National Income (Pack 4)

• What is the difference between wealth and income?

  • Wealth: total value of assets owned
  • Income: flow of money received over time
• What is the 'circular flow of income'?

  The flow of spending and income within an economy
• What are the components of the circular flow of income?

  • Households
  • Firms
  • Government
  • Financial institutions e.g. Banks
  • Rest of the world
• What are the three injections in the circular flow of income?

  1. Investment
  2. Government spending
  3. Exports
• What are the three withdrawals in the circular flow of income?

  1. Savings
  2. Taxes
  3. Imports
• What is the 'multiplier effect'?

  When a change in an injection leads to an even bigger change in real GDP.
• What are the formulas for the multiplier ratio?

  1. Multiplier = 1 / (1 - MPC)
  2. Multiplier = 1 / MPW
  3. Multiplier = 1/ MPT+MPM+MPS
• What does the multiplier formula triangle represent?

  • Top: Final change in real GDP
  • Bottom left: Multiplier ratio
  • Bottom right: Size of the injection/withdrawal
• What are three factors that could lead to a larger multiplier effect?


  1. High marginal propensity to consume (MPC)
  2. Low marginal propensity to save (MPS)
  3. Increased investment spending
• What is marginal propensity?

  A measure of how much of any extra pound is earned.
• What is the difference between the simple and realistic model of the circular flow of income?

  The simple model only shows households and firms and doesn’t show the external factors like injections and withdrawals with an economy
• What does the simple model for the circular flow of income assume?

  Households own all the resources (factors of production) and the firms are producing the goods and services