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
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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 ?