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    Lecture 3 - National Income Determination

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    Pia Tanya Uy
    The document discusses the concept of equilibrium in a simple economy. It defines key terms like aggregate supply (AS), aggregate demand (AD), consumption (C), savings (S), and investment (I). It explains that equilibrium occurs when AS = AD and S = I. The multiplier effect is introduced, where a change in autonomous investment (ΔI) results in a proportionally larger change in national income (ΔY) according to the multiplier of 1/(1-c). Disequilibrium conditions are when S ≠ I, resulting in either excess demand or lack of demand.

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    Lecture 3 - National Income Determination

    Uploaded by

    Pia Tanya Uy
    108 views21 pages
    The document discusses the concept of equilibrium in a simple economy. It defines key terms like aggregate supply (AS), aggregate demand (AD), consumption (C), savings (S), and investment (I). It explains that equilibrium occurs when AS = AD and S = I. The multiplier effect is introduced, where a change in autonomous investment (ΔI) results in a proportionally larger change in national income (ΔY) according to the multiplier of 1/(1-c). Disequilibrium conditions are when S ≠ I, resulting in either excess demand or lack of demand.

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    Economics

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    The document discusses the concept of equilibrium in a simple economy. It defines key terms like aggregate supply (AS), aggregate demand (AD), consumption (C), savings (S), and investment (I). It explains that equilibrium occurs when AS = AD and S = I. The multiplier effect is introduced, where a change in autonomous investment (ΔI) results in a proportionally larger change in national income (ΔY) according to the multiplier of 1/(1-c). Disequilibrium conditions are when S ≠ I, resulting in either excess demand or lack of demand.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    108 views21 pages

    Lecture 3 - National Income Determination

    Uploaded by

    Pia Tanya Uy
    The document discusses the concept of equilibrium in a simple economy. It defines key terms like aggregate supply (AS), aggregate demand (AD), consumption (C), savings (S), and investment (I). It explains that equilibrium occurs when AS = AD and S = I. The multiplier effect is introduced, where a change in autonomous investment (ΔI) results in a proportionally larger change in national income (ΔY) according to the multiplier of 1/(1-c). Disequilibrium conditions are when S ≠ I, resulting in either excess demand or lack of demand.

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    National income determination

    Equilibrium in a Simple Economy


    Simple economy: Two Sector, Closed Economy System

    Two Sectors: Consumption (+Savings) and Investments

    Equilibrium in a Simple Economy


    Simple Economy: Overall Production (AS) = Aggregate

    Demand (AD) for the final goods and services Equilibrium Condition: AS = AD Equilibrium = economic stability

    Equilibrium in a Simple Economy


    Equilibrium Condition: AS = AD

    AS Total income generated by owners of factor inputs

    used in the production of final goods and services for a particular period of timed Y=C+S Y: Total Income C: Consumption S: Savings

    Equilibrium in a Simple Economy


    Equilibrium Condition: AS = AD

    AD measure of the sum of various forms of demand for

    final goods and services Z=C+I Z = Aggregate Demand C = Consumption Expenditures I = Investment Expenditures

    Equilibrium in a Simple Economy


    Equilibrium Condition: AS = AD

    Y=Z
    C+S=C+I

    S=I

    Equilibrium in a Simple Economy


    S=I

    Savings
    Part of national income for nonconsumption

    Outflow: not used to purchase the final goods and services

    produced within the year

    Equilibrium in a Simple Economy


    S=I

    To offset the outflow, an equal amount of inflow or injection

    into the system must be undertaken to maintain the equilibrium in the economy Investments
    A form of deman that purchases the final goods and services not

    consumed by households

    Simple Theory of National Income Determination


    Y=C+I

    Consumption (C)
    Influenced positively by the level of national income (NI),

    increase in NI, increase in C


    Increase in C < increase in NI may devote the increase in NI

    to savings

    Simple Theory of National Income Determination


    Y=C+I

    Consumption (C)
    Consumption Function Relationship describing the factors that influence the level of consumption expenditures in the economy C = C0 + cY C0: autonomous consumption cY: income-led consumption c: marginal propensity to consume (mpc) proportion of the additional income used in additional consumption; additional consumption per unit increase in the level of national income

    Simple Theory of National Income Determination


    Z=S+I

    Savings
    Savings Function Complement of the consumption function S = -C0 + sY -Co: autonomous savings sY: level of savings that is influenced by the level of income s: marginal propensity to save influence of a unit change in NI

    Simple Theory of National Income Determination


    Y=C+I

    Investment (I)
    Independently determined from the level of national income

    I = I0

    Simple Theory of National Income Determination


    Y=C+I

    Y = C0 + cY + I0
    Y Co cY = Io

    -Co + (1 c)Y = I0
    -Co + sY = Io

    * Equilibrium condition in the economy is attained

    Simple Theory of National Income Determination


    sY = Co + Io

    Y = 1/s (Co + Io)


    Y = 1/(1-c)*(Co + Io)

    Equilibrium level of NI is the reciprocal of mps

    Reciprocal of mps multiplier a number that

    measures the change in national income due to changes in autonomous expenditures

    Simple Theory of National Income Determination


    sY = Co + Io

    Y = 1/s (Co + Io)


    Y = 1/(1-c)*(Co + Io)

    Equilibrium level of NI is the reciprocal of mps

    Reciprocal of mps multiplier a number that

    measures the change in national income due to changes in autonomous expenditures

    Simple Theory of National Income Determination


    Concept of Multiplier
    Multiplier effect: the effect of the changes in autonomous

    expenditures on national income Cumulative effect of an initial expenditure on subsequent expenditures and income Multiplier: a number that measures the increase in national income due to an increase in autonomous expenditures

    Simple Theory of National Income Determination


    Equilibrium National Income with No Change in Investment

    Y=Z
    Y = Co + cY + Io

    Y cY = Co + Io
    Y (1 c) = Co + Io

    Y1 = 1/ (1-c) * (Co + Io)

    Simple Theory of National Income Determination


    Equilibrium National Income with Change in Investment

    Y=Z
    Y = Co + cY + Io + I

    Y cY = Co + Io + I
    Y (1 c) = Co + Io + I

    Y2 = 1/ (1-c) * (Co + Io + I)

    Simple Theory of National Income Determination


    Change in National Income Due to a Change in Investment

    Y = Y2 Y1
    Y = [1/ (1-c) * (Co + Io + I)] [1/ (1-c) * (Co + Io)]

    Y = 1/ (1 c) * I
    Y/ I = 1/ (1 c) multiplier

    Simple Theory of National Income Determination


    Conditions for Disequilibrium

    Y<Z
    C+S<C+I

    S<I
    Excess aggregate demand -> inflationary pressure

    Simple Theory of National Income Determination


    Conditions for Disequilibrium

    Y>Z
    C+S>C+I

    S>I
    Lack of Demand

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