How the Macroeconomy Works

• What is national income?

  Total value of new output over time
• What produces the output in an economy?

  Physical and human capital
• How does income differ from wealth?

  Income is a flow; wealth is a stock
• What are nominal and real GDP used for?

  To measure national income
• What does nominal GDP represent?

  Actual value of goods/services produced
• What is the effect of inflation on nominal GDP?

  No adjustment for general price level increase
• What does the term 'nominal' refer to in GDP?

  Not adjusted for inflation
• What is real GDP?

  Value adjusted for inflation
• If nominal GDP is £100bn and inflation is 10%, what is real GDP?

  £90bn
• What does rising real income indicate?

  Improving economic performance
• What happens to the standard of living if real income falls during a recession?

  Standard of living likely falls
• What does the rate of change of national income measure?

  Change in economic growth
• Why are both the level and rate of change in national income valuable?

  For cross-country comparisons
• What does the circular flow of income model illustrate?

  National income and flow of money

  
• What does a closed economy model show?

  Money flows between households and firms

  
• What additional agents are included in a more complex circular flow model?

  Government, financial sector, foreign trade

  
• Who owns the wealth in the economy?

  Households
• What do households receive in exchange for supplying factors of production?

  Income as a reward
• What types of income do households receive?

  Rent, wages, interest, profit
• What do firms do with the factors of production purchased from households?

  Produce goods and services
• What do firms receive when they sell goods and services to households?

  Sales revenue
• What does an open circular flow of income demonstrate?

  Relationship between all economic agents globally

  
• What is the role of the government in the circular flow of income?

  Influences size through taxation and spending
• How does the financial sector influence the circular flow?

  Provides funds for investment and savings
• What effect does globalization have on the circular flow of income?

  Affects exports and imports significantly
• What is the equation for national income using the expenditure approach?

  Nominal GDP = C + I + G + (X-M)
• What does the income approach to national income include?

  Wages, rent, interest, profit
• What is the equation for national income using the income approach?

  National Income = W + R + I + P
• What does the output approach to national income measure?

  Value of all finished goods/services produced
• What is the relationship between injections and withdrawals?

  One agent's expenditure is another's income
• How does the value of GDP differ from its volume?

  Value is monetary; volume is physical number
• What are injections in the circular flow of income?

  New income added to the economy
• What are withdrawals in the circular flow of income?

  Leakage of money from the economy
• What happens if injections exceed withdrawals?

  National income will increase
• What is the effect of increased government spending?

  It is an injection into the economy
• What is the effect of increased savings by households?

  It is a withdrawal from the economy
• What is the impact of increased exports?

  It is an injection into the economy
• What happens if withdrawals exceed injections?

  National income will decline
• What factors influence the size of the circular flow?

  Government spending, investment, consumption, net exports

  
• How do interest rates affect savings and consumption?

  Higher rates increase savings and reduce consumption