National Income
Economics: Edexcel A A Level, topic 3.4.1
Circular Flow of Income
This model provides an illustration of the flow of money around an economy. Firms pay households for their factors of production (labour, land and capital) and households pay firms for goods and services. Income 'flows' in a circle.
The basic model
Factors of production
- Households own the factors of production that firms need to produce goods and services, so firms pay households to use them.
- Labour is paid for in wages.
- Land is paid for in rent.
- Capital is paid for in interest.
- The owner of the firm earns profit. Because the owner is from a household, the profits also go to households as payment for 'enterprise'.
Income vs Wealth
Income is the flow of money received, and wealth is the sum of the value of all assets.
What is income?
- Income is a flow of money, often measured on a monthly or annual basis.
What is wealth?
- Wealth is the sum of all assets, including pensions, money in the bank, financial investments, and the value of a home.
Factors influencing distribution of income/wealth
- Taxation policy: regressive policies will tend to increase the income and wealth gap between different groups in a country. Progressive taxation policies will reduce the gap.
- The differences in wage between low and high skilled labour.
- The level of discrimination against different groups of workers.
- Regional differences in earnings.
- Unsalaried individuals depending on state benefits.
Test yourself on National Income
Which factor of production is paid for by interest?
Which of the following are factors of production?
Who owns the factors of production that firms need to produce goods and services?
Enrique Iglesias is estimated to have $100M in stocks, bonds, cash and other real estate assets. How are all of these assets best described?