Key Concepts in National Income and Macroeconomic Equilibrium

National income

The total value of all goods and services produced in an economy over a period of time.

Gross domestic product (GDP)

The total value of all goods and services produced within a country's borders over a period of time.

Gross national income (GNI)

The total income earned by a country's factors of production, regardless of where they are located (GDP + net property income from abroad).

Nominal national income

National income measured at current prices, without adjusting for inflation.

Real national income

National income adjusted for inflation, measured at constant prices.

Expenditure method

Calculating national income by summing up all spending on final goods and services (C+I+G+(X-M)).

Income method

Calculating national income by summing up all incomes earned by factors of production (wages, rent, interest, profit).

Output method

Calculating national income by summing up the value added at each stage of production.

Circular flow of income

A model showing the flow of money, goods, and services between households and firms in an economy.

Injections

Additions to the circular flow of income (e.g., Investment, Government Spending, Exports).

Withdrawals (or leakages)

Reductions from the circular flow of income (e.g., Savings, Taxes, Imports).

Equilibrium (in circular flow)

The state where total injections equal total withdrawals, and national income is stable.

Aggregate demand (AD)

The total demand for all goods and services in an economy at a given price level.

Aggregate supply (AS)

The total supply of all goods and services in an economy at a given price level.

Macroeconomic equilibrium

The state where aggregate demand equals aggregate supply, determining the real GDP and price level.

Consumption

Spending by households on goods and services.

Interest rates

The cost of borrowing money and the reward for saving money.

Consumer confidence

Households' optimism or pessimism about their future financial prospects, affecting their spending and saving.

Taxation

Compulsory payments made to the government by individuals and firms, reducing disposable income.

Capital stock

The total value of all physical assets like machinery, buildings, and infrastructure in an economy.

Net exports (exports - imports)

The value of a country's total exports minus the value of its total imports (X-M).

Government expenditure

Spending by the central and local government on goods, services, and transfer payments.

Accelerator theory

The theory that the level of net investment depends on the rate of change of national income.

The multiplier process

The process by which an initial change in an injection (like investment) leads to a larger final change in national income.

Negative multiplier

The process by which an initial withdrawal from the circular flow (like a cut in spending) leads to a larger final fall in national income.

Marginal propensity to consume (MPC)

The proportion of any extra income that is spent on consumption.