The National Income Flashcards
(22 cards)
What’s the circular flow of income?
An economic models that illustrates money flows in an economy
Define national income
National income is the value of the output or expenditure in an economy over a period of time.
What is household role in the circular flow of income?
Household supplies the factors of production to firms and receive income in exchange.
Define wealth.
Wealth is the stock of assets that can be used to generate income.
What is the difference between income and wealth?
Income is measured through a flow of money in the economy. Wealth is measured through a stock of assets at one point in time of economy.
How can national income be calculated?
By using expenditure and income approach.
Expenditure:
GDP = C + I + G + Exp by foreigners
Income:
GDP= Wages + Rents + Profits + Statistical Adjustments
What are injections in the circular flow of income?
Injections are additions of money into the circular flow of income that increase national income.
What are withdrawals?
Withdrawals are leakages of money from the circular flow of income that reduce national income.
List the three types of injections
- increased government spending
- Increased investment
- Increased exports
List the three types of withdrawals
- increased savings by households
- increased taxation by the government
- increased import purchases
What happens when injections are greater than withdrawals?
Net positive injections increase economic growth, while net negative withdrawals leads to a fall in economic growth
How does an increase in interest rates affect the circular flow of income?
An increase in interest rates increase savings (of withdrawal) and reduces consumption and investment (injection). This reduces the circular flow of income.
What is the positive multiplier effect?
The positive multiplier effect is when economy grows by a greater amount than the size of initial injection. For example an increase in investment will stimulate further rounds of spending.
Which factors influence the size of the multiplier?
- marginal propensity to consume (MPC)
- Marginal propensity to the safe (MPS)
- Marginal propensity to import (MPM)
- Marginal propensity to tax (MPT)
What is negative output gap?
A negative out gap is when the equilibrium of the real national output is below the full employment level of real national output.
How does the Keynesian model explain price stickiness?
As an inability to adjust prices and wage rates quickly to change in macro economic conditions.
What is multiply ratio?
The multiply ratio is the size of a change in real income in relation to the size of the injections that created a change.
State of formula for a multiplier in terms of the MPC
1 / (1-MPC)
State of formula of the multiplier in terms of withdrawals
1 / (MPS+MPM+MPT) = 1 / MPW
How does an increase in tax rates affect the multiplier?
An increase in tax rates reduces the value of the multiplier.
How does increase in interest rates affect the multiplier?
Increase in interest rates reduces the value of the multiplier. It increases the incentive to save and decreases the consumption as borrowing is more expensive.
What is marginal propensity to consume?
The proportion of one additional unit of income that is spent
