2.4 - national income

Question 1

2.4.1 - national income

circular flow of income?

Answer 1

-an economic model that illustrates money flows in an economy
-The circular flow of income is a model that describes how money moves within an economy. It illustrates the flow of goods, services, and money between different sectors.

Question 2

key components of circular flow of income?

Answer 2

Households: Provide factors of production (labor, land, capital) to firms and receive wages, rent, and profits in return.

Firms: Produce goods and services, paying households for their factors of production and receiving revenue from selling products.

Government: Collects taxes from households and firms, and spends on public services and welfare.

Financial Sector: Facilitates saving and investment by households and firms.

Foreign Sector: Engages in trade with the domestic economy through exports and imports.

Question 3

what do households own?

Answer 3

• the wealth in the economy

Question 4

what do households supply?

Answer 4

-Their factors of production to firms and receive income as a reward

They receive rent for land, wages for labour, interest for capital, and profit for enterprise

With this income, they purchase goods/services from firms

Question 5

WHAT DO FIRMS DO?

Answer 5

purchase factors of production from households

They use these resources to produce goods/services

They sell the goods/services to households and receive sales revenue

National income is the value of the output of an economy over a period of time

It can be calculated using the income approach or expenditure approach

Expenditure = income

Question 6

income?

Answer 6

a flow in the economy, whereas wealth is a stock of assets that can be used to generate income

Question 7

injections?

Answer 7

-exports
-gov spending
-investments

increases AD
increase size of circular flow of income

Question 8

withdrawals?

Answer 8

-import
-taxes
-savings

decreases AD

Question 9

how does The relative size of the injections and withdrawals impacts the size of the economy?

Answer 9

Injections > withdrawals = economic growth

Withdrawals > injections = fall in real GDP

Question 10

Injections represent…?

Answer 10

new income in the economy

Question 11

real flow?

Answer 11

Movement of goods and services (e.g., labor, products).

Question 12

money flow?

Answer 12

Movement of money (e.g., wages, consumer spending).

Question 13

distinction between income and wealth?

Answer 13

Income Refers to the flow of money received, typically measured over a period (e.g., monthly or annually).
Sources include wages, rent, interest, and profits
Wealth: Refers to the stock of assets owned at a given point in time.
Includes physical assets (real estate, cars) and financial assets (stocks, bonds).

Question 14

[2.4.2 - injections and withdrawals]

types of injections?

Answer 14

Investment: Expenditures on capital goods by businesses, such as machinery and buildings
.
Government Spending: Public sector spending on goods and services, including infrastructure, education, and defence.

Exports: Sales of domestic goods and services to foreign buyers, bringing money into the domestic economy.

Question 15

types of withdrawals?

Answer 15

Savings: Income not spent by households or firms, diverted to financial institutions.
Taxes: Mandatory payments to the government, reducing disposable income and consumption.
Imports: Spending on foreign-produced goods and services, sending money out of the domestic economy

Question 16

The Impact of Injections and Withdrawals
Balancing Injections and Withdrawals?

Answer 16

When injections exceed withdrawals, there is an increase in national income, leading to economic growth.

When withdrawals exceed injections, there is a decrease in national income, potentially leading to economic contraction.

Question 17

Impact Analysis: of injections and withdrawals

Answer 17

Economic Growth: Sustained high levels of investment, government spending, and exports lead to increased production, job creation, and higher national income.

Recession: High savings rates, increased taxes, and high import levels can lead to reduced spending, lower production, and rising unemployment.

Question 18

what will cause increase/decrease the relative size of the circular flow of income?

Answer 18

-Changes to any of the factors that influence government spending, investment, consumption and net exports

Question 19

2.4.3 - Equilibrium levels of
real national output

Real national output equilibrium occurs…?

Answer 19

where aggregate demand intersects with aggregate supply

Question 20

a) The Concept of Equilibrium Real National Output
Equilibrium Real National Output?

Answer 20

The equilibrium real national output is the level of GDP where aggregate demand (AD) equals aggregate supply (AS).

At this equilibrium, there is no tendency for the economy to change its output level; all produced goods and services are sold, and there is neither excess supply nor excess demand.

Question 21

key characteristics of Equilibrium Real National Output?

Answer 21

Price Stability: Prices are stable, with no inflationary or deflationary pressures.

Full Employment: The economy operates at full employment, meaning all available resources are utilized efficiently.

Sustainable Output: The output level is sustainable in the long run without causing imbalances.

Question 22

b) How Shifts in AD or AS Cause Changes in the Equilibrium Price Level and Real National Output
AD/AS Model:

Answer 22

The Aggregate Demand (AD) curve represents the total quantity of goods and services demanded at different price levels.

The Aggregate Supply (AS) curve represents the total quantity of goods and services that producers are willing and able to supply at different price levels.

The intersection of the AD and AS curves determines the equilibrium price level and real national output.

Question 23

increase in AD?

Answer 23

Caused by factors such as higher consumer confidence, increased government spending, or tax cuts.

Results in a rightward shift of the AD curve.
Leads to a higher price level (inflation) and an increase in real national output.

Question 24

decrease in AD?

Answer 24

Caused by factors such as reduced consumer spending, lower government expenditure, or higher taxes.
Results in a leftward shift of the AD curve.
Leads to a lower price level (deflation) and a decrease in real national output.

Question 25

Increase in AS?

Answer 25

Caused by factors such as technological advancements, reduction in production costs, or improvements in labor productivity. Results in a rightward shift of the AS curve. Leads to a lower price level and an increase in real national output.

Question 26

decrease in AS?

Answer 26

Caused by factors such as natural disasters, increased production costs, or labor strikes. Results in a leftward shift of the AS curve. Leads to a higher price level and a decrease in real national output.

Question 27

what is stagflation?

Answer 27

A situation of slow economic growth and high unemployment (stagnation) accompanied by rising prices (inflation).

Question 28

2.4.4 -- [the multiplier] The multiplier ratio ?

Answer 28

is the ratio of change in real income to the injection that created the change The multiplier ratio quantifies the total change in national income resulting from an initial change in spending. It demonstrates how initial spending generates further income and consumption, leading to a multiplied effect on the overall economy.

Question 29

what is the multiplier effect?

Answer 29

An initial change in aggregate demand can have a greater final impact on the level of equilibrium national income.

Question 30

when does the multiplier effect occur?

Answer 30

when an initial injection into the circular flow causes a bigger final increase in real national income. This injection of demand might come for example from a rise in exports, investment or government spending.

Question 31

when does the multiplier effect arises?

Answer 31

because one agent’s spending is another agent’s income. When a spending project creates new jobs for example, this creates extra injections of income and demand into a country’s circular flow.

Question 32

The negative multiplier effect occurs when...?

Answer 32

when an initial withdrawal or leakage of spending from the circular flow leads to knock-on effects and a bigger final drop in real GDP.

Question 33

The multiplier process is based on what?

Answer 33

based on the idea that one individual's spending is another individual's income

Question 34

Multiplier process; an increase in consumption immediately increases AD

Answer 34

An increase in consumption immediately increases AD Initial Spending: An initial increase in spending (e.g., government investment, export demand) injects money into the economy. Income Generation: This spending becomes income for households and firms, who then spend a portion of this income. Secondary Spending: The subsequent spending generates additional income for others, continuing the cycle. Diminishing Returns: Each round of spending is smaller due to withdrawals (savings, taxes, imports), eventually tapering off.

Question 35

The size of the multiplier is entirely dependent on...?

Answer 35

the size of withdrawals or leakages that occur during the process The higher the leakages the smaller the multiplier

Question 36

The initial injection shifts AD to the right ?

Answer 36

The result of the multiplier process is that there is then a secondary movement of AD to the right which (if the multiplier were 2) may be double the initial movement

Question 37

The multiplier can also work in reverse when...?

Answer 37

-when injections are reduced (downward multiplier effect)

Question 38

The 'marginal propensities' refer to what?

Answer 38

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

Question 39

why are Marginal propensities calculated

Answer 39

Marginal propensities are calculated for economies and provide insights into how each additional $ of income is allocated

Question 40

effect of marginal propensities on the multiplier?

Answer 40

A high MPC and low MPS, MPT, and MPM result in a larger multiplier. Conversely, a low MPC and high MPS, MPT, and MPM lead to a smaller multiplier.

Question 41

Marginal Propensity to Consume (MPC)

Answer 41

The proportion of additional income that is spent

Question 42

Marginal Propensity to Save (MPS)

Answer 42

The proportion of additional income that is saved

Question 43

Marginal Propensity to Tax (MPT)

Answer 43

The proportion of additional income that is paid in tax

Question 44

Marginal Propensity to Import (MPM)

Answer 44

The proportion of additional income that is spent on imports

Question 45

calculating the multiplier

Answer 45

The value of the multiplier can be calculated one of two ways Focussing on the MPC multiplier = 1 / 1- MPC Focusing on the Withdrawals multiplier=1 / MPM + MPT + MPS

Question 46

Significance of the Multiplier in Shifting AD

Answer 46

The multiplier effect means that an initial increase in AD results in a larger overall increase in national output and income. The greater the withdrawals, the smaller the value of the multiplier - and vice versa The greater the MPC, the greater the value of the multiplier - and vice versa Any change in one of the factors that impacts on disposable income, will change the multiplier If taxes increase, the value of the multiplier reduces If interest rates increase, savings increase and consumption decreases, and the multiplier reduces If exchange rates appreciate, the level of imports will increase and the multiplier decreases If confidence in the economy increases consumption increases and the multiplier increases

Question 47

c) Effects of the Multiplier on the Economy Economic Expansion?

Answer 47

The multiplier amplifies the effects of initial spending increases, leading to greater overall economic growth. Job Creation: Increased demand for goods and services requires more labor, reducing unemployment. Income Growth: Higher demand raises incomes, enhancing living standards.

Question 48

Effects of the Multiplier on the Economy economic contraction

Answer 48

Conversely, a reduction in spending can have a multiplied negative impact, leading to deeper recessions. Increased Unemployment: Lower demand reduces the need for labour, increasing unemployment. Decreased Income: Reduced economic activity leads to lower incomes and consumption.

Question 49

policy implications?

Answer 49

Understanding the multiplier helps policymakers design effective fiscal policies to manage economic cycles. Stimulus Measures: Governments can use fiscal stimulus to combat recessions, knowing the multiplier effect will amplify the impact. Austerity Measures: Conversely, cutting spending can have a larger-than-expected negative impact due to the multiplie