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    National Income Model Bba

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    yagya pandeya
    National income

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    © All Rights Reserved
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    National Income Model Bba

    Uploaded by

    yagya pandeya
    2 views6 pages
    National income

    Original Title

    National income model bba

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    © © All Rights Reserved

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    National income

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    2 views6 pages

    National Income Model Bba

    Uploaded by

    yagya pandeya
    National income

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 6

    National income model

    Aggregate National Income: Total income generated within an economy


    from all productive sectors with in a period of time (esp. 1 year) is
    known as national income. Usually national income is denoted by Y.

    There are many methods to measure national income. The different


    methods of measuring National Income include Income Method,
    Production (Value-Added) Method and Expenditure Method.

    Consumption expenditure:
    Household final consumption expenditure covers all purchases made by
    resident households (home or abroad) to meet their everyday needs:
    food, clothing, housing services (rents), energy, transport, durable
    goods (notably cars), spending on health, on leisure and on
    miscellaneous services. It is denoted by C.

    Investment expenditure :

    Financial investment refers to the investment expenditure made on the


    purchase of shares, bonds, securities etc. Real investment refers to the
    investment expenditure made on the purchase and production of new
    capital goods like machinery, roads, bridges, power projects etc. It is
    denoted by I.

    Government expenditure

    It is the aggregate expenditure by local, state, and national


    governments on goods and services, including salaries of public
    employees, public infrastructure investments, welfare programs, and
    national defense. It is denoted by G.

    Aggregate expenditure:

    In economics, aggregate expenditure is the current value of all the


    finished goods and services in the economy. It is the sum of all the
    expenditures undertaken in the economy by the factors during a
    specific time period. It is denoted by E.
    Aggregate Expenditure: E = C + I + G + X – M

    Where,

    E = Aggregate planned expenditure

    C = household’s consumption expenditure

    I = Firms’ investment expenditure

    G = government expenditure

    X = Foreign expenditure on domestic exports

    M = Domestic expenditure on imports


    Equilibrium national income
    If aggregate national income (Y) is equal to the aggregate
    national expenditure (E) then equilibrium national income
    occurs.
    i.e. Y = E

    or, Y = C + I + G + X – M

    Note:

    1) It is assumed that all expenditure are planned expenditures.

    2) Expenditure on exports is income lost to the economy so minus sign


    appears with M.

    https://www.youtube.com/watch?
    v=4rLrKjwkZ8E&list=PLTbVGZacMgcsh4hZrxpUQGv3Ya1NFHXxw&index
    =4

    https://www.youtube.com/watch?v=-
    3n1CvsAX3E&list=PLCoADkNMW5xikePlwnh7ch5sy05gYWHUv&index=
    2
    Deriving Equilibrium National Income (youtube.com)

    Steps for deriving the equilibrium level national income

    Step.1) express expenditures in the form of E = f(Y)


    Step.2) Use Y = E ( Aggregate National income = Aggregate expenditure)
    and solve for Y.

    For Graphical solution:

    Find the point of intersection of the equations Y = E (the 450 line


    through origin ) and E = C+I+G+X-M, value of Y at that point gives the
    equilibrium level of national income.

    Note: Use Y and E in horizontal and vertical axis respectively.

    Equilibrium level of national income in two sector model

    - it is a closed economy (no foreign sector)


    - no government sector
    - only two sector are operating they are household sector and
    firms.
    - household consumption expenditure is denoted by C
    - C = C0 + by where C0 is autonomous consumption (consumption
    that does not depends upon income) and b is marginal propensity
    ∆C
    to consume. i.e. b = MPC = ∆Y
    (0< b<1) slope of consumption
    function.
    - Firms investments is autonomous so I=I0.

    Aggregate expenditure in two sector model is given by


    E=C+I (1)
    where, C = household consumption expenditure
    I = firms investment expenditure.
    For equilibrium level national income
    Y=E (2)
    From (1) and (2)

    Y = C+I (3)

    If S is saving then Y = C + S (4)

    From (3) and (4) we get S = I.

    Hence in closed economy two sector model is modeled as

    Y = E, E = C+I, C = C0 + bY, I = I0, Y = C+S

    Again at equilibrium

    Ye = Ce+I0

    = C0+ bYe +I0

    Ye – bYe = C0 + I0
    1
    Ye = (C + I )
    ( 1−b ) 0 0

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