National Income

• What is the circular flow of income?

  This is an overview of how the entire economy works and demonstrates the way money flows through the economy. It includes injections and withdrawals.
• In the circular flow of income, there are only two economic agents. What are they?


  • firms
  • households
• What is assumed in the circular flow of income?

  Households own all the FOP - land, labour, capital, enterprise
• What do households sell land to firms in exchange for?

  Rent
• What do households sell labour to firms in exchange for?

  Wages/salaries
• What do households sell capital to firms in exchange for?

  Interest
• What do households sell enterprise to firms in exchange for?

  Profit
• What is all the money earned then spent on?

  The goods and services produced by firms.
• What are examples of injections in the circular flow of income?

  • investment
  • government spending
  • exports
• What are examples of leakages/withdrawals in the circular flow of income?

  • savings
  • taxes
  • imports
• What is investment?

  An increase in spending on capital equipment, such as vehicles/transport, machines, buildings factories and other capital equipment.
• What are exports?

  Spending by foreigner consumers on domestic goods and services.
• What is government spending?

  Spending by central/local government on public goods and services.
• What are savings?

  Households and firms put money aside for the future. i.e. income not spent on consumption.
• What are taxes?

  The government takes money from households and firms e.g. corporation tax.
• What are imports?

  Spending on foreign goods and services by UK citizens.
• If savings rise, what should happen to spending?

  Spending should fall (ceteris paribus).
• If tax falls, what should happen to output?


  Output should increase (ceteris paribus).
• If invesment rises, what should happen to incomes?

  Incomes should increase (ceteris paribus).
• If exports fall, what should happen to output?

  Output should fall (ceteris paribus).
• If government spending rises, what should happen to income?

  Income should increase (ceteris paribus).
• What Is the formula for when the economy is in equilibrium?

  S+T+M=G+I+X
• What does actual output refer to?


  Actual output refers to the current rather than the potential level of production (real GDP) in an economy.
• What happens to the output gap when actual output is rising?


  When actual output is rising, the output gap is often declining and an economy is moving closer to their PPF by increasing the level of capacity utilisation.
• What is meant by output per worker?

  Productivity is output per worker (one of our key FOP).
• Will an increase in AD cause real GDP to expand?


  This depends on the elasticity of aggregate supply.
• When is equilibrium established?


  Equilibrium is established when AD intersects with SRAS (i.e. planned output and demand are in balance).
• In relation to total planned demand and actual product ion, what is important?


  What matters is whether total planned demand for goods and services (AD) is close to actual production from domestic and external sources.
• A fall in the general price level (other factors remaining equal) will lead to what?


  A movement down the AD curve.
• What is the impact of an increase in AD?

  An increase in AD causes an expansion of aggregate supply and a higher equilibrium level of national output (i.e. higher real GDP).

  An outward shift of AD will bring about a cyclical rise in output and employment.