National income

National income

The amount recieved by various agents in an economy, by households, firms and the government

• It is the same as GDP measured by households, firms, gov

• It’s the same as total spending by those agents

• It’s the same as gross domestic income (all income earned in an economy)

• It assumes leakages and injections have been taken into account)

National income is the flow of money rather than a stock of money, such as savings, assets, shares.

Leakages

Also known as withdrawal

• Are an exit from the circular flow of money, these compromise saving, taxation, and money spent on imports.

Circular flow of money

The idea that money continuously flows between firms and households

• Households provide labour and they spend money on GS

• Firms provide wages and produce GS

Wealth

The stock of assets (wealth, or land)

Income and wealth

There is a strong correlation between income and wealth, for example, if my house is worth more than what i paid for it, i might feel more confident about buying a new car and i will be able to lend money easier as the house is collateral

Injections

Are an input to the circular flow of money, these inputs comprise of government spending, investment and export income

The 3 injections

• Investment

  • An increase in the capital stock

• Government spending

  • Where the government buys goods and services such as healthcare in the NHS

• Exports

  • Where people abroad buy domestically made services

Withdrawals

Leakages out of the circular flow of income

Reasons of withdrawals

• Savings

  • When we spend later rather than now, it means there is less spending in the current time period

• Tax

  • When the gov demands your money, you can’t spend it, especially if it is in a budget surplus

• Imports

  • When we buy goods and services from abroad, money flows out the country

Equilibrium

Where there is a balancing point where there is no tendency to change

• If prices were higher than the balancing point (above the equilibrium), there’d be a tendency for them to fall because supply would be greater than demand, and there’d be lots of unsold GS

• If prices were lower than the balancing point, there’d be shortages of supply (not all demand is filled) so prices would rise so everyone could get what they’re prepared to pay for

• If there was a recession and a fall in AD occured, you’d expect to see falls in prices

Equilibrium types

• The SR equilibrium is where AD = SRAS

• The LR equilibrium is where AD = SRAS = LRAS

• For keynesian, wherever AD =LRAS, could be the long run equilibrium

The multiplier

The multiplier shows how much total spending in the economy changes in response to an initial change in an injection or a leakage

The multiplier ratio

The multiplier ratio, if written as x:y, shows how much of an impact an initial injection (x) will have on total incomes (y).

Marginal propensities

• Marginal propensity to consume (MPC)

• Marginal propensity to save (MPS)

• Marginal propensity to tax (MPT)

• Marginal propensity to import(MPM)

Marginal propensity to consume (MPC)

The fraction of extra income that households spend on GS

• If I give you £10 and you spend half of it straight away, then you have a marginal propensity to consume (MPC) of 0.5, that is, 50% of any extra injection will be re-spent in the economy in macroeconomic terms. The MPC is 0.5.

Marginal propensity to save (MPS)

MPS (Marginal Propensity to Save) is the fraction of any extra income that you save instead of spending.

If I give you £10 and you save £1, then your marginal propensity to save (MPS) is 0.1. The more you save, the less you spend, so the lower the multiplier is. This means that an injection has a smaller overall impact on the economy. The multiplier ratio falls when the marginal propensity to save rises.

Marginal propensity to tax

The fraction of extra income paid as taxes

• If I give you £10 and you buy some cigarettes, which have a specific tax of £3, then the effect on the economy will not be as great as if you spent the money on some locally grown apples (no tax). The higher the marginal propensity to tax (MPT), the lower the multiplier ratio.

Marginak propensity to import (MPM)

The fraction of extra income spent on imports

• If i give u £10 and u spend it on starbucks, the money is flowing out of the country to america (import) (money from investment) so the MPM is 0.1