Professional Documents
Culture Documents
determination
NATIONAL INCOME
EQUILIBRIUM
DETERMINATION NATIONAL INCOME EQUILIBRIUM
CONCEPTS OF EQUIBLIBRIUM AND DISEQUILIBRIUM
CONSUMPTION THEORY : CONVENTIONAL AND ISLAMIC
INVESTMENT THEORY : CONVENTIONAL AND ISLAMIC
DETERMINATION OF EQUILIBRIUM IN 2,3,4-SECTOR ECONOMY
-AGGREGATE DEMAND = AGGREGATE SUPPLY
- LEAKAGES = INJECTIONS
MULTIPLIERAL
-DEFINITION INVESTMENTS, GOVERNMENT AND TAX MULTIPLIER.
- FORMULA AND CALCULATION OF MULTIPLIER
INFLATIONARY AND DEFLATIONARY GAPS - GRAPH ILLUSTRATION
INCOME EQUILIBRIUM
Definition:
Total quantity of goods and services purchased (AD/AE)) are equals
to total quantity of goods and services produced (AS/Y) in an
economy in a given period.
EQUALIBRIUM ;
AS = AD @ Y = AE
DISEQUALIBRIUMM ;
AS > AD @ Y > AE
AS<AD @ Y<AE
Two approach to determine national income equilibrium
AGGREGATE DEMAND-AGGREGATE LEAKAGE-INJECTION APPROACH
SUPPLY APPROACH (AD=AS)
AD @ aggregate expenditure : Leakage :
- Total demand for goods and services in -A withdrawal from the income-expenditure
the economy. stream.
-4 components : - include :
consumption saving
investment taxes
government sector imports
foreign sector (net export) Injection :
-Additional spending to income-
AS @ aggregate output : expenditure stream.
- Total quantity of goods and services - include :
produced in an economy in any given investment
period of time. government expenditure
exports
equilibrium occurs when AD=AS equilibrium occurs when
LEAKAGE=INJECTION
CONSUMPTION THEORY : CONVENTIONAL AND ISLAMIC
Conventional perspective
Def : refer to the purchase of goods and services by individuals or
household which are produced by firms / the amount of goods and
services the households spend at different level of disposable income.
Keynes theory of consumption :
believed that planned consumption was subject to fundamental
psychological law.
according this law a person would increase his consumption as his
income increase, but the expenditure will be less than the increase in
income.
means consumer will spend only a part of increase in their income
and save the rest.
Income = consumption + saving Y = C+S
TYPES OF CONSUMPTION
C(Y)
Saving Equation
Y=C+S
S=YC
S = Y ( a + bYd)
S = Y a bYd
S = - a + ( 1 b ) Yd
Where :
S = savings
-a = autonomous savings (autonomous savings
does not depend on the income level)
1-b = MPS because MPC+MPS = 1
Yd = disposable income
BREAKEVEN INCOME
-Def : is the level at which household consume all their income.
-On the other word savings is equal to zero
-At the breakeven point :
Y=C
S=0
APC = 1
APS = 0
-E.g. : C = 1250 + 0.75 Yd
Y =C
Y = 1250 + 0.75Yd
Y-0.75Yd = 1250
o.25Y = 1250 (Assume Tax = 0; Y = Yd)
Y = 5,000
OR
S =0
-1250+0.25Yd =0
0.25Yd = 1250 (assume Tax = 0; Y = Yd)
Y = 5,000
C (AE)
Y=C
a = 1250
Dissaving area
S = -1250 + 0.25Yd
Saving area
National income (Y)
Dissaving area
5,000
-1250
E = E1 + E2
free to decide how much of his income will spend on this two expenditure.
Islam gives two guidelines on the spending pattern, which is :
- rational spending
- wealth
- price level
- expectations and others
- degree of God fearness or God-consciousness (Taqwa)
E1
- basket of goods limited to permissible goods.
-The Quran states that wealth is important to man.
-Muslim must rational- because not only spending for world solely.
-Include spending for the way of Allah not only spend now but must save for
the future consumption or investment-improve their economics.
E2
- The Quran not specify exactly how much we must spend on E2
- the minimum should be the amount of zakat an individual compulsory to pay
yearly if all conditions are satisfied.
- More muslim spends to others advantages/barakah to him in this world and
the hereafter.
Household
Expectation of
income
the future
income
Factors
Wealth Influencing
consumption
Rate of
interest
Tax
* Both autonomous and induced constitute the
consumption function :
C = a + b(Yd) ; where a is autonomous consumption and
b is value of MPC
C C
Y=C Y=C
C = a2 + bYd C = a + b2Yd
C = a1 + bYd C = a + b1Yd
a2
a
a1
Yd Yd
INVESTMENT THEORY CONVENTIONAL
- Def : spending or purchases and accumulation of capital goods.
- Eg : purchases by firms of a new building, equipment, and additions to
inventories.
- Also refers to expenditure made by private sector (firms).
TPYES OF INVESTMENT
1. Autonomous investment (I)
- fixed and independent of income (not affected by income).
- can be affected by other factors such as interest rate, repayment rates,
business expectation and technology developments.
Investment
Autonomous investment
Income
2. Induced investment [I = f(Y)]
- depends on the national income.
- as national income increase, induced investment will also increase; vice
versa.
- higher national income attracts more investors to invest.
Income
Expectation of
the future Rate of
interest
Factors
Technological
changes Influencing
@innovation
Investment
Rate of
return @
profit
Government
expectation
policies
INVESTMENT IN ISLAM
- All resources created by Allah must be manage and exploited to the fullest
(base on Shariah demand).
- Capital is not just wealth also include human factor that is humans
performance, belief, attitude and human motivation (conventional
perspective focuses only in human behavior).
- Wide integration of various dimensions of social, moral, political as well as
spiritual.
- Main objective development in Islam which requires investment to
balance between rapid development and equal distribution base on rule in
Islam.
- Four institutions that encourage process of capital formation/investment :
(i) Family
(ii) Ummah
(iii) Mosque
(iv) Government (base on Dr Aqeel A. Ansari points)
The boundaries/determinants/constraints of investment in Islam are :
(i) Only permissible activities are allowed
(ii) Investment is based on the needs of human and also on the needs of
Dharuriyah, Hajiyah or Kamaliyah. (follow the hierarchy of goods)
(iii)Should emphasize on the welfare of the society not solely on the
profitability.
(iv)Its implementation should not against Syariah principles for examples
exploitation or treachery.
(v) Does not involve any forms of riba, gharar and gambling.
DETERMINATION OF
EQUILIBRIUM IN 2, 3
AND 4 SECTOR
ECONOMIES.
EQUILIBRIUM IN A TWO-SECTOR ECONOMY
Firms
Investment (I)
Consumption of
Factor domestically BANKS, etc
Payments produced goods (Financial Market)
and services (C)
Net
saving (S)
Households
Also called the simple economy.
There are two approach to calculate
national income equilibrium which is;
(i) aggregate demand-aggregate supply
approach (AD-AS)
(ii) leakage-injection approach (I-S).
To determination of equilibrium can be
through mathematical equations , tables or
diagrams.
AD AS APPROACH LEAKAGE - INJECTION
APPROACH
AS = Y Injection = I (investment)
AD = C+I Leakage = S (Saving)
equilibrium is achieved when AD = AS, equilibrium is achieved when injection =
which is: leakages, which is:
AS = AD I=S
Y =C+I
2500 I
C = 5000+0.75Y
National
7500
income
30,000
5000 -5000
National
30,000 income
QUESTION (TEST 1/ JULY 2008)
AD
Y =AD
Refer diagram
below and
C+I answer the
following
C = 100 + 0.75Y questions.
Y
Y1 1500 3500
(a) Y1 (1 m)
(b) investment (I) (2m)
(c) assume Yfe is at 1500 level of income, how much should
the economy increase its Investment in order to achieve Yfe. (2m)
(d) Based on the question (c), draw national income equilibrium
diagram using the Leakage-Injection approach. (2m)
EQUILIBRIUM IN A THREE-
SECTOR ECONOMY
INJECTIONS
Firms
Investment (I)
Government
Consumption of expenditure (G)
Factor domestically
BANKS, etc GOV.
payments produced goods
and services (C)
Net
Net taxes (T)
saving (S)
WITHDRAWALS
Households
consists of household, firms and the
government.
from graph- shows flow of taxes form
household and firms to G
also the flow of purchases of goods and
services by G and transfer payments to
households.
G expenditure (injections)
Taxes (leakages)
AD AS APPROACH INJECTION-LEAKAGE APPROACH
AS = Y (Y = Y-T) equilibrium is achieved when injection =
AD = C+I + G leakages, which is:
equilibrium is achieved when AD = AS, Injection = Leakage
which is: I +G = S + T
AS = AD
Y =C+I+G
focus on two types of taxes, which is :
C = 200+0.75Yd
(before tax) C = 200+0.75Yd
275
350 (before tax)
C=
125+0.75Yd C = 200+0.6Yd
I+G 200 (after tax) (after tax)
I+G
125
200
NI
NI
1100 875
(1) Autonomous taxes (2) Induced taxes.
Leakage/injections Leakage/injections
S+T = -200+0.25Yd S+T = -200+0.25Yd
(before tax) (before tax)
S+T = -225+0.25Yd S+T = -200+0.2Yd
(after tax) (after tax)
150 150
I+G I+G
NI NI
-200 1100 875
-225 -200
EQUILIBRIUM IN A FOUR-SECTOR
ECONOMY
INJECTIONS
Firms
Export
expenditure (X)
Investment (I)
Government
Consumption of expenditure (G)
Factor domestically
BANKS, etc GOV. ABROAD
payments produced goods
and services (C)
Import
Net expenditure (M)
Net taxes (T)
saving (S)
WITHDRAWALS
Households
consists of household, firms,
government and foreign sectors.
Also knows as open economy.
export (injections)
import (leakages)
AD AS APPROACH INJECTION-LEAKAGE APPROACH
AS = Y equilibrium is achieved when injection =
AD = C+I + G + (X-M) leakages, which is:
equilibrium is achieved when AD = AS, Injection = Leakage
which is: I +G+X = S + T+M
AS = AD
Y = C + I + G + (X-M)
given the following information. Equilibrium income is:
C = 200 + 0.75Yd (disposable income) I+G+X = S+T+M
I = 100 G = 50 100+50+100 = -200+0.25(Y-100)+100+50
T = 100 X = 100 M = 50 250 = -75+0.25Y
Equilibrium income is: 0.25Y = 325
Y = C+I+G+ (X-M) Y = 325/0.25
= 200+0.75Yd+100+50+(100-50) Y = 1300 (EQUILIBRIUM INCOME)
= 400+0.75(Y-T)
= 400+0.75(Y-100)
= 400+o.75Y-75
Y-0.75Y = 325
Y = 325/0.25
Y = 1300 (EQUILIBRIUM INCOME)
AD AS APPROACH LEAKAGE-INJECTION APPROACH
Graphical analysis Graphical analysis
- Same example as above- translate into - same as example above translate into
graph graph.
AD Leakage/injection
Y=AD S+T+M
C+I+G+(X-M) I+G+X
250
NI
325
NI -75
1300
MULTIPLIER
K= 1
1-MPC
TYPES OF INVESTMENT GOVERNMENT TAX
MULTIPLIER
Ratio of the change in Ratio of the change in Ratio of the change
the equilibrium income the equilibrium income in the equilibrium
to a change in to a change in income to a change
investment. government expenditure in taxes assuming
DEFINITION assuming there is no there is no change in
change in taxes government
expenditure.
Ki = change in Income Kg = change in Income Kt = change in Income
change in investment change in government change in Taxes
expenditure
Y
Ki Y Y
I Kg Kt
FORMULA G T
Also can be derived by: Also can be derived by: Also can be derived by:
1 1 1 1 MPC
Ki Kg Kt
1 MPC MPS 1 MPC MPS MPS
INFLATIONARY GAP
occurs when national income exceeds full employment level Yfe.
full employment achieved when resources are all used with max
efficiency increased in aggregate expenditure.
Also measure as the excess of aggregate expenditure over full
employment aggregate supply, Yfe (Y>Yfe) .
When aggregate expenditures are greater than the full employment
level causing demand-pull inflation.
Government might use contractionary fiscal policy to close the
inflationary gap by either decreasing (reduces) its spending or by
rising taxes
Aggregate demand
Y=AD
Inflationary gap E C+I+G+(X-M)
A The inflationary
C+I+G(X-M)fe
gap A to B will
B
increase general
price level
NI
Only disappears
Leakage/injection when aggregate
S+T+M money increase
Inflationary gap
A E from OYfe to OY-
I+G+X
raising general
B prices.
NI
Yfe Y
Yfe<Y = inflationary
gap
DEFLATIONARY GAP
C Deflationary gap
NI
Y Yfe
Yfe>Y = Deflationary
gap
Q (Final/oct 2007)
I,S (RM Million)
S=-400+0.3Y
I=250
National Income
Yo Yf Ye
Where :
Yf = full-employment national income
Ye=equilibrium national income
C = 7500 + 0.8Yd
I = 8000
G = 4500
T = 4000
(all figures are in RM Billion)
(i) Calculate the equilibrium level of national income for the above
economy. (2m)
(iii)How much should the government change its spending to close the
gap in (ii) above? (2m)
b) The data in the first two columns below are for closed economy. Use this table
to answer the following question:
Real GDP Aggregate Exports Imports Net exports Aggregate
expenditure expenditures
(closed (open
economy) economy)
80 100 $15 $5
120 130 15 5
160 160 15 5
200 190 15 5
240 220 15 5
280 250 15 5
320 280 15 5
360 310 15 5
(i) Fill in the blanks and determine the equilibrium GDP for the closed economy.
(iii) What will happen to equilibrium GDP if exports were RM10 billion larger at
each level of GDP?
Exercise
National Income (RM Consumption (RM Saving (RM billion)
billion) billion)
0
2000
4000
6000
8000