EQUILIBRIUM LEVEL OF NATIONAL INCOME

“Value of commodities and services produced in

an economy during a given period, counted without duplication”

NATIONAL INCOME

How to measure ?

The Product Method

The income Method

The expenditure Method

“add up all expenditures made for final goods and services at

current market prices by households, firms and government during a year”

“This method

seeks to measure

national income

at the phase of

distribution.”

“involves adding up

the value of all the

final goods and

services produced in

the country during the

year.”

EQUILIBRIUM LEVEL OF NATIONAL INCOME

‘How much should be

the national income?’PRODUCTION TO THE DEMAND OF THE

PEOPLE=So that goods, Do not remain unsold and

Do not face shortage

DEMAND

CONSUMPTION DEMAND

DEMAND FOR INVESTMENT GOODS

AGGREGATE DEMAND(AD)

+

PRODUCTION

CONSUMER GOODS

CAPITAL GOODS

AGGREGATE SUPPLY(AS)

+

AGGREGATE DEMAND(AD)

=AGGREGATE SUPPLY(AS)

EQUILIBRIUM LEVEL OF NATIONAL INCOME

INCOME AD CONSUMPTION AS SAVINGS INCOME AD-AS TREND

400 460 380 400 20 80 60 EXPANSION

450 490 410 450 40 80 20 EXPANSION

500 520 440 500 60 80 20 EXPEANSION

550 550 470 550 80 80 0 EQUILIBRIUM

600 580 500 600 100 80 -20 CONTRACT

650 610 530 650 120 80 -40 CONTRACT

Equality between AD and AS

45

C+I=

ADC

Y = AS=C+S

E

AS=AD (EQUILIBRIUM)

INCOME

CONSUMPTION0

Since AD>AS,Producer will keep on producing more and expansionary trend take place.

Instance where government took steps to maintain equilibrium level of National Income

Fall in Domestic demand by fall in house price in 1989 in U.K

Fall in AD

Government took steps to control

Consumers were asked to cut back their expenditure

Rise in world oil prizes over 30

years.

Internal crude oil price moved

sharply.

Increased the variable cost of oil

firms.

Firms raised the price of finished

product.

Leading to Disequilibrium

Subsidized pricing done by the government

SUPPLY CHANGE

Inco

me

consumption0

I I

s

s

E

S=I (EQUILIBRIUM)

S=I is a equilibrium point, Before this point investment > savings,expension will take place.After this point investment < savings contraction will take place.

Is savings equal to investment always ?

KEYNES

Y=C+Sand

Y=C+I

From here, It is evident that I should be = S

BUT IT IS NOT POSSIBLE IN REAL LIFE.

THE EQUALITY IS SHOWN ON THE BASIS OF REAL INVESTMENT AND REAL SAVINGS.

INCOME (C+I)AD CONSUMPTION AS SAVINGS INCOME (I-S)

AD-AS TREND

400 460 380 400 20 80 60 EXPANSION

450 490 410 450 40 80 20 EXPANSION

500 520 440 500 60 80 20 EXPEANSION

550 550 470 550 80 80 0 EQUILIBRIUM

600 580 500 600 100 80 -20 CONTRACT

650 610 530 650 120 80 -40 CONTRACT

Thank you