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