National Income

This section explains national income, covering the circular flow of income and the distinction between income and wealth. 

Introduction to National Income

National income refers to the total value of goods and services produced by an economy over a specific period of time, usually a year. It is a key measure of the economic performance of a country and is used to assess the overall health of an economy.

The Circular Flow of Income

The circular flow of income is a fundamental concept in economics that illustrates the movement of money and goods within an economy. It shows how income is distributed and spent between different sectors, typically households, businesses, the government, and foreign trade.

In its simplest form, the circular flow of income consists of the following key components:

Households provide factors of production (labour, capital, land, and entrepreneurship) to firms in exchange for wages, rent, interest, and profits.

Households spend their income (wages, profits, etc.) on goods and services produced by firms. This expenditure is known as consumption.

Firms produce goods and services and sell them to households, the government, and foreign buyers (exports).

Government collects taxes from households and firms and uses this revenue to fund public services and welfare programs. The government may also inject money into the economy through spending on infrastructure, education, and healthcare.

Foreign Trade refers to exports (goods and services sold to other countries) and imports (goods and services bought from other countries). Money flows out of the domestic economy when imports are purchased, and flows back in when exports are sold abroad.

The simple circular flow model shows a closed economy, meaning there is no foreign trade or government intervention. In reality, however, most economies are open and include foreign trade and government policies.

Key Concepts within the Circular Flow Model:

• Leakages: These are outflows from the circular flow, including savings (S), taxes (T), and imports (M). Leakages reduce the amount of income circulating in the economy.
• Injections: These are inflows into the circular flow, including investment (I), government spending (G), and exports (X). Injections stimulate economic activity by increasing income in the economy.

The Distinction Between Income and Wealth

While income and wealth are both related to financial well-being, they are distinct concepts in economics. Understanding the difference between them is crucial for analysing national income and the distribution of economic resources.

Income:

• Definition: Income is the flow of money received over a period of time (e.g., weekly, monthly, or annually). It includes wages, salaries, profits, rents, and interest.
• Sources: For households, income is earned from work, investment, and other activities. For businesses, income is generated from the sale of goods and services.
• Measuring National Income: National income is the sum of all incomes earned in the economy, and it can be measured using several methods, such as the Income Method or the Expenditure Method.

Example of Income:

• A worker’s monthly salary is income.
• The rent received by a landlord is income.

Wealth:

• Definition: Wealth refers to the total value of assets owned by individuals, businesses, or the government. It is the stock of resources accumulated over time, including properties, stocks, savings, and other assets.
• Sources: Wealth can be accumulated through saving income, inheritance, or the appreciation of assets (such as property or investments).
• Distribution of Wealth: Wealth is often distributed unevenly in society, with a few people holding a large proportion of total wealth, while others may have limited or no wealth.

Example of Wealth:

• A person’s property, stocks, or savings in a bank account are considered wealth.
• A company’s buildings, machinery, and other assets are part of its wealth.

Key Differences Between Income and Wealth:

Summary

• The circular flow of income shows the flow of money between households, firms, the government, and foreign trade, and highlights the role of injections and leakages in maintaining equilibrium in an economy.
• Income is the flow of money earned over time, while wealth is the stock of assets owned by individuals or entities.
• Understanding the difference between income and wealth is essential for analysing economic inequality and the distribution of resources in an economy.

Key Takeaways:

• The circular flow of income model helps explain the interdependence between different sectors of the economy.
• Income is a flow measure, while wealth is a stock measure.
• Both income and wealth play crucial roles in determining an economy’s performance and the economic well-being of its citizens.

This guide will help consolidate your understanding of national income concepts in preparation for your A-Level Economics exam.