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    National Income: Three and Four Sector Model

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    Kratika Pandey
    This document introduces the government sector into the three and four sector models of national income. It defines key government accounting terms like taxes (T), government expenditure (G), budget balance (T-G), and public saving. The government sector is added to aggregate demand (AD = C + I + G). Taxes reduce disposable income while government spending is an autonomous component of AD. Public saving schedules and net export schedules are presented, showing how taxes, government spending, exports, and imports affect equilibrium national income using the aggregate expenditure approach.

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    National Income: Three and Four Sector Model

    Uploaded by

    Kratika Pandey
    34 views13 pages
    This document introduces the government sector into the three and four sector models of national income. It defines key government accounting terms like taxes (T), government expenditure (G), budget balance (T-G), and public saving. The government sector is added to aggregate demand (AD = C + I + G). Taxes reduce disposable income while government spending is an autonomous component of AD. Public saving schedules and net export schedules are presented, showing how taxes, government spending, exports, and imports affect equilibrium national income using the aggregate expenditure approach.

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    6. 3 & 4 sector iimm

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    This document introduces the government sector into the three and four sector models of national income. It defines key government accounting terms like taxes (T), government expenditure (G), budget balance (T-G), and public saving. The government sector is added to aggregate demand (AD = C + I + G). Taxes reduce disposable income while government spending is an autonomous component of AD. Public saving schedules and net export schedules are presented, showing how taxes, government spending, exports, and imports affect equilibrium national income using the aggregate expenditure approach.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    34 views13 pages

    National Income: Three and Four Sector Model

    Uploaded by

    Kratika Pandey
    This document introduces the government sector into the three and four sector models of national income. It defines key government accounting terms like taxes (T), government expenditure (G), budget balance (T-G), and public saving. The government sector is added to aggregate demand (AD = C + I + G). Taxes reduce disposable income while government spending is an autonomous component of AD. Public saving schedules and net export schedules are presented, showing how taxes, government spending, exports, and imports affect equilibrium national income using the aggregate expenditure approach.

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    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 13

    National Income

    Three and four sector model

    Introducing Government

    Budget Balance = T G
    T = Taxes or Government Revenue
    G = Government Expenditure (autonomous)
    When T > G Budget Surplus
    When T < G Budget Deficit
    When T = G Balanced Budget
    When T > G Positive Government Saving
    When T < G Negative Government Saving
    Public Saving = Government Revenue
    Government Expenditure

    Government expenditure and aggregate


    demand
    When we include the government sector,
    aggregate demand can be re-written as

    AD C I G
    G = govt expenditure on goods and services, another
    autonomous component
    Government also levies taxes (T) and pays transfer benefits
    (B). We define net taxes (NT) as direct taxes minus transfer
    benefits

    The Public Saving (Budget Surplus) Function


    National
    Income (Y)

    Government Net Taxes


    Purchases (G) (T = 0.1Y)

    Public Saving
    (T-G)

    2500

    850

    250

    -600

    5000

    850

    500

    -350

    8750

    850

    875

    25

    10,000

    850

    1000

    150

    15,000

    850

    1500

    650

    The Public Saving (Budget Surplus) Function

    Introducing Net Export = X - M


    Exports: depends on spending decision made by foreign
    households. Therefore , it will not change as national
    income changes. This means that X is autonomous .
    Note that as foreign income increases, demand on
    domestic product by foreign countries increases
    (exports).
    Imports: Depends on spending decisions of local
    households or domestic consumption. Therefore as Y
    rises, M rises, and as Y falls M falls too.
    There is a positive relationship between national income
    and desired imports .

    A Net Export Schedule


    National
    Income (Y)

    Export
    (X)

    Import
    (IM = 0.1Y)

    Net Export
    (X-IM)

    5000

    1200

    500

    700

    10,000

    1200

    1000

    200

    12,000

    1200

    1200

    15,000

    1200

    1500

    -300

    20,000

    1200

    2000

    -800

    The Net Export Function

    Equilibrium National Income


    Aggregate Expenditure Approach We will add the government expenditure and net
    expenditure to the aggregate expenditure function so that:
    AE = C + I + G + NX
    Note that the sum of a, I, G, and X represents the
    autonomous expenditure.
    The slope of the AE function depends on the marginal
    propensity to spend on national income (Z) .
    Now, after introducing net taxes and net exports, Z will not
    be equal to the marginal propensity to consume.

    How to measure Z: Example

    Assume that the economy produces Rs.1 of extra income:


    10 paise will be collected as net taxes.
    The disposable income becomes 90 paise.
    Assume that the marginal propensity to consume = 0.8,
    then 72 paise will be spent on consumption while 18
    paise will be saved.
    However, 10 paise of all expenditure goes to imports,
    thus, the amount to be spent on domestic goods equals 62
    paise only.
    This means that Z = 0.62 and 1 Z = 0.38.

    The multiplier now (with taxes and imports) will be


    1 / (1-Z) = 1 / (1-0.62) = 2.63.
    The higher the marginal propensity to import, the
    lower the simple multiplier.
    The higher the income tax rate, the lower the simple
    multiplier.
    Note that we can calculate Z by applying the
    following formula: Z = b(1-t) - m,
    Where b is the MPC, (1-t) is the percentage of
    disposable income out of national income, and m is
    the marginal propensity to imports.

    The AE Function Approach


    Y

    C=500+.72Y

    I = 1250

    G = 850

    NX=1200-.1Y AE=C+I+G
    +NX

    500

    1250

    850

    1200

    3800

    2500

    2300

    1250

    850

    950

    5350

    5000

    4100

    1250

    850

    700

    6900

    10,000 7700

    1250

    850

    200

    10,000

    15,000

    1250

    850

    -300

    13,100

    11300

    Equilibrium National Income

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