National Income 2.4

Question 1

What is the definition of National Income?

Answer 1

the total value of all goods and services produced by a country in a year.

Question 2

What role do households play in the circular flow of income?

Answer 2

They provide the factors of production (CELL) to firms, while purchasing goods and services through consumer expenditure.

Question 3

What role do firms play in the circular flow of income?

Answer 3

They produce goods and services for househoulds, while providing wages/ rent/ dividends to labour and to people.

Question 4

What is the definition of wealth?

Answer 4

The value total (accumulation) of assets by an individual, firm or country.

Question 5

What is the definition of income?

Answer 5

The flow of money recieved by factors of production (wages, rent profit, interest).

Question 6

What are the 3 injections into the circular flow of income?

Answer 6

Government Spending, Exports, and Investment.

Question 7

What are the 3 withdrawals from the circular flow of income?

Answer 7

Savings, Taxes, and Imports.

Question 8

What is the significance of the equilibrium point on a diagram?

Answer 8

Equilibrium = where supply meets demand, meaning that there will be no tendency for it to fall/ rise. If the price level was higher (lower) than the equilibrium, the PL would fall (increase).

Question 9

Diagramatically, what happens when AD increases, and what does it depend on?

Answer 9

The AD curve shifts to the right, causing an increase in the equilibrium price and an increase in the real national output.

This depends on the shape of the AS curve (LRAS). The more elastic it is, the more the effect is seen on the real output rather than on the price level.

Question 10

Diagramatically, what happens when AD decreases, and what does it depend on?

Answer 10

The AD curve shifts to the left, causing a decrease in equilibrium price and a decrease in real national output.

This depends on the elasticity of the AD curve. If AD is more inelastic, the impact on the price level will be greater than on real output.

Question 11

What is the definition of the Multiplier?

Answer 11

The multiplier shows the amount by which a change in an injection or leakage causes total income to change.

It is the result of income being re-spent in the economy, having 2nd round/ successive effects.

Question 12

How do you calculate the multiplier value?

Answer 12

K (Multiplier) = Change in Real GDP / Change in Injections

Question 13

How does the multiplier affect the economy?

Answer 13

It causes an injection to have a MAGNIFIED effect on the GDP.
This depends on how many resources are unemployed in the economy.
A POSITIVE MULTIPLIER EFFECT causes a rise in GDP > leading to a fall in unemployment, a potential rise in inflation (if the economy is at full employment (LRAS/ AD).
UK Multitplier value - low (0.9-1.7) due to its MPM.

Question 14

What is the definition of the Marginal Propensity to Consume (MPC)?

Answer 14

How much of an additional unit of income is spent (on goods & services).

Question 15

How is the MPC calculated?

Answer 15

MPC = Change in Consumption/ Change in Income

Question 16

Using the MPC, how is the Multiplier calculated?

Answer 16

K = 1 / 1 - MPC

Question 17

What is the Marginal Propensity to Save (MPS)?

Answer 17

How much of an additional unit of income is saved.

Question 18

How is the MPS calculated?

Answer 18

MPS = Change in Savings / Change in Income

Question 19

What effect does the value of the MPC have on the Multiplier?

Answer 19

The HIGHER the value of MPC, the HIGHER the value of the Multiplier and the GREATER the increase in GDP.

Question 20

What effect does the value of the MPS have on the Multiplier?

Answer 20

The HIGHER the value of MPS, the LOWER the value of the Multiplier and the LOWER the increase in GDP.

Question 21

Using the MPS, how is the Multiplier calculated?

Answer 21

K = 1 / 1 - MPS

Question 22

What is the Marginal Propensity to Tax (MPT)?

Answer 22

How much of an additional unit of income is taxed.

Question 23

How is MPT calculated?

Answer 23

MPT = Changes in tax / Changes in income

Question 24

What effect does the value of MPT have on the Multiplier?

Answer 24

The HIGHER the value of MPT, the LOWER the value of the Multiplier and the LOWER the increase in GDP.

Question 25

Using the MPT, how is the Multiplier calculated?

Answer 25

K = 1 / 1 - MPT

Question 26

What is the Marginal Propensity to Import (MPM)?

Answer 26

How much of an additional unit of income is spent on imports.

Question 27

How is the MPM calculated?

Answer 27

MPM = Changes in imports / Changes in income

Question 28

What effect does the value of MPM have on the Multiplier?

Answer 28

The HIGHER the value of MPM, the LOWER the value of the Multiplier and the LOWER the increase in GDP.

Question 29

Using the MPM, how is the Multiplier calculated?

Answer 29

K = 1 / 1 - MPM

Question 30

What are the alternative calculations of the Multiplier?

Answer 30

K = 1 / 1 - MPC K = 1 / MPW , (MPW (WITHDRAW) being MPS + MPT + MPM)

Question 31

What is the significance of the multiplier in shifting Aggregate Demand?

Answer 31

If there is a rise in any injections/ withdrawals, the total effect on the economy will be greater than the original change. The multiplier magnifies the effect The larger the value, the greater shift in AD (increase OR decrease).

Question 32

What is the Multiplier process?

Answer 32

The process begins with an injection (ie 100bil), and the MPC is 0.6 This spending of (60bil) forms the income of other people (ie, investment into new hospitals, many businesses, like construction, benefit) This generates income (wages) Some of this income is spent (60bil), and some leaks out in S, T or M (40bil) . The money spent again forms the incomes of other people. Some is spent again (36bil), and some leaks out (14.4bil). The process continues until full effects have worked through the econmy. > Overall, the NEW INJECTION will have a magnified impact on total expenditure (in this case, GDP rises by 250bil).