Chapter 10 Flashcards
(45 cards)
Consumption
Spending by households on goods and services
Investment
Spending by businesses on additions to the capital stock, new premises or equipment, or the building up of inventory (stock) levels
Government expenditure
Spending by the government at both national and local levels within the economy
Net exports
Exports - imports over a period of time
How can National income be calculated
Expenditure method (adding up all spending so C + I + G + (X-M) )
Income method (adding up all incomes earned)
Output method (totalling the value of all output produced for a period of time in each sector of the economy)
Comparison of three methods (all three should give the same value for a period of time but viewed from a different perspective) (National income = national expenditure = national output)
Nominal National income
National income unadjusted for changes in prices (not adjusted for inflation)
Money income
Uses of real National income
• measure of how successful the economy
• shows how well off the population is
• allows a government to estimate how much can be collected in taxation
Circular flow of income
A model of the economy where income and spending flow between households and firms
Injections
Extra money placed into the circular flow of income
Withdrawals
Money taken out of the circular flow income
(Leakages)
3 injections
Investment
Government expenditure
Exports
3 withdrawals
Savings
Taxation
Imports
Macroeconomic equilibrium
The level of National income where there’s no tendency for the level of change
Injections = withdrawals
Aggregate demand
Total planned spending in an economy over a period of time at any given price level
C + I + G + (X-M)
Wealth effect
Increases in the value of a household’s assets cause people to feel wealthier and encourages them to spend more of their current income (or to borrow more to finance the increases in spending)
Wealth
Value of the assets held by households. Most assets will be held in the value of property
What determines aggregate demand
Consumption
Investment
Government expenditure
Net exports
How does interest rates affect consumption
If interest rates rise, mortgages payments increase, less money is avaliable for households to spend on consumption
High interest rates reduce desire of households to engage in credit financed consumption
Higher interest rates increase the reward for saving
How would consumption affect AD
interest rates
Consumer confidence (if they feel like their incomes are likely to fall or jobs are less secure then they’ll reduce consumption)
Taxation (increase in income tax, reduce disposable income)
Wealth (if wealth increases, wealth effect)
Unemployment (more unemployment less consumption)
Interest rate
The cost of borrowing money expressed ad a percentage of the amount borrowed
How would investment affect AD
Interest rates (increase will reduce profitability of any investment project)
Business confidence (if sales are expected to increase, more likely to invest to increase productive capacity)
Tax (increase in tax lower investment)
Technology (new technology increase efficiency which lead to more investment)
Accelerator theory
Accelerator theory
Where increases in National income lead to firms spending more on investment to expand their capacity to exploit the rising income
Budget balance
Government spending - tax revenue
Budget deficit
G>T
