National Income Flashcards
(17 cards)
What is the circular flow of income?
An economic model that illustrates money flows in an economy. Money flows between households and firms in the simplest models. More complex models adds in other economic agents such as the government, financial sector and foreign trade (net exports).
What is the difference between income and wealth?
Income is a flow in the economy. Wealth is a stock of assets that can be used to generate income.
What is the difference between an injection and withdrawal?
Injections add money into the circular flow of income and increase its size. Withdrawals or leakages remove money from the circular flow of income and reduce its size.
What are examples of injections?
- Increased government spending
- Increased investments
- Increased exports
What are examples of withdrawals?
- Increased savings
- Increased taxation
- Increased imports
What is the equilibrium level of real national output?
The economy reaches a state of equilibrium when the rate of withdrawals = the rate of injections. This is equivalent to the point where AD = AS.
Changes in this level are a result of shifts in AD and/or AS.
What is the multiplier ratio?
The ratio of change in real income to the injection that created the change
How does the multiplier process work?
Based on the idea that 1 individual’s spending is another individual’s income.
- An increase in consumption immediately increases AD
- Store owners who benefitted from the extra consumption now have extra income
- They spend that income on goods/services
- Their expenditure on these goods and services is now income for the next tier of individuals
- Due to the successful rounds of spending, the final increase in national income is much larger than the initial injection
How does the size of the multiplier depend on the size of the leakages or withdrawals?
The higher the leakages, the smaller the multiplier. The higher the injections, the greater the multiplier.
What are the marginal propensities?
The proportion of the next additional $ earned that a consumer saves, consumes, is taxed or purchases imports with.
Why are marginal propensities calculated?
For economies as they provide insights into how each additional $ of income is allocated.
How does a high tendency to save affect the multiplier?
High marginal propensity to save means that the effect of the multiplier on any injections will be lower
How to calculate the multiplier using MPC?
MULTIPLIER = 1/(1-MPC)
How to calculate the multiplier using the withdrawals?
MULTIPLIER = 1/MPW WHERE MPW= MPM + MPS+ MPT
How is the multiplier affected by withdrawals and MPC?
The greater the withdrawals, the smaller the value of the multiplier and vice versa. The greater the MPC, the greater the value of value of the multiplier and vice versa.
What is the significance of the multiplier for shifts in AD?
If one of the factors that affect disposable income changes, the multiplier also changes.
- taxes increase, value of multiplier reduces
- interest rates increase, savings increase and consumption decreases, and the multiplier reduce
- exchange rates increase, imports increases and multiplier reduces
- confidence in economy increases, consumption increases and multiplier increases
Why is the multiplier useful for the government? What is the disadvantage?
They can use it to judge the likely economic growth caused by increased spending. However, there is a time lag as it takes time for the successive rounds of income to work through the economy.
