Theme 2 - Topic 4: National income and macroeconomic equilibrium (Ch 28-30)

Circular flow of income, expenditure and output

A model of the economy which shows the movement of goods and services between households and firms and their corresponding payments in money terms

Withdrawals

Where money flows out of the circular flow in the forms of savings, taxation and imports

Injections

Where money flows into the circular flow in the form of investment, government spending and exports

Income

A flow concept - the amount that is earned during a period. Rent, interest, wages and profits earned from wealth owned by economic agents.

Wealth

A stock concept - the accumulation of assets, such as property of shares. A stock of assets which can be used to generate a flow of production or income, e.g. physical wealth such as factories or machines is used to make goods and services.

Multiplier

The ratio of a change in equilibrium real income to the autonomous change that brought it about; it is defined as 1 divided by the marginal propensity to withdraw

Marginal propensity to import (MPM)

The proportion of additional income that is spent on imports of goods and services

Marginal propensity to tax (MPT)

The proportion of additional income that is taxed

Marginal propensity to withdraw (MPW)

The proportion of additional income that is withdrawn from the circular flow - the sum of the marginal propensities to save, import and tax

Closed economy

An economy where there is no foreign trade

National income

The value of the output, expenditure or income of an economy over a period of time.

Open economy

An economy where there is trade with other countries