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Average propensity to consume (APC)
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Average propensity to import (APM)
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LC Econ NI Size
LC Economics Factors Affecting Size of National Income
| Question | Answer |
|---|---|
| Average propensity to consume (APC) | The fraction of income that is spent. APC=C/Y |
| Average propensity to import (APM) | The fraction of income spent on imports. APM=M/Y |
| Average propensity to save (APS) | The fraction of income that is saved. APS=S/Y |
| Closed economy | An economy that does not engage in international trade, that is, it has no exports and imports. |
| Deflationary gap | If the equilibrium level of income is less than the level of income required to have full employment of resources, then there is said to be a deflationary gap. |
| Inflationary gap | If the equilibrium level of income is higher than the level of income required to bring about full employment, then there is said to be an inflationary gap. |
| Injection | Anything that increases the flow of income in the economy (that is, investment, exports and government spending). |
| Marginal propensity to consume (MPC) | The fraction of extra income that is spent. MPC = ∆C/∆Y |
| Marginal propensity to import (MPM) | The fraction of extra income that is spent on imports. MPM = ∆M/∆Y |
| Marginal propensity to pay tax (MPT) | The fraction of extra income that is paid in tax. MPT = ∆T/∆Y |
| Marginal propensity to save (MPS) | The fraction of extra income that is saved (Whatever is not consumed). MPS = ∆S/∆Y |
| Multiplier | The multiplier is the relationship between an initial injection into the circular flow of income and the eventual total increase in national income resulting from that injection. Increase in income= 1/ MPS+MPM+MPT x injection |
| National income equation | Y= C + I + G + X - M |
| Open economy | An economy that engages in international trade, selling exports and buying imports. |
| Potential level of national income | The maximum level of output that the economy is capable of producing, given its resources. |
| Withdrawal (or leakage) | Anything that reduces the flow of income in the economy (that is, savings, imports and taxation). |
| What determines the size of national income in a country? | The potential level of national income is the maximum level of output that the economy is capable of producing, given its resources. The actual level is expressed as Y=C+I+G+X-M |
| Consumption Function | The relationship between consumption and income. Consumption depends on Income, the higher the income the higher the consumption. C=a+bY, where a = that part of consumption independent of income (autonomous expenditure), b= the MPC |
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MrFromholz
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