National income
The income of an economy earned by all workers and businesses over a period of time
How is national income measured
GNI, GDP
Uses of national income
- measures how successful the economy is
- shows how well off population is
Difference between nominal and real GDP
- Nominal GDP is the actual value of all goods and services produced in an economy in a year (not adjustment to inflation)
- Real GDP is the value of all goods and services produces in an economy in a year (adjusted for inflation)
RNI as an indicator of economic performance
- If RNI is rising, then economic performance of country is improving.
- likely that the standard of living is also improving
- Whereas if RNI falls during recession, standard of living will fall
Circular flow of income
Shows national income and flow of money, resources and goods in an economy
Simple model of the circular flow of income
Shows money flows in a ‘closed economy’, between households and firms
Explain the simple circular flow of income
-Households sell their factors of production to firms and in return they get paid facto incomes ( firms hiring workers for labour and them getting wages in return which is a factor income)
- Households then spends their income on firms and gets goods and services in return
What is deduced from the circular flow of income
income = expenditure = output
- this is because the income received goes towards expenditure (spending) on the output (goods & services) produced by firms
Leakages/ Withdrawals
- Savings: money isn’t spent on economy
- Imports : money spent on other economy
- Taxes: money isn’t spent on firms
Injections
- Govt spending
- Exports : money coming in from foreign consumers
- Investment: banks lending to firms to invest in economy
Equilibrium in the circular flow of income
When there is no pressure on national income to rise or fall.
When injections = withdrawals, so national income is constant
Aggregate demand
total planned spending in economy over a period of time
Consumption
almost 70% of overall AD
Factors that affect consumption
- interest rates
- consumer confidence
- taxation
- wealth
- unemployment
Investment
addition to the capital stock in an economy
Main determinants of investment
- interest rates
- business confidence
- tax
- technology
- accelerator theory
The Accelerator theory
Increases in income will lead t and even larger increase in the level of investment
Factors affecting exports and imports
- exchange rate
- Uk growth
- inflation
The multiplier
How a change in AD leads to a proportionately larger change in overall national income.
Extra spending created income for other ppl and so on, however it decreases at some point bcuz less is ‘passed on’ as extra income is taxed, saved or spent on imports
Negative multiplier
A fall in AD leading to a proportionately larger fall in overall a national income. Sometimes referred to as ‘reverse’ multiplier
Marginal Propensity to Consume (MPC)
The proportion of additional income that is spent and passed on around the circular flow of income.
The size of the MPC determines the size of the multiplier.
What does a high or low MPC mean
A higher MPC means more of any additional income received is ‘passed on’ around the economy. A higher MPC means a larger multiplier.
Why does the SRAS slope upwards
increasing output in the short run would make costs increase so therefore price level would go up
