2.4 National Income Flashcards
(21 cards)
What does national income equal?
national output = national expenditure
This indicates the interconnectedness of income, output, and expenditure in an economy.
What are the factors of production supplied by households?
- Labour
- Land
- Capital
- Enterprise
These factors are essential for firms to produce goods and services.
What is the circular flow of income?
The movement of money between firms and households through the exchange of factors of production and goods/services
It illustrates the interdependence of different sectors in the economy.
What are withdrawals from the circular flow of income?
- Saving income
- Taxes
- Imports
These actions remove money from the economy, affecting overall economic activity.
What constitutes an injection into the circular flow of income?
- Government spending
- Investment
- Exports
Injections increase the total money supply in the economy.
What happens when the rate of withdrawals equals the rate of injections?
The economy reaches a state of equilibrium
This balance is crucial for stable economic performance.
How is income defined in economic terms?
A flow of money that goes to the factors of production
Examples include wages, welfare payments, profits, dividends, rents, and interest.
What is wealth in economic terms?
A stock of assets such as savings, shares, property, bonds, and pension schemes
Wealth represents accumulated resources, unlike income which is a flow.
What occurs when there are net injections into the economy?
There will be an expansion of national output
This indicates growth and increased economic activity.
What causes a contraction of production in the economy?
Net withdrawals from the economy
This leads to a decrease in national output.
What is the condition for equilibrium real national output?
The rate of withdrawals = the rate of injections; AD = AS
This condition ensures that the economy is stable and balanced.
What happens at a price above equilibrium?
There will be excess supply
This indicates a surplus in the market.
What is the multiplier ratio?
The ratio of the rise in national income to the initial rise in AD
It reflects the impact of initial spending on overall income.
What is the multiplier effect?
An initial increase in AD leads to a larger increase in national income
This effect demonstrates how spending stimulates further economic activity.
What does the marginal propensity to consume (MPC) represent?
The proportion of each additional pound of household income that is spent
A higher MPC leads to a larger multiplier.
What is the relationship between marginal propensity to save (MPS) and MPC?
MPS + MPC = 1
This means that any increase in income is either saved or spent.
What is the marginal propensity to tax (MPT)?
The proportion of each pound taxed by the government
Higher MPT reduces disposable income and the size of the multiplier.
What is the effect of marginal propensity to import (MPM) on the multiplier?
Higher MPM reduces the size of the multiplier
Spending on imports withdraws income from the circular flow.
How is the multiplier calculated?
1/(1-MPC)
This formula helps determine the total impact of spending on national income.
What is the significance of the multiplier in an economy with spare capacity?
A small increase in AD leads to a large increase in national income
This indicates that excess capacity allows for rapid output increases.
What is a reverse multiplier?
A withdrawal of income leading to a larger decrease in income for the economy
This can negatively impact economic growth.
