2. “Value of commodities and
services produced in an
economy during a given
period, counted without
duplication”
3. How to
measure
The Product Method “This method seeks to
“add up all expenditures
“involves adding up the value
made for final goods
measure national
of allservices at current
and the final goods and
The income Method market prices by of
income atproduced in the
services thefirms and
phase
households,
distribution.”
government during a
country during the year.”
The expenditure Method year”
4. ‘How much should be the
national TO THE DEMAND OF THE
PRODUCTION
income?
= PEOPLE ’
So that goods, Do not remain unsold and
Do not face shortage
8. Equality between AD and AS
INCOME AD CONSUMPTION AS SAVINGS INCOME AD-AS TREND
400 460 380 400 20 80 60 EXPANSION
450 490 410 450 40 80 20 EXPANSION
500 520 440 500 60 80 20 EXPEANSION
550 550 470 550 80 80 0 EQUILIBRIUM
600 580 500 600 100 80 -20 CONTRACT
650 610 530 650 120 80 -40 CONTRACT
9. Y = AS=C+S
AS=AD
I
N (EQUILIBRIUM)
C
O
M E
E
45
0 CONSUMPTION
Since AD>AS,
Producer will keep on producing more and
expansionary trend take place.
10. Instance where government took steps to
maintain equilibrium level of National Income
Fall in Domestic demand by fall
in house price in 1989 in U.K
Fall in AD
Government took Consumers
steps to control were asked
to cut back
their
expenditure
11. SUPPLY CHANGE
Rise in world oil Internal crude oil Increased the
prizes over 30 price moved variable cost of oil
years. sharply. firms.
Subsidized pricing Firms raised the
Leading to
done by the price of finished
Disequilibrium
government product.
12. S=I s
Income
(EQUILIBRIUM)
E
I I
consumption
0 s
S=I is a equilibrium point,
Before this point investment > savings,expension
will take place.
After this point investment < savings contraction
will take place.
13. Is savings equal to investment always
Y=C+S
and
Y=C+I
KEYNES
From here, It is evident that I should be = S
14. BUT IT IS NOT POSSIBLE IN REAL LIFE.
THE EQUALITY IS SHOWN ON THE BASIS OF
REAL INVESTMENT AND REAL SAVINGS.
(C+I) (I-S)
INCOME CONSUMPTION AS SAVINGS INCOME TREND
AD AD-AS
400 460 380 400 20 80 60 EXPANSION
450 490 410 450 40 80 20 EXPANSION
500 520 440 500 60 80 20 EXPEANSION
550 550 470 550 80 80 0 EQUILIBRIUM
600 580 500 600 100 80 -20 CONTRACT
650 610 530 650 120 80 -40 CONTRACT
The product approach measuring national income involves adding up the value of all the final goods and services produced in the country during the year.The expenditure approach to measuring national income is to add up all expenditures made for final goods and services at current market prices by households, firms and government during a yearThis method seeks to measure national income at the phase of distribution.
real life examples of national level of equilibriumConsider a £300 million increase in business capital investment – for example created when an overseas company decides to build a new production plant in the UK. This will set off a chain reaction of increases in expenditures. Firms who produce the capital goods that are purchased will experience an increase in their incomes and profits. If they in turn, collectively spend about 3/5 of that additional income, then £180m will be added to the incomes of others