3.2.2.1 THE CIRCULAR FLOW OF INCOME

What does national income measure?

The flow of new output produced by an economy in a particular time period, such as a year

The total monetary value of all goods and services produced in an economy usually in a year

What is the difference between nominal and real national income?

nominal (includes inflation) - measures the flow of output at the current price level in the economy

real (does not include inflation) - the flow of new output - the actual goods and services that are produced

What is the role of real national income as an indicator of economic performance?

The level of real national income is an indicator of current living standards living within the economy

What is the difference between economic development and economic growth?

Economic growth - a growing economy

Economic development - does this mean that people are better off?

What is the debt to GDP ratio?

100% (£2.6 trillion)

What is the 3 word that all begin with national that equal each other?

National income = national output = national expenditure

What is national income?

Incomes received by the differnt factors of production (labour)

What is national output?

Summing the total of the actual goods and services produced by the economy

What is national expenditure?

How wages and profits end up being spent on the goods and services produced by the economy

What is the income approach?

Sums the factor incomes to the factors of production

What is the output approach?

Adds to the 'value added' by each of the industries in the economy

What is the expenditure approach?

Suns consumption and investment and government expenditure and exports minus imports

What is the equation for this?

AD = C + I + G + (X - M)

What does each letter stand for?

C - consumption - consumers

I - investments - businesses

G - government spending

X - imports

M - exports

What are the 2 types of flows?

• real flow (households own factor services which they hire out of firms)

• money flow (household receive payments for their services - income - and use this money to buy the outputs of firms - consumption

What are the 4 main factors of the circular flow of income?

• income

• households

• consumption

• firms

What does the circular flow of income look like?

What does a closed economy mean?

An economy with no international trade

An examples of a closed economy?

Iceland

Is the UK a closed or open economy?

Open - the UK exports services

What services does the UK predominantly export?

Finance related services

What is FDI?

Foreign direct investment - when businesses have outlets in different countries, but all the money/profit goes to the parent country

Define saving

Income which is not spent

Define withdrawal

A leakage of spending power out of the circular flow of income into savings - taxation or imports

Define investments

Total planned spending by firms on capital goods produced within the economy

Define injection

Spending entering the circular flow of income as a result of investment, government spending and exports

What is equilibrium national income?

The levels of income at which withdrawals from the circular flow of income equal injections into the flow

Also the level of output at which aggregate demand equals aggregate supply

What equation shows equilibrium?

Planned saving = planned investment

S = I

What does an open economy mean?

An economy open to international trade

What is hoarding?

When consumers keep a fraction of their income and do not spend it

Income that is not spent

Is hoarding a good or bad thing for the economy?

A bad - this does not help the multiplier as it is leaving the circular flow of income and not back into the economy

Why do consumers hoard money?

Consumers have a propensity to either spend or save their money - depending on their confidence

Examples of withdrawals into the circular flow?

• put aside for future saving

• paid to the government in taxes

• spent on foreign goods imported into the country

Examples of infections into the circular flow?

• other firms - investment expenditure

• the government - expenditure

• foreigners - export expenditure

Explain how hoarding affects the equilibrium national income?

Leads to deficient aggregate demand in the economy which means there is too little demand to buy the output the economy is capable of producing

What happens to national income when:

S + T + M = I + G + X

National income is in equilibrium

What happens to national income when:

S+T+M > I+G+X

National income level decreases

What happens to national income:

S+T+M < I+G+X

National income level increases

What does S+T+M = I+G+X stand for?

saving + taxation + imports = investments + government spending + exports

What is another word for withdrawals?

Leakage

What are the 3 leakages/withdrawals?

• savings

• taxation

• imports

What are the 3 injections?

• investments

• government spending

• exports

Which out of the 3 injections, do not contribute to AD?

Imports

Is this statement true or false?

If the sum of all injections is greater than the sums of all withdrawals then national income will rise and the economy should grow

True

Is this statement true or false?

If saving plus government spending equals taxation plus investment then the economy is in equilibrium?

False

Why is this?

It ignores other injections and withdrawals

If exports are £-50bn, does this mean money is flowing in or out of the economy?

Out - so exports would go from 300 to 350 as more money is leaving the economy