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National Income Determination

Introduction

This is to determine the relationship between production, income & spending by taking into account all aspects that interrelate with :

1. Production

2. Income

3. Household Spending

4. Business Invesment

5. Government

References

Fiscal Policy

The Savings Function

Introductory Macroeconomics

by: Pagoso, Dinio, Villasis

www.wikipedia.org

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www.quora.com

www.slidesharenet.com

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www.study.com

www.colorado.edu

www.treasury.gov.ph

www.asianpundit.com

www.economics.fundamentalfinance.com

Demand Estimation

The Government & Equilibrium Income (Y = C + I + G)

it is the means by which a government adjusts its spending levels & tax rates to monitor & influence a nation's economy

Savings is the difference between consumption & income computed as: s = y - c

What happens when a businessman does not know how to estimate demand?

From the two previous given examples, savings shall be:

Factors Affecting Aggregate Consumption

Philippine Economy

vs

Thailand Economy

2

Types:

this is adding the value of government spending to consumption & investment spending, the level of total spending by households, investors & the government itself

This is what happens....

Given:

For the businessman to earn more & for the consumers to be provided with the goods & services they need then the first step in estimating demand is an analysis of the

1. Expansionary

used when economy is in recession

or deflation

3 Impacts of Government Expenditure & Tax Policy :

Yg= 500 billion

Income Gap = 100 billion

MPC = 75%

no savings at income level of 25 million with consumption of 30 million

1. s = 25 - 30

= -5 million

Consumption Function

production

effect

Famous economist, John Maynard Keynes, proposed that aggregates real consumption is a function of the aggregate level of income resulting to it being considered a passive component of aggregate expenditure which is:

Yg = G x K

Yg = G x 1 / 1 - .75

100 = G x 4

100/4 = G

G = 25 billion

Thailand's core economic indicators has overtook the Philippines' by 2000 and beyond. Why?

The government needs to spend 25 billion to fill the gap of 100 billion

more than what is demanded

1. Government Expenditure

Impact

2. Financial Impact

3. Supply Impact

What happens when government spends more than or less than 25 billion?

surplus; if perishable goods, should be disposed of immediately.

if not perishable, he will incur storage costs; with less demand, will reduce production

1. Inflationary Gap

An ideal objective is to achieve a full level of employment equilibrium. It means that the total amount of goods/services demanded is equal to the total of goods/services produced.

- spending more than 25 billion

- economy is in the "boom" part of the

trade cycle

- labor is used beyond normal hours

- when consumer/investor spending is

very buoyant

2. s = 80 - 74

s = 6 million

2. Deflationary Gap

- spending less than 25 billion

- economy's resources are not being

used or are idle

- unemployment & low levels of

output

- less income for the economy

According to Michael Alan Hamlin of asianpundit.com (2/9/12):

there is savings at an income of 80 million with consumption of 74 million

less than what is demanded

pressure from consumers demanding more

Understanding consumption function is important to:

- the total amount that businesses & households plan to spend on goods & services at each level of income.

2. Contractionary

used when economy is causing inflation

1. forecast economic activity

2. develop reliable policies

Thus, we need to:

Philippines

Thailand

foreign investments in manufacturing

heavy reliance on OFW remittances

1. understand the components of aggregate

consumption

2. know how policy changes affect

consumption

3. have estimates on the likelihood of the

outcome happening or not

labor productivity grew by 80%

labor productivity grew by 25%

- sum of expenditures on consumption, investment, government expenses & net exports

In 2011, exports decreased

By Sept 2011, negative

In 2011, exports growth remained steady

Consumption Function

The MPC & The MPS

The Multiplier (K)

Reason: Failure of the Philippine economy to diversify markets; Thailand exports a much broader array of manufactured goods. Even if the Philippines enjoy growth in the IT-BPO sector (90% growth in 2011), per Asian Development Bank economist, Dr. Norio Usui......

Income=

Consumption+Investment

To define:

"The Philippines needs two economic legs to stand on to grow."

Focus Questions

it is the number of times money has changed hands & generated income; the formula is: K = 1 / 1 - MPC

Consumption - the use of goods & services by households

1. What happens when a business fails to

estimate demand correctly?

Marginal Propensity to Consume (MPC) - the result of change in the level of consumption as a consequence of a change in income; it is represented by the ratio: c/ y

2. Do consumption & consumption function

mean the same thing? Explain your answer.

Investment - the decision made by firms to spend on capital goods for the purpose of income regeneration

3. When are the times that government should

spend? And when should government rein

in spending?

Consumption Expenditure - purchase of goods & services by households

Important points of MPC:

Given: I = 50; MPC = 75%

4. At this point in time, what are the possible

solutions for the Philippines to better its

economic growth as against that of

Thailand?

2

Types :

1. Autonomous

expenditure made is independent

is independent of economic growth

1. in normal situation, MPC varies between 1 to zero.

Thus, the income generated (Yg) is:

2. MPC of poor is more than that of the rich.

National Income = consumption + investment

(y = c + I)

K = 1 / 1 - .75

K = 1 / .25

K = 4

3. MPC falls with successive increase of income.

Equilibrium Income - when aggregate quantity supplied is equal to aggregate quantity demanded

Consumption Function or the Propensity to Consume - the schedule that relates consumption to

income

2. Induced

investments that changes

with the changes in

income level

Let us compute for the

MPC & MPS at Year 3:

Given: I = 50; a = 50; MPC = 75%

Yg = I x K

Yg = 50 x 4

Yg = 200 million

The formula for consumption function is c = a + by, where:

MPC = 275 - 200 / 300 - 200

MPC = 75 / 100

MPC = 75% or .75

Marginal

Propensity to Save (MPS) - the result of a change in the level of savings as a consequence of a change in income; it can never be less than zero; represented by the ratio s / y

y = (a + by) + I

y - by = a + I

y - .75y = 50 + 50

.25y = 100

.25y/.25 = 100/.25

y = 400 million

MPS = 25 - 0 / 300 - 200

MPS = 25 / 100

MPS = 25% or .25

a = the level of consumption at zero income

b = Marginal Propensity to Consume

y = break-even point where consumption =

income. Thus, C=Y

Factors that

determine investments:

That's All Folks !!!

Thank you !!!

Assumptions (in millions):

The sum of MPC and MPS is always 1.

Consumption

(c)

Income (y)

Savings (s)

Assuming: a = 10 million; b = 80%

1. economic condition

2. peace & order

3. political condition

4. mood of the investors

This means that at 50 million, consumption equals income.

.75 + .25 = 1

100

125

-25

Year 1

With the same formula, we can compute for consumption at different income levels. Given an income (y) of 1) 25 million and 2) 80 million, consumption is:

Year 2

200

0

* If MPC is high, K is also high & vice versa

Categories of Investment:

Thus, c = 10 + .80y

Since c = y

So y = 10 + .80y

y - .80y = 10

.20y = 10

.20y/.20 = 10/.20

y = 50 million

1. c = 10 + (.80)(25)

c = 10 + 20

c = 30 million

2. c = 10 + (.80)(80)

c = 10 + 64

c = 74 million

Year 3

300

275

25

So, at what income level did we incur

1. Business Investment

2. Residential Construction

3. Changes in Inventories

Savings ?

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