1.4.2.1 The circular flow of income

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What is national income?

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• What national income measures. • The difference between nominal and real income. • Real national income as an indicator of economic performance. • The circular flow of income concept, the equation income = output = expenditure, and of the concepts of equilibrium and full employment income. • The difference between injections and withdrawals into the circular flow of income. • The effect of changes in injections and withdrawals on national income.

20 Terms

1

What is national income?

National income is the total value of the goods and services a country produces. It is the output in one year.

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2

How can national income be measured?

GDP, GNP, GNI

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3

The value of GDP adjusted for inflation

the value of GDP adjusted for inflation

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4

What is nominal GDP?

It is the value of GDP without being adjusted to inflation.

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5

What is GNP (Gross National Product)?

GNP (Gross National Product) measures the total value of goods and services produced by individuals and businesses from a country within a year regardless of whether the individual or business is operated within that country.

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6

What is GNI (Gross National Income)?

The sum of the value added by all producers who live in a nation, plus product taxes (without subsidies included), plus receipts of primary income.

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7

What is the circular flow of income?

Demonstrates how money moves around the economy via producers and households in an endless loop

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8

What do households supply?

Factors of production

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9

What do households receive from firms?

Wages and dividends

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10

What do firms supply to households?

Goods and services

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11

What is the definition of withdrawals?

These are actions which take money out of the circular flow

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12

What are withdrawals?

Imports
Taxes
Saving

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13

What is the definition of an injection?

Spending that puts money into the circular flow of income.

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14

What are injections?

Investments
Government spending
Exports

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15

What is full employment income?

Full employment income is the total output of an economy when unemployment is minimised or is at the government target. This accounts for frictional unemployment.

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16

How are firms rewarded from households?

Through consumer spending

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17

Income = =

Income = output == expenditure

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18

When is the economy in equilibrium?

When leakages = injections

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19

What happens when there are net injections into an economy?

There will be an expansion of national output

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20

What happens if there are net withdrawals in an economy?

There will be a contraction of production, so output decreases.

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