Economics Chapter 6: National Income and Determination

Factors of production are the resources used to create goods and services. They include labor, land, capital, and entrepreneurship.

Factor payments are the incomes earned by households for providing factors of production to firms.

Wages are payments made to workers for their labor.

Rent is payment made to landowners for the use of their land.

Interest is payment made to lenders for the use of their capital.

Profits are the earnings of entrepreneurs for their risk-taking and innovation.

When households spend their factor income on goods and services, this is called consumption expenditure.

Savings are the portion of household income not used for consumption expenditure. It's often channeled into investments.

The total demand for all goods and services produced in an economy at a given price level.

The total supply of all goods and services produced in an economy at a given price level.

The factors that influence the amount of goods and services individuals, businesses, and governments are willing to buy at different price levels.

The factors that influence the amount of goods and services businesses are willing to produce at different price levels.

A change in the quantity of goods and services demanded due to a change in the price level.

A shift of the entire AD curve, caused by changes in any of its components.

The value of goods and services produced in a country, adjusted to remove the effects of inflation. It provides a true picture of how a country's output has changed over time.

The total value of final goods and services that households, firms, the government, and foreign countries want to buy at each price level in a given time period. It is downward sloping because as prices fall, people are willing to buy more.

The percentage change in the price level. It measures how much prices have risen or fallen over time.

The value of goods and services produced in a country as measured in current prices. It is not adjusted for inflation.

The formula to calculate the percentage change in real income:

Government spending is not directly linked to tax revenue. Governments can choose to spend more, less, or the same as their tax revenue.

A government can borrow money to finance its spending if it needs more money than it collects in taxes. This is called running a budget deficit.

When a government collects more tax revenue than it spends, it runs a budget surplus.

Exports (X) are goods and services sold to other countries.

Imports (M) are goods and services bought from other countries.

The amount of exports depends on the income levels of other countries, not necessarily on the income level of the exporting country.

The amount of imports depends on the income level of the importing country.

In the Keynesian model, exports (X) are considered independent of domestic income. This means that changes in domestic income do not directly affect exports.

An increase in the capacity of an economy to produce goods and services over time, often measured by the growth of real GDP.

The total amount of goods and services that an economy can produce at a given price level.

Improvements in the efficiency of factors of production, leading to increased output with the same resources.

Factors that influence the amount of goods and services businesses are willing to produce at different price levels.

A shift in the AS curve to the right, indicating an increase in the economy's potential output.

The Long Run Aggregate Supply (LRAS) curve is a vertical line representing the economy's maximum sustainable output level, unaffected by price changes. It reflects the economy's full productive potential.

The LRAS is determined by factors that influence the economy's production capacity, such as the size and skill of the labor force, the available capital stock, and technological advancements.

The LRAS is price inelastic, meaning that changes in the price level do not affect its position. This implies that even if prices rise, the maximum output level remains unchanged.

YF represents the long run equilibrium output level, which is the output level achieved when the AD curve intersects the LRAS. This indicates an economy operating at its full potential.

When the economy operates below its full potential, there is excess capacity, and increasing output may not necessarily cause price increases. This is reflected in the LRAS curve being flat at very low output levels.

The long run equilibrium income is determined by the intersection of the LRAS and AD curves. This point signifies an economy operating at its maximum output level, with no inflationary pressures.

The LRAS is vertical or perfectly inelastic in the long run because it represents the maximum sustainable output level, which is determined by real factors, not price levels.

Economists argue that the AS curve can be relatively flat at very low output levels due to excess capacity. This implies that output can increase without significant price rises.