2.4- National income

define MPC

proportion of an increase in income that gets spent on consumption

define MPW

• marginal propensity to withdraw

• proportion of an increase in income that is withdrawn from the circular flow of income

define MPS

proportion of an increase in income that is saved

define MPT

proportion of an increase in income that is taken in taxation

define MPM

the proportion of an increase in income that is spent on imports

define multiplier

process by which any change in the components of AD will lead to an even greater change in national income

when will economic growth increase?

when the injections are greater than leakages because more money is entering the economy

define macroequilibrium

when the injections + withdrawals are equal to each other

define accelerator effect

changes in investment can be directly linked to changes in the rate of GDP growth

define negative output gap

where actual output is less than potential output

define positive output gap

where actual output is greater than potential output (unsustainable)

why are measures of economic growth useful to the government?

• helps evaluate the economic performance of an economy

• allows government to evaluate policies + see how effective they were

• helps forecast expected growth and demand in future

define GDP

the value of all final goods + services produced in an economy in a year

ADV and DIS of GDP

ADV = measures growth/ living standards/ income

DIS = informal activity has a market value but is not included in figure as it isn’t registered

DIS = negative externalities not included

define GNI

the total income generated by a country’s factors of production

define green GDP

accounts for the environmental costs of production

DIS = monetary value on environmental costs can be difficult- subjective

when might LRAS shift outwards?

increase in quantity/ quality of factors of production

increase in productive efficiency of the economy ( lower costs)

define economic growth

an increase in real GDP in an economy in a year caused by an increase in AD or an increase in LRAS

define national income

total spending on goods and services

Define ‘circular flow of income’

• flow of money between households + firms in an economy

• households provide labour + receive income which they spend on goods + services produced by firms

define wealth

a large amount of money or valuable possessions + can be held in different ways