2-4 National Income Workbook PDF

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Workbook that helps achieve a good grade. Good practice material to achieve high grades. Can provide pmt notes for extra help...

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Theme 2: The UK Economy – Performance and Policies (Workbook 2 of 6)

2.2 Aggregate Demand

Name:

2.4. 1 a b 2.4. 2 a

2.4. 3 a b

2.4. 4 a b c d

i j

National Income Explain The Circular Flow Of Income Understand The Distinction Between Income And Wealth

R A G R A G

Injections And Withdrawals Explain The Impact Of Injections Into, And Withdrawals From, The Circular Flow Of Income

R A G

Equilibrium Level Of Real National Output Understand The Concept Of Equilibrium Real National Output The Use Of AD/AS Diagrams To Show How Shifts In AD Or AS Cause Changes In The Equilibrium Price Level And Real National Output

R A G R A G

The Multiplier Understand The Multiplier Ratio R A G Understand The Multiplier Process R A G Explain The Effects Of The Economy On The Multiplier R A G Understand Marginal Propensities And Their Effects On The Multiplier: R A G The Marginal Propensity To Consume (MPC) R A G The Marginal Propensity To Save (MPS) R A G The Marginal Propensity To Tax (MPT) R A G The Marginal Propensity To Import (MPM) R A G Be Able To Calculate The Multiplier Using The Formulae 1/(1-MPC) R A G And 1/MPW, Where MPW=MPS+MPT+MPM Explain The Significance Of The Multiplier To Shifts In AD R A G

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National Income

The circular flow of income and spending shows connections between different sectors of an economy. It shows flows of goods and services and factors of production between firms and households. The circular flow shows how national income or Gross Domestic Product is calculated.

Complete this diagram.

What does the diagram above show?

Households own ……………………. of ………………, which they provide to ……………………… In return, firms will have to pay for these and these are known as ………….. …………. . Labour receives ………. Capital receives …….. Land receives ………. Enterprise receives ……

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With these factor inputs, firms will produce …………………….. and ……………………… Households will use their incomes to purchase the goods and services that firms have provided.

Why is this model unrealistic?

Income and wealth

What is meant by income?

Why is it a “flow” concept?

What is meant by wealth?

Why is wealth considered a “stock” concept?

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What is the inter-relationship between income and wealth?

Why might lower consumption in the short-run lead a shift in the PPF in the long run?

Reinforcement: PMT Notes – Page zzzz and add to the notes above YouTube: “Econplusdal Circular Flow of Income”

Challenge: Research the income and wealth distribution in the UK. How equal is it? What are the possible reasons to explain your findings?

Injections and withdrawals

Using this model, we can see how incomes flows around the economy. To understand how this income level can increase or decrease, we need to introduce the concepts of injections and withdrawals. 4

Injections lead to an increase in the circular flow of income. Withdrawals reduce the circular flow of income. Decide whether the following are injections or leakages within the UK economy.

Factor Government spending Investment by business Savings by households Imports

Injection or leakage?

Exports Taxation

True or False….read carefully! If the sum of all injections is greater than the sum of all withdrawals then national income will rise and the economy should grow. If the saving equals investment and exports exceed imports then national income will fall and the economy will shrink If saving plus government spending equal taxation plus investment then the economy is in equilibrium

Reinforcement: PMT Notes – Page zzz and add to the notes above YouTube: “Econplusdal Circular Flow of Income”

Challenge: Is encouraging people to save less and spend more a good thing for the economy?

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Equilibrium level of real national output

When injections equals leakages, we expect the circular flow of income to be stable. This is referred to as equilibrium. These is no tendency for income to go up or down. Equilibrium could happen at any level of output. It may be that it occurs where there is full employment or it could occur at a level well below this. Full employment output occurs when the economy is operating at full capacity with all factors of production employment to their maximum.

AD / AS Analysis of Equilibrium Level of Real National Output Equilibrium national income will occur where AD is equal to AS. This will determine:   

The level of GDP Unemployment The Price Level - inflation

Draw the effects of the changes identified below. Identify the effects on GDP, Unemployment and the Price Level.

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In each case, the AD or AS curves will shift, or both. Increase in income tax Classical LRAS curve

Keynesian AS curve.

Explanation:

Explanation:

Rise in the level of consumer confidence

Classical LRAS curve

Keynesian AS curve

Explanation:

Explanation:

Innovation in the quality of UK goods and services Classical LRAS curve

Keynesian AS curve 7

Explanation:

Explanation:

Reduction in the minimum wage Keynesian AS Curve

SR AS curve

Explanation:

Explanation:

Decrease in VAT Keynesian AS Curve

SR AS curve

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Explanation:

Explanation:

Increase in imports

Keynesian AS Curve

SR AS curve

Explanation:

Explanation:

Increase in the price of oil

Keynesian AS Curve

SR AS curve

Explanation:

Explanation:

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Increase in government spending.

Keynesian AS Curve

SR AS curve

Explanation:

Explanation:

Reinforcement: PMT Notes – Page zzzz and add to the notes above YouTube: “Econplusdal Aggregate Demand Supply” (various videos)

Challenge: Research the impact of the coronavirus on the UKs AD and AS. Explain the subsequent impact on economic indicators.

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The multiplier

What is the multiplier effect?

What is the multiplier ratio?

To understand the concept of the multiplier, it is important to understand the marginal propensities. Marginal propensity to consume (MPC)

This refers to …

Marginal propensity to save (MPS)

This refers to …

Examples:

If a person had an MPC of 0.8, what would it mean if s/he received an increase in income of £50?

If a person had an MPC of 0.75, what is the MPS?

What will MPC + MPS add up to? Why?

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What is the formula for calculating the simple multiplier (K)?

What would happen to the value of the multiplier if MPS was to increase?

What would happen to the value of the multiplier if MPC was to increase?

Open Economy Multiplier A full ‘open’ economy has all sectors, and therefore, three withdrawals – savings, taxation and imports. This is indicated by the marginal propensity to save (MPS) plus the extra income going to the government - the marginal tax rate (MRT) plus the amount going abroad – the marginal propensity to import (MPM).

Marginal Rate of Tax (MPT)

This refers to …

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Marginal propensity to import (MPM)

This refers to …

MPS + MPT + MPM is referred to MPW

By adding up all the withdrawals we get the marginal propensity to withdraw (MPW). The multiplier can now be calculated by the following general equation:

K

=

1 1 - MPW

Exercise 1:

If the UK government decided to give everyone a £100 tax credit this could cause a major i_______ into the c________ f_______ of i________. This money would be passed onto firms in form of i__________ d__________ for their goods and services. These firms respond by employing more labour to meet the increased demand. This labour now gets paid and the circle repeats. However, it does not go on forever. Each time the money circulates some will be withdrawn by ____, ________ and spending on _________. Eventually the economy will establish a new equilibrium at higher level of output. The key point is that the initial injection has produced a larger increase in GDP. The degree of economic expansion will depend on the m_________ p______ to w_______. If we withdraw a lot of that initial income then the multiplier will be ______. If we only withdraw a little the multiplier will be ________.

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Exercise 2: From the above we can see that the size of the multiplier varies inversely with the size of the marginal propensity to withdraw. If the MPW was ___ there would be no multiplier. If the MPW was ____ there would be an infinite multiplier. Therefore the formula give the multiplier as the inverse of the MPW. K = 1/MPW Or since MPW + MPC = 1 and therefore MPW = 1 – MPC the formula can be written as: K = 1/(1 –MPC )

So if the MPW was ¼ the multiplier would be _____. If there were an injection of 100 billion the economy would expand by _____ billion.

The Multiplier and Shifts in AD

Draw an AS / AD diagram to show an initial and subsequent effects of an increase in an injection on AD and GDP. Initial Impact:

Diagram:

Subsequent Impacts:

Diagram:

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Reinforcement: PMT Notes – Page zzzz and add to the notes above YouTube: “Econplusdal Multiplier Effect”

Challenge: What are the possible direct and indirect effects of the proposed HS2?

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