National income determinants and the economy

National income calculation

The key variable that will help you to decide whether the investment makes sense for you is the real interest rate that you will have to pay on the loan. There are several important assumptions about the form of the AD function that are needed to assure an equilibrium. An increase in investment demand. Individuals generally utilize their past savings for consumption purposes. We project aggregate supply, Y1, to the vertical axis using the forty-five-degree line so that we can compare supply with demand. The basic definition of the current account is the difference between the value of exports and the value of imports. Let us understand the concept of propensity to save by plotting a graph that represents income and savings of individuals in an economy, as shown in Figure In Figure-7, line N represents the saving-income curve. Expectations—There are times when consumers adjust their spending, based not on their actual income but rather on their expectations of future changes in their income. A simple example will illustrate the difference. Business Taxes—The government can influence the level of investment by the tax structure they impose on businesses. Before the investment takes place, firms only know their expected rate of return. Consumer Indebtedness—Consumers adjust their consumption to levels of indebtedness as well. Key Takeaway Aggregate demand is positively related to changes in disposable income, the real exchange rate as defined , and investment and government demands. Therefore, an investor would only invest when the expected income on investment is more than the rate of interest. In Figure-4, OP and OM curves also represent the income- consumption relationship; however, they are not alike.

Producers respond to more orders by producing more and thus GNP begins to rise. This is done by holding prices constant from a starting measure, called the base year.

national income formula

Obviously, a decrease in wealth will have the opposite effect. When the marginal efficiency of capital is greater than rate of interest, the n the investor would invest more.

One should think of this effect as a possible short-term exception to the standard theory. There are certain factors that are responsible for bringing changes in the propensity to consume.

national income introduction

Close X Some of the Non-Income Determinants of Consumption and Savings Notice that when we graph the Consumption Function, Consumption is measured on the vertical axis and disposable income is measured on the horizontal axis. Recall that ceteris paribus means that all other variables affecting aggregate demand are assumed to remain constant as GNP changes.

The consumption expenditure always changes with change in income.

What is national income in economics

However, this estimate is merely a rough rule of thumb as the actual paths will be influenced by many other variable changes also occurring at the same time. The logic of the relationship goes as follows. The opposite is also true. The output method, which is the combined value of the new and final output produced in all sectors of the economy, including manufacturing, financial services, transport, leisure and agriculture. The more that workers are needed the higher the wage rate. Keynes View on Consumption Function: As discussed above, Keynes has given a number of concepts to determine the income and consumption. Merchants, faced with storerooms filling up, send orders for fewer goods to producers. In the text, the effect of a change in the currency value is analyzed. Therefore, an investor would only invest when the expected income on investment is more than the rate of interest.

The reasons for the J-curve effect can be better understood by decomposing the current account balance.

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Determinants of the Level of National Income and Employment