A level Macroeconomics OCR Topic 1

Circular flow of income

A model of the economy which shows the flow of goods and services, the factors of production and money around the economy.

Injections

Spending power entering the circular flow of income resulting from investment, government spending, and exports.

Leakages

Spending power leaving the circular flow of income resulting from savings, taxation, and imports.

Macroeconomic equilibrium

Where the rate of withdrawals equals the rate of injections.

Monetary flows

The flow of money, for example from taxes or for consumption.

Physical flows

The flow of a good or service.

Aggregate demand (AD)

The total level of demand in an economy at any given price level at a moment in time.

Consumption

Consumer spending on goods and services.

Investment

Spending by businesses on capital goods, which leads to the creation of real goods.

Government expenditure

Spending by the government for the provision of goods and services.

Exports

Goods and services sold to foreign countries that provide an inflow of money.

Imports

Goods and services bought from foreign countries that lead to an outflow of money.

Net exports

Exports minus imports.

Aggregate supply (AS)

The total amount of output in the economy at any given price level at a moment in time.

Short run aggregate supply (SRAS)

Aggregate supply when at least one factor of production is fixed.

Long run aggregate supply (LRAS)

The total output an economy can produce when operating at full output.

Multiplier

An increase in an injection will lead to an even greater increase of national income.

Accelerator theory

A change in consumption will cause a larger percentage increase in investment; high consumption leads to high investment.

Output gap

The difference between the long-term trend rate of growth and actual growth.

Negative output gap

When GDP is lower than predicted; the economy is producing below full output.

Positive output gap

When GDP is higher than predicted; the economy is producing above full output.

Marginal propensity to consume (MPC)

The proportion of an increase in income spent on consumption.

Marginal propensity to save (MPS)

The proportion of an increase in income that is saved.

Marginal propensity to withdraw (MPW)

The proportion of an increase in income that is withdrawn from the circular flow.

Average propensity to consume

The percentage of income spent on goods and services.

Average propensity to save

The percentage of income that is saved.