EC0211 CH 3 NI EQUILIBRIUM.pptx - CHAPTER 3 ECO211 NATIONAL INCOME EQUILIBRIUM 1 EQUILIBRIUM DISEQUILIBRIUM National Output National Expenditure 2

EC0211 CH 3 NI EQUILIBRIUM.pptx - CHAPTER 3 ECO211 NATIONAL...

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CHAPTER 3 ECO211 CHAPTER 3 ECO211 NATIONAL INCOME EQUILIBRIUM 1
National National Output Expenditure 2 EQUILIBRIUM / DISEQUILIBRIUM
i. According to Keynesian theory, the size of national income (Y) depends upon the level of aggregate demand. ii. There are two approaches to determine national income equilibrium: 3 3.1Concepts of Equilibrium and Disequilibrium AGGREGATE OUTPUT (AS) AGGREGATE EXPENDITURE (AD) = INJECTIONS (I) = LEAKAGES (S)
Methodologies of Equilibrium National Income Aggregate demand Aggregate supply Total demand made by households, firms, government and foreign sectors for final goods and services produced in the economy. Total amount of goods and services produced in the economy at various price levels. 4
Methodologies of Equilibrium National Income Injections Leakages Activities done by various sectors in the economy that causes an increase in the flow of national income. Examples: Investment, government expenditures, exports. Incomes that flow out from the circular flow of national income, causes the volume of national income to reduce. Examples: savings, taxations, import. 5 I + G + X S + T + M = Additional spending to the income Withdrawals of potential spending from the income- expenditure stream
1. Consumption 2. Investment 3. Government expenditures 4. Net export (Export – Import) 6 Components of Aggregate Demand
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Consumption Expenditure on goods and services by consumer The main component of aggregate expenditure Most important determinant of consumer spending is disposable income (Y d ) Saving The part of the income that a household does not consume Basic thing for consumer to use their income is to consume or to save 11 CONSUMPTION & SAVINGS THEORY So we have the simple conclusion: Income = Consumption + Saving Y = C + S
d , , 12
CONCEPTS OF CONSUMPTION Disposable Income (Yd) Consumption APC (C/Yd) MPC (ΔC/ΔYd) 0 - - 100 125 1.25 0.75 200 200 1.00 0.75 300 275 0.92 0.75 400 350 0.88 0.75 500 425 0.85 0.75 APC is ratio of total consumption to total income 13 MPC is ratio of change total consumption to change total income Autonom ous Consump tion 5 0 Break- even, Y = C =
1. As Y increases C will also increases until the stage where Y=C. This level is known as break-even . 2. When Y increases more than C, the extra income will go into saving . 14 THE RELATIONSHIP BETWEEN CONSUMPTION AND INCOME C = a + bY d C = Consumption expenditure a = autonomous consumption b = MPC Y d = disposable income
APC + APS = 1 15 CONCEPTS OF CONSUMPTION + SAVINGS MPC + MPS = 1 Disposab le Income (Yd) Consumpti on Savin gs APC (C/Yd) APS (S/Yd) MPC (ΔC/ΔY d) MPS (ΔS/ΔYd ) 0 -50 - - - - 100 125 -25 1.25 -0.25 0.75 0.25 200 200 0 1.00 0 0.75 0.25 300 275 25 0.92 0.08 0.75 0.25 400 350 50 0.88 0.12 0.75 0.25 500 425 75 0.85 0.15 0.75 0.25 Autonom ous Consumpt ion 5 0 Break- even, Y = C =
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