How National Income is Determined :: Employment Finances Economy Economics Essays

How National Income is DeterminedQuestion 1/2 - Describe how national income is determined. Include a description of equilibrium, using income and expenditure, and leakages and injections.How practically reinforcement people get and their disbursal determine national income. Theabove circular flow shows that although wages argon being spent in the households the silver still works its way back to the firms.The leakages in the circular flow are the money is the money that households arepaying back into firms and services from wages they are paid. The savings are themoney people save in their banks, taxes are the tax that people pay in their wagesweekly, monthly or fortnightly and imports are items that the people have boughtfrom companies.The injections in the circular flow is the money that has been put into firms andservices. the investments are the money firms and the government have invested intocompanies, the government spending is the money the government spend on firmsand se rvices and exports are the money the firms and companies spend buying goodsto sell.The money keeps on going round and round.The equilibrium is when the leakages and injections are the same.i.e. if the leakages = 23500, the injections will = 23500. Theequilibrium is where they meet.Question 3 - Explain the concept of the multiplier with regard toNational Income using a worded example.According to the Keynes a rise in the injection to the circular flow will cause theincomes and employment to increase by more than the increase in investment.The equilibrium at start -If there is an increase in investments of 20m. The effect of this will be to raiseincomes by the same, the people who receive this increase will spend some and savesome. If 3 quarters are spend and 1 quarter is saved. this would mean 15m isand is turned into income for other people, which leaves 5m being saved. Incomeshave increased by the original 20m, but likewise by the 15m due to people spendingextra. The people who r eceive the extra income will spend 3 quarters and save 1quarter and so it goes round and round. Incomes increase a little as follows -20m + (3/4 x 20m) + (3/4 x 3/4 x 20m) + (3/4 x 3/4 x 3/4 x20m)etc. . . . . . . The multiplier is denoted as k - k = 1 = 4 1 - 3/4 center extra income - 4 x 20m = 80mTotal extra savings - 20mThe new equilibrium is -Question 4 - What is meant by the terms aggregate demand and aggregate generate?