2.4 - National Income Flashcards
What is the circular flow of income?
The circulation of money from households to firms. The more households spend the more the firms produce and the higher the levels of income.
What’s the difference between wealth and income?
Wealth is a stock concept which refers to the total value of assets in an economy at a given moment in time.
Income is a flow concept which treats to the value of income earned over a period of time.
What is the wealth effect?
The effect on incomes or spending when asset values change.
Injections into the circular flow
Investment (I)
Government spending (G)
Exports (X)
Withdrawals from the circular flow
Savings (S)
Tax (T)
Imports (M)
Where is the equilibrium level of real national output?
The point where AD meets LRAS. An equilibrium is a balancing point where there is no tendency for the price level or real output to change.
Relationship between leakages and injections
If injections equal leakages, the economy will be in equilibrium.
If injections exceed leakages, the economy will grow.
If leakages exceed injections, the economy will shrink.
What is the multiplier ratio?
The ratio of a change in equilibrium real income to the autonomous change (the injection) that brought it about. It’s the number of times a change in GDP exceeds the change in net injections that caused it.
The multiplier formula
K = 1/MPW K = 1/(MPS+MPT+MPM) K = 1/(1-MPC)
MPW
Marginal propensity to withdraw is a measure of how much of any extra pound earned is saved, taxed, or spent on imports.
MPC
Marginal propensity to consume is a measure of how much of any extra pound earned is spent within an economy.
Importance of the multiplier
If there is any change in spending min an economy, the final impact on incomes will be greater than the initial injection. The greater the leakages, the smaller the multiplier. The larger the value of the multiplier the greater the shift in AD.
