Edexcel International A Level Economics

Edexcel International A Level Economics National Income Exam Questions

Free Edexcel International A Level Economics exam questions for National Income, with a mark scheme for every pack. Covers national income, the circular flow, injections and withdrawals, equilibrium output, the multiplier and income and wealth.

National Income exam questions

1 question pack of real past exam questions, each with its mark scheme. Do not stop after a few: answer as many as you can without notes, then mark every answer with the mark scheme. The more questions you do, the more quickly you will spot how examiners ask about each idea.

National income exam questions for Edexcel International A Level EconomicsQuestions Mark scheme

About Edexcel International A Level Economics National Income

National income is a Unit 2 topic in Edexcel International A Level Economics that explains how output and income are determined. You study the circular flow of income between households and firms, how injections and withdrawals change the level of national income, and how equilibrium real output is reached where AD meets AS. A central idea is the multiplier: an initial injection of spending leads to a larger final increase in national income. This topic underpins economic growth and the evaluation of fiscal policy. Examiners frequently set multiplier calculations and ask you to analyse what determines the size of the multiplier.

What you need to know

Income and wealth Income is a flow of money over time, such as wages, rent, interest and profit. Wealth is a stock of assets, such as property and shares.
The circular flow Households supply factors of production to firms in return for income, and spend income on goods and services. Injections (investment, government spending, exports) add to the flow; withdrawals (savings, taxation, imports) take money out.
Equilibrium National income is in equilibrium when injections equal withdrawals. In AD/AS terms it is where AD meets AS.
The multiplier Multiplier = 1 / (1 - MPC) or 1 / MPW, where MPW = MPS + MPT + MPM. The final change in national income = multiplier x initial change in injections.
Size of the multiplier The multiplier is larger when the propensity to consume is high and withdrawals are low. Economies with high import propensities or high tax rates tend to have smaller multipliers.

Common mistakes in National Income

Treating income and wealth as interchangeable. Income is a flow; wealth is a stock.
Putting savings in injections. Saving is a withdrawal; investment is an injection.
Using the MPC in the denominator directly. The multiplier is 1 / (1 - MPC), not 1 / MPC.
Assuming the multiplier works instantly. It takes time and depends on confidence and how much spare capacity there is.
Ignoring the negative multiplier. A fall in an injection leads to a larger fall in national income.

Try three National Income exam-style questions

1. In an economy MPS = 0.1, MPT = 0.2 and MPM = 0.2. Investment rises by 6 billion dollars. Calculate the change in national income. (3 marks)

Show the mark scheme answer

MPW = 0.1 + 0.2 + 0.2 = 0.5; multiplier = 1 / 0.5 = 2; change in national income = 2 x 6 billion = 12 billion dollars.

2. Explain the difference between an injection and a withdrawal in the circular flow of income. (4 marks)

Show the mark scheme answer

An injection adds spending to the circular flow from outside household consumption, for example investment, government spending and exports; a withdrawal removes income from the flow, for example savings, taxation and imports; injections increase national income and withdrawals reduce it; equilibrium is where they are equal.

3. Explain why the multiplier may be smaller in a small open economy. (4 marks)

Show the mark scheme answer

Small open economies tend to have a high marginal propensity to import; a high MPM increases MPW; multiplier = 1 / MPW falls; extra income leaks abroad rather than being spent domestically.