National Income Flashcards
National Income definition
total Value of all goods and services produced by a country in a year
National Income = National Output = National Expenditure
Draw + Explain the circular flow of incomes - just households and firms?
- Households provide Factors of production e.g. Labour –> In return they receive wages / dividends
- Households use income to buy consumer goods + Services
Wealth Vs. Income
Wealth = Value of total assets - Stock concept - can be measured at any period
Income = Flow of money - measured over period of time
–> Strong correlation
- Change in wealth effects peoples spending and Income –> Wealth Effect
What are Injections (Circular flow of Income)
- Additions to the circular flow of Income
Comprised of - Investment –> Increase in capital stock
- Gov. Expenditure –> When Gov spends money to provide goods + Services e.g. NHS
- Exports –> People from abroad buy domestic produced goods + Services
What are Withdrawals? (Circular Flow of Income)
- Leakages out the Circular flow of Income
Comprised of - Savings (S) –> People save money for later meaning less spending at current period
- Taxation (T) –> Gov imposes taxes money no longer available to consumers or business to spend
- Imports (M) –> Goods and services bought from abroad - Income withdrawn from domestic flow
Where is the Equilibrium on an AD/AS graph + What does it tell us?
- Equilibrium is were AD curve Intersects with AS Curve
–> Tells us the Price Level and R. GDP of a Country
Graph - Y-Axis = PL, X-Axis = R.GDP
–> If PL was lower than PLe would be shortages making PL rise till equilibrium hit + Vis versa
Impact of ↑AD on an AD/AS Graph?
- ↑AD –> AD Shift Right
- ↑PLe + ↑R. National Output (R.GDP)
–> Depends on shape of AS curve
Keynesian - More inelastic, the bigger the effect on R.GDP will be
Classical - No effect on R.GDP, only ↑PLe
Impact of ↓AS on an AS/AD Graph?
- ↓AS–> AS Shift Left
- ↑PLe and ↓R.GDP
Depends on elasticity - IF AD inelastic –> Impact on PL Greater than Impact on R.GDP
What is the Multiplier?
- the process where an injection into the Circular flow of Trade (G, I, X) causes a more than proportionate change in National Income
What is the Multiplier ratio?
- The amount an injection or leakage causes total income to change
K [Multiplier] = △Y [R.GDP] / △J [Injections]
–> Multiplier x △Injections = △R.GDP
What are some effects the Multiplier can have on an Economy?
- Multiplier causes injection to have magnified effect on R.GDP
- IMF estimate UK’s multiplier between 0.9 - 1.7
–> Relatively low due to High propensity to Import - Positive effect cause ↑R.GDP –> ↓Unemployment –> ↑Inflation if Econ at full employment
- Multiplier Higher in Developing Countries
What is Marginal Propensity to Consume + formula + effect on Multiplier?
- Proportion of a change in Income that is spent
MPC = △C / △Y
c = Consumption , Y = Income
e.g. extra £10 Income –> £5 spent, MPC = 0.5
–> higher the MPC, higher the multiplier and greater impact on GDP
- K [Multiplier] = 1/ 1-MPC
What is Marginal Propensity to Save + formula + effect on Multiplier?
Proportion of Increase in Income that is Saved
MSP = △S / △Y
S= Saving, Y = Income
–> Higher MPS, lower the multiplier –> smaller effect on R. GDP
- K [Multiplier] = 1/1-MPS
What is Marginal Propensity to Tax + Formula + effect on Multiplier?
- proportion of Increased Income that is taxed
MPT = △T/△Y
T= Tax, Y= Income
–> Higher MPT, Lower the Multiplier –> Smaller impact on R.GDP
What is Marginal Propensity to Import + Formula + effect on Multiplier?
- proportion of Increase Income spend on Imports
MPM = △M/△Y
M= Imports , Y= Income
–> Higher the MPM lower value of multiplier –> Smaller impact on R.GDP
- MPM Higher in developed countries
