2.3.4 National income + Injections and withdrawals

Ways to measure national income

• National output

• National expenditure

• National income

National output (O)

• Total value of goods and services produced by firms in an economy (most commonly measured using GDP

National expenditure (E)

Total value of spending by all economic actors (consumers, firms, governments, net exports)

National income (Y)

• Total value of income of all producers (wages, owner income, corporate profits)

Circular flow of income

Ways of thinking about money flowing around an economy

• No foreign trades, closed economy - O = E= Y, no taxation

• Households supply firms with factors of production in exchange for rent, wages

• Firms supply households with goods and services

Income vs wealth

• Income: flow of money received after a period

• Wealth: stocks of asset accumulated over time

Injections

Spending not generated by households

• Investments by firms (factors/machinery, spending on goods and services used in production)

• Government spending (Subsidies, benefits)

• Exports - spending by foreigners on goods and services

Withdrawals

Spending that does not flow back to households and firms

• Saving by households and firms

• Taxes paid to the government by households and firms

• Imports - goods and services purchased from abroad by households and firms

Equilibrium

injections = withdrawals

• outputs, expenditure and income remain the same

National income rises

Injections > withdrawals

(spending increases)

National income falls

Injections < withdrawals

(spending decreases)

How do classical economists believe RNO is increased

• Supply-side policies (shift supply)

• Shifts in AD only lead to inflation

How do keynesian economists believe RNO is increased

• Demand-side policies (if in recession), followed by shifts in supply

The multiplier effect

Increase in components of AD will lead to greater increase in GDP

• Autonomous spending results in induced spending

MPW + Components

Marginal propensity to withdraw:

Change in income that is withdrawn from the circular flow of income

• MPS (save)

• MPT (tax)

• MPM (import)

MPW = MPS + MPT + MPM

Formulas for the multiplier

• 1 / 1 - MPC

• 1 / MPW

Formula with MPC and MPW

MPC + MPW = 1

Example evaluations for multiplier effect

• Also leads to larger fall in GDP

• Time lag

• Difficult to measure (size and complexity of economy)

Factors that affect multiplier

• Spare capacity

• MPM

• MPT

• MPC