National Income Accout. System
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Transcript of National Income Accout. System
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National Accounting System
Financial institutions are medium betweenhousehold savings and investment for industry.
Government imposes taxes and collects revenue
and provides services for public. Transaction of goods, services and financial assets
within the countries as well as with the foreignersare also considered in National Accounting System(NAS).
NAS provides a picture of economic transactions.
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Account System: Production Account
Debit Credit
Factor Income
Retained Profit
Corporate Profit TaxIndirect Taxes
Imports
Depreciation
Sales to Household
Sales to Government
Domestic InvestmentExports
Subsidies from
Government
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Account System: Household SectorAccount
Debit Credit
Consumption
Personal Income Taxes
Transfer to foreignersPersonal Savings
Income from domesticsavings
Income from AbroadTransfer from Government
Transfer from Foreigners
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Account System: Government Account
Debit Credit
Wages and Salaries
Purchase of goods and
servicesTransfer to foreigners
Subsidies to producers
Surplus
Corporate profit Tax
Indirect taxes
Personal Income Tax
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Account System: External Account
Debit Credit
Exports
Transfer from foreigners
Income from AbroadDeficit on CurrentAccount
Imports
Transfer to foreigners
Income paid to foreigners
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Account System: Investment Account
Debit Credit
Personal Savings
Business Savings
Government SavingsDeficit on CurrentAccount
Fixed Investment
Net Change in stocks
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Consumption Saving and
Investment
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Consumption Saving and Investment
John Maynard Keynes : British economist (1883-1946) who offered an explanation of the GreatDepression of the 1930s.
The General Theory of Employment Interestand Money
Keynes - The economy could tend towards aless than full employment equilibrium.
Classical economist (Prior to the 1930s) - Theeconomy is always tending toward a fullemployment equilibrium
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Consumption Saving and Investment
J. B. Say (Says law) : Supply creates its owndemand.
Keynes believed that Demand can be foreverinadequate for an economy to achieve full
employment. What determines demand for goods and services -
Disposable income
Consumption Function: shows the householdspending for goods and services at different levelsof disposable income.
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Consumption Saving and Investment
Consumption function Relationship between consumption and disposable
income
Positive slope Autonomous consumption spending
Part of consumption spending
Independent of income
Vertical intercept - consumption function Saving: Money earned but not spent.
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Consumption Saving and Investment
Dis-saving - The amount personal spendingexceeds disposable income.
By taking money from personal savings.
Autonomous Consumption: Consumption that is
independent of the level of disposable income What happens when disposable income is zero?
Spending will be equal to autonomous consumption
because households will dissave for basic needs.
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Consumption Spending
Consumption spending increases when:
Disposable income rises
Wealth rises
Interest rate falls
Optimistic about the future
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Consumption and DisposableIncome
Marginal propensity to consume (MPC)
Slope of the consumption function
Amount by which consumption spending riseswhen disposable income rises.
1MPC0incomeeDisposabl
onConsumptiMPC
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Consumption and DisposableIncome
Representing the consumption with anequation
C = consumption spending
a = autonomous consumption spending
b = MPC
Income)e(DisposablbaC+=
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The Consumption Function
Consumption
Function
1,000
600
The consumption function shows the (linear)relationship between consumption spendingand disposable income
and the slope of the line(0.6) is the marginal
propensity to consume.
Consumptio
nS
pending
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Disposable Income
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000
The vertical intercept (2,000)
is autonomous consumptionspending
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Consumption and Income
Consumptionincome line
Aggregate consumption spending at eachlevel of income or GDP
Slope = MPC
If Tax is fixed, it shifts downward by
MPCTax
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The Consumption-Income Line
1. To draw the consumption-
income line, we measurereal income (instead of realdisposable income) on thehorizontal axis.
Consumption-Income Line
600
A
B
Real ConsumptionSpending
1,000
2,000
3,000
4,000
5,0005,600
Real Income
2,000 4,000 6,000 8,000
1,000
2. The slope of theconsumption function
3. but a differentvertical intercept.
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Shifts in the Consumption-Income Line
Move along
Change in income - changes consumptionspending
Shift Change in anything else except income
changes consumption spending
lineincome-nconsumptiothealongrightward
MovementspendingnConsumptio
incomeDisposableIncome
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Shifts in the Consumption-Income Line
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Shift the Consumption-IncomeLine
Consumption-Income Line WhenNet Taxes = 500 billion
Consumption-Income Line WhenNet Taxes = 2,000 billion
RealConsumption
Spending
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Real Income
2,000 4,000 6,000 8,000
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Getting to Total Spending
Investment Spending
Given
Government purchases
Given
Net exports = Total exports - Total imports
Given
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Income and AggregateExpenditure
Aggregate expenditure=C+Ip +G+NX
Income increases Aggregate expenditure increases
GDPMPCAE =
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Deriving the AggregateExpenditure Line
C + IP + G
C + IP + G + NX
C + IP
C
2. then add planned investment (IP)
1. Start with theconsumption-income line,
5. to get the aggregate expenditure line.
3. government purchases (G) . . .
4. and net exports (NX)
RealAggregate
Expenditure
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Real GDP
2,000 4,000 6,000 8,000
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Finding Equilibrium GDP
Equilibrium GDP in the short run
Output = aggregate expenditure
Change in inventory
Inventories = GDP - AE
GDPinchangeNo0sInventorieGDPAE
GDP0sInventorieGDPAE
GDP0sInventorieGDPAE
==
> potential output
Unusually low unemployment
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AELOWAggregateProductionFunction
45
Equilibrium GDP and Full Employment
8,000
10,000
10,000
E
F
100
10,000
150
A
B
8,000
and equilibrium employmentis less than full employment.
Full EmploymentPotential GDP
cyclicalunemployment= 50
AggregateExpenditure
Real GDP
Real GDP
Number ofWorkers
equilibrium output(8,000) is less thanpotential output,
When the aggregateexpenditure line islow . . .
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Equilibrium GDP andEmployment
12,000
12,000
H
10,000
10,000
10,000 B
Potential GDP
AggregateExpenditure
Real GDP
AEHIGH
Real GDP
Number ofWorkers
AggregateProductionFunction
150
Full Employment200
When the aggregateexpenditure line is high . . . and equilibrium employment is
greater than full employment.
equilibrium output (12,000) is
greater than potential output,
F
E'
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A Change in InvestmentSpending
Increase investment spending
Sales revenue increases
Income/disposable income increases
Consumption spending increases
Expenditure multiplier
Change in equilibrium real GDP
For 1 change in C, IP, G, or NX
MPC)(1
1Multiplier
=
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A Change in InvestmentSpending
1,600
1,960
2,1762,306
2,500
1,000
InitialRise in
IP
AfterRound
2
AfterRound
3
AfterRound
4
AfterRound
5
Increase inAnnual GDP
AfterAll
Rounds
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A Change in InvestmentSpending
Increase investment spending
GDP increases by morethan the initialincrease in investment
Decrease investment spending GDP falls by more than the change in
spending
PIMPC)(1
1GDP
=
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A Graphical View of theMultiplier
An increase in C, IP, G, or NX
Shift the AE line upward by the initial increasein spending
Equilibrium GDP rises:
SpendingMPC)(1
1GDP
=
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A Graphical View of theMultiplier
F
E
2,500
4,000 8,000 12,000
4,000
8,000
12,000
Real GDP
Real AggregateExpenditure
45
AE2
AE1
Increase inEquilibrium GDP
$1,000
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Automatic Stabilizers and theMultiplier
Automatic stabilizers
Reduce the size of the multiplier
Diminish the impact of spending changes Taxes.
Transfer payments
Interest rates
Imports Forward-looking behavior
Long-run: Multiplier = 0
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Appendix 1
Finding Equilibrium GDP Algebraically
b1
NXGIbTaY
AEY
NXGICAE
bY)bTa(C
)TY(baCTYY
bYaC
PP
D
D
+++=
=
+++=
+=
+=
=
+=
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Appendix 2: Tax Multiplier
Tax multiplier = -(Spending multiplier-1)
TMPC-1
MPC-GDP
MPC-1
MPC-MultiplierTax
=
=