2.4 National Income

• Circular Flow of Income


  An economic model that shows flows of goods and services and factors of production between firms and households
• Income


  A flow of earnings from using factors of production to generate an output of goods and services
• Injections


  Variables in an economy that add to the circular flow of income and include investment (I), government spending (G) and exports (X).
• Withdrawals


  Variables in an economy that remove money flows from the circular flow of income and include saving (S), government taxation (T) and imports (M).
• Equilibrium National Output

  Aggregate demand is exactly equal to aggregate supply
• Marginal Propensity to Consume (MPC)


  The proportion of any change in income that is spent rather than saved.
• Marginal Propensity to Import(MPM)


  The change in total spending on imported products following a change in income. A high MPM reduces the size of the multiplier effect
• Marginal Propensity to Save (MPS)


  The change in total savings arising from a small change in household disposable income.
• Marginal Propensity to Tax


  The change in taxation following a change in income
• Marginal Propensity to Withdraw (MPW)


  The sum of the marginal propensity to save + marginal propensity to tax + the marginal propensity to import.
• Multiplier


  A calculation of the degree to which injections cause changes in final national income k = change in real GDP/change in injections
• Multiplier Effect


  Injections into the circular flow of income which stimulate further rounds of spending
• Multiplier Ratio


  Ratio of a change in equilibrium real income to the injection that has brought it about