Please enable JavaScript.
Coggle requires JavaScript to display documents.
the circular flow of income - Coggle Diagram
the circular flow of income
National Income Determination
Aggregate Demand (AD) and Income Approach:
National income is determined by the level of aggregate demand (AD = C + I + G + (X - M)).
The income approach measures national income by summing factor incomes (wages, rents, interest, profits).
Multiplier Effect on National Income
Impact of Changing AD on National Income:
The change in AD leads to a multiplied change in national income through the multiplier effect.
Determinants of Aggregate Demand
Consumption (C):
Consumer confidence, interest rates, wealth.
Investment (I):
Business confidence, interest rates, technological innovation.
Government Spending (G):
Fiscal policies, political priorities.
Net Exports (X - M):
Exchange rates, global demand, trade policies.
Consumption and Savings Functions
Consumption Function:
Autonomous Consumption:
Consumption that occurs regardless of income.
Induced Consumption:
Consumption that depends on the level of income.
Savings Function:
Autonomous Savings:
Savings independent of income.
Induced Savings:
Savings that vary with income.
Investment
Determinants of Investment:
Interest rates, business expectations, government policies.
Autonomous Investment:
Investment not influenced by national income.
Induced Investment:
Investment that rises with higher national income.
Accelerator Theory:
The idea that investment depends on the rate of change of economic growt
Government Spending
Determinants:
Fiscal policies, social priorities, economic conditions.
Inflationary & Deflationary Gaps
Inflationary Gap:
Occurs when AD exceeds full employment output.
Deflationary Gap:
Occurs when AD is less than full employment output.
Net Exports (X - M)
Determinants:
Exchange rates, trade policies,
global economic conditions.
Full Employment vs Equilibrium National Income
Relationship:
Full Employment National Income:
The level of national income where all resources are fully employed.
Equilibrium National Income:
The level where AD = AS, not necessarily full employment.
Propensities and rates
-average and marginal propensities
-tax rates - average rate of tax
-marginal rate of tax
The process by which an initial change in spending leads to a larger change in national income.
Definition:
The Multiplier
Full Employment vs Equilibrium National Income
Relationship:
Full Employment National Income:
The level of national income where all resources are fully employed.
Equilibrium National Income:
The level where AD = AS, not necessarily full employment.
