Unit 10

• what is national income?

  The flow of new output produced by the economy in a particular period
• what does changes in real national income indicate in an economy?

  changing economic growth (living standards etc)
• what are the 3 ways in which the "flow of new output in an economy" can be measured?

  national income (sum of incomes)

  national output (sum of Gross Value Added from g+s produced)

  national expenditure (spending of factor incomes/profits)
• when national income = national output = national expenditure, what do we assume at the same time?

  ignore income flows in/out
• how is national income calculated?

  sum all components of aggregate demand
• what are the two types of market involved in the simple circular flow model?

  goods market (firms) and labour market (households)
• the relationship between households and firms is what

  circular
• what are the conditions within the simple circular flow model?

  no international trade (closed economy) sector and no government sector
• what is a closed economy?


  no international trade (opposite to open economy)
• what is an injection?


  Spending entering the circular flow of income as a result of Government spending, Investment, and eXports
• what is a withdrawal?

  a leakage of spending power out of the circular flow of income into Savings, Imports or Taxation.
• what is saving?


  income not spent
• what is equilibrium national income?

  the level of income at which withdrawals = injections in the circular flow of income OR aggregate demand = aggregate supply
• what is full employment income?


  the level of income when the economy is producing on its production possibility frontier, with no spare capacity
• what is deficient aggregate demand?

  Deficient demand refers to a situation wherein aggregate demand in the economy falls short of aggregate supply of goods and services at full employment
• what is a financial intermediary?

  financial institutions through which savers can indirectly provide funds to borrowers
• what is the simple circular flow of income aka?

  TWO-SECTOR (firms/households) circular flow of income model
• what are the three ways of reaching equilibrium national income?

  S = I

  S + I + T = G + I + X or AD=AS
• what is aggregate demand?

  total planned spending on real output in the economy at different price levels
• what's the difference between aggregate demand and national expenditure?

  Ad = PLANNED spending

  Ne = ACTUAL spending
• what are two assumptions to cause an upward aggregate supply curve?

  firms have profit-maximising objective

  in the short-run, the cost of producing extra units increases as more output is produced
• when will the AD curve shift?

  if there is a change in the value of any AD components
• what does a decrease in AS lead to?

  inflation
• what is an increase in SRAS caused by?

  decrease in the cost of production (reduced wage rates or increased productivity etc)
• a shift in AD causes what for the AS curve?

  a movement along the AS curve
• a shift in AS causes what for the AD curve?

  a movement along the AD curve
• what is SRAS?


  shows the quantity of total output that will be produced at each price level in the short run
• what is LRAS?


  the real output that can be supplied when the economy is on its PPF - the productive potential of an economy
• what is the difference between SRAS and LRAS?

  SRAS depends on the price level (whether or not to increase supply - profit)

  LRAS does not (spare/full capacity determines supply)
• what is underlying growth?


  long-run economic growth
• how can underlying growth be shown?

  by a shift of the PPF or LRAS curve
• what 2 things cause short-run economic growth?

  an increase in AD

  increase in SRAS
• what are the two types of equilibrium (1 micro 1 macro)?

  market equilibrium

  national income equilibrium
• what is consumer confidence?

  the degree of optimism about the state of the economy expressed through saving/spending
• what is productive capacity?


  The maximum level of output or production
• when deciding which of the AD and AS curves will shift, what 3 things do we consider?

  AD is determined by factors affecting national spending

  SRAS is determined by factors affecting costs of production + its profitability

  LRAS is determined by the economy's productive capacity
• how do we calculate net export demand?

  X-M
• what are the 8 determinants of aggregate /consumption/saving?

  Interest rates

  Level of income

  Expected future income

  Wealth

  Consumer confidence

  The availability of credit

  Distribution of income

  Expectations of future inflation
• what is the life-cycle theory of consumption?

  explains consumption/saving in terms of how people expect their incomes to change over the whole of their life cyles
• what is the difference between a stock and a flow?

  Stock refers to any quantity that is measured at a particular point in time, while flow is referred to as the quantity that can be measured over a period of time