2.4 - National Income Flashcards
How are each of the FOP paid for
Labour is paid for in wages
Land is paid for in rent
Capital is paid for in interest
The owner of the firm earns profit, because the owner is from a household, the profits also go to the households as payment for ‘enterprise’
What is the multiplier ratio
The ratio of the final change in income to the initial change in income
What does the size of the multiplier process depend on
The size of the multiplier will be determined by how much of an increase in income people will spend (the MPC), the lower leakages, the higher the MPC, the higher the multiplier
Can you have negative multiplier effects
Yes
When does the multiplier effect create quickest growth
When injections are targeted at those with the highest MPC
What is MPC
calculated as the change in consumption (C) divided by change in income and represents the amount of each extra pound that the consumer spends when given an extra pound in income.
What is MPS
calculated as the change in savings divided by change in income
What is MPT
change in tax divided by the change in income,
What is MPM
change in imports purchased divided by the change in income
What is the formula for the multiplier effect
1 / (1-MPC)
OR
1 / MPW
What components make up the MPW
MPW = MPS + MPT + MPM
When will the multiplier effect have the biggest effect
When there is plenty of spare capacity
MPW is low / MPC is high
When does the multiplier effect have little effect on output
When there is little spare capacity in the economy so rising demand creates rising prices
What does the multiplier effect cause if AS is inelastic
Increased prices, no change on output
