ECONOMICS THEME 2 - TOPIC 2.4 - NATIONAL INCOME

National Income

Injections and withdrawals

Equilibrium and level of output

The Multiplier

the circular flow of income graph^^

income and wealth

injections are monetary additions to the economy

  • investment (I)
  • exports (X)
  • government spending (G)

withdrawals are where money is being removed from the economy

  • taxes (T)
  • savings (S)
  • imports (M)
  • if the sum of injections is greater than the sum of withdrawals then the economy will be growing and vice versa
  • in an equilibrium, injections must be equal to withdrawals so national income remains the same
  • the equilibrium position is where the AD and AS curves intersect
  • if either AS or AD are shifted then the equilibrium position will change

GRAPHS FOR KEYNSIAN AND CLASSIC

increasing AD + AS

  • in microeconomics a factor that influenced demand or supply wouldn't effect the other
  • but in macro its not the same
  • e.g an increase in investment would increase AD, as well as AS as firms can produce more with machinery
  • the multiplier process is the idea that an increase in AD because of injection, can lead to a further increase in national income

multiplier = 1 / (1-MPC)

effects on the economy...

  • there will be a time lag between the injection and its full effect
  • the overall effect on the economy will depend on the change in AD and the elasticity of the AS curve
  • the multiplier means growth can occur quicker

effects of the marginal propensities

marginal propensity to tax (MPT) - the increase in taxation following an increase in income

marginal propensity to import (MPM) - the increase in imports following an increase in income

marginal propensity to save (MPS) - the increase in savings following an increase in income

marginal propensity to withdraw (MPW) - the increase in withdrawals following an increase in income - MPW=MPS+MPT+MPM

marginal propensity to consume (MPC) - the increase in consumption following an increase in come

= 1/MPW

effects of a change in AD

  • the multiplier leads to an increase in AD but for it to have its desired effect there must be sufficient spare capacity in the economy
  • wealth is a stock of assets e.g house, whereas income is a flow e.g money from work
  • if AS is perfectly inelastic such as classical LRAS curve, then the only impact will be to increase price
  • the more elastic the curve, the more of an effect on output rather than price