidence?

A

confidence increases, consumption increases, multiplier increases

47
Q

Why do governments find the value of the multiplier?

A

to use to judge the likely economic growth caused by increased spending

48
Q
A

Economics (10 decks)

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