Glossary
Exports
Goods and services sold to other countries, which represent an injection into the domestic circular flow and increase a nation's real GDP.
Example:
A surge in demand for domestically produced software from overseas buyers would lead to an increase in Exports, boosting the nation's real GDP.
Imports
Goods and services purchased from other countries, which represent a leakage from the domestic circular flow and decrease a nation's real GDP.
Example:
When consumers buy more foreign-made cars, the increase in Imports tends to reduce the overall real GDP of the domestic economy.
MPC Formula
The mathematical expression used to calculate the Marginal Propensity to Consume, which is the change in consumption divided by the change in disposable income.
Example:
To find your MPC Formula, you'd divide the extra 100 bonus you received.
MPS Formula
The mathematical expression used to calculate the Marginal Propensity to Save, which is the change in savings divided by the change in disposable income.
Example:
If you want to determine your MPS Formula, you would take the 100 gift and divide it by the $100 gift.
Marginal Propensity to Consume (MPC)
The fraction of each additional dollar of disposable income that a household chooses to spend on consumption.
Example:
If a college student gets an extra 80 on textbooks and coffee, their Marginal Propensity to Consume is 0.8.
Marginal Propensity to Save (MPS)
The fraction of each additional dollar of disposable income that a household chooses to save rather than spend.
Example:
If a recent graduate receives a 150 into their retirement account, their Marginal Propensity to Save is 0.3.
Multiplier Effect
The phenomenon where an initial change in spending or taxes leads to a larger overall change in the economy's real GDP.
Example:
If the government invests in a new high-speed rail project, the initial spending creates income for construction workers, who then spend part of that income, leading to a larger Multiplier Effect on the economy.
Spending Multiplier
A measure of how much real GDP changes for a given change in autonomous spending, indicating the total impact of an initial spending injection.
Example:
If a new factory opens, the initial investment leads to a larger increase in overall economic activity due to the Spending Multiplier.
Spending Multiplier Formula
The mathematical expression used to calculate the spending multiplier, which is 1 divided by the Marginal Propensity to Save (1/MPS).
Example:
To determine the total economic impact of a new government infrastructure project, economists would use the Spending Multiplier Formula to find out how much GDP will increase.
Tax Multiplier
A measure of how much real GDP changes for a given change in taxes, typically having a negative impact on GDP.
Example:
A government tax cut might stimulate the economy, but its effect on GDP will be less than an equal increase in government spending due to the nature of the Tax Multiplier.
Tax Multiplier Formula
The mathematical expression used to calculate the tax multiplier, which is the negative of the Marginal Propensity to Consume divided by the Marginal Propensity to Save (-MPC/MPS).
Example:
When analyzing the potential impact of a new income tax increase, policymakers would apply the Tax Multiplier Formula to estimate the resulting decrease in aggregate demand.