Circular Flow of Income

What is an injection?

A flow of money (investment, government spending or exports) into the circular flow and increases the level of economic activity

What is a leakage?

A flow of money (taxes, savings or imports) out of the circular flow and reduces the level of economic activity.

Define The Basic Circular Flow Model

A simple model of the economy showing flows of goods and services and factors of production between firms and households.

What is Real GDP per Capita?

GDP figure has been adjusted to take into account inflation. If inflation had not been take into account this would then be classed as a nominal figure.

What is Marginal Propensity to Consume and how is it calculated?

It is the proportion of income spent by a person. It is calculated through the equation: MPC = change in consumption / change in income

What is the Multiplier Effect and how is it calculated?

It reflects how an initial change in aggregate demand can have a much greater final impact on national income. It is calculated through the equation: Multiplier = 1 / 1-MPC

Other than GDP, what are the alternative indicators that can be used to measure living standards?

Ownership of consumer durables such as televisions, dish washers, home computers, etc. Home ownership levels The number of patients per Doctor - a measure of health provision in a country Hospital waiting lists Infant mortality rates Literacy rates Estimates of pollution levels Life expectancy The average food intake per person (average calorific intake) Crime rates

What are the limitations to GDP when measuring living standards?

Regional variations in income and spending - For example, in the UK income and employment levels are considerably higher in places such as London and the South East compared to areas in South Wales or the North East of England. Economic growth and externalities - Rising national output may of been accompanied by a rise in pollution and negative externalities which have a negative effect on economic welfare. Output figures also tell us little of the quality of the goods and services produced. Leisure and working hours (quality of life) - Rising national output have been achieved at the expense of leisure time if workers are working long hours. The balance between consumption and investment (sustainability) - If an economy devotes too many resources to the short run needs and wants of the consumer, there may be insufficient resources for investment needed for long term economic development. Faster economic growth might improve living standards today but lead to an over-exploitation of scarce finite economic resources thereby limiting future growth prospects. The Shadow Economy - GDP may understate the true living standards because of the existence and growth of the black economy which includes economic activity that goes unrecorded by the Inland Revenue and Customs and Excise.

What does The Basic Circular Flow Model show?

That households provide the factors of production for firms who produce goods and services. In return for the factors of production, households receive factor payments (wages, dividends, rent, interest, profit) which are in turn spent on the output of firms.

What are the 3 different ways of measuring the Full Circular Flow Model?

The Income Method The Expenditure Method The Output Method

What is the Income Method?

The national income which is the sum of the final incomes earned through the production of goods and services including

What does the size and rate of change of National Income/National product allow us to determine?

The rate of economic growth and where the economy is in the business cycle Changes to overall living standards of the population The distribution of national income (whether inequalities exist in different sections of society) Comparisons of economic performances and living standards between countries The performance of different sectors in the economy and the performance and effectiveness of government in economic policy

What is the Expenditure Method?

The sum of aggregate demand ((AD)=C+I+G(X-M))

What does National Income/National product describe?

The total wealth produced, distributed and consumed in an economy over a year. It is a flow with respect to time.

What is the Output Method

The value of output produced by each of the industrial sectors (primary, secondary, tertiary) in the economy using the concept of value added. Value added is the increase in the value of the product at each successive stage of the production process. This avoids the problem of double counting the value of intermediate inputs. This is the most recognised and widely used method of measuring national income and is more commonly known as GDP (Gross Domestic Product).

What is Gross National Product (GNP)?

This measures the final value of output produced by UK owned factors of production whether they are located in the UK or overseas. E.g. oil produced by British Petroleum in Russia would be included.

What is Gross Domestic Product (GDP)?

This measures the output produced by all firms in the UK even that output produced by foreign based firms in the UK. It is output produced within the national borders of the UK. E.g. it would include the value of cars produced by Nissan in Sunderland.

What is GDP per Capita?

Total GDP divided by the population and represents average income