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Topic 8

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    Topic 8 Topic 8 Presentation Transcript

    • Determination of National Income EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Chapter #10, 11
    • PRODUCERS Y = $40M CONSUMERS S = $6M S T = $4M M = $10M Factors of Production Goods and Services X = $7M G = $5M I = $8M C D = $20M Circular Flow of Income EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • Injections (J)
      • Investments spending,
      • Government spending
      • Exports (spending by foreigners)
      • J = I + G + X
      EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • Withdrawals (W)
      • Saving
      • Taxation
      • Imports
      • W = S + T + M
      EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • Injections and Withdrawals Injections Withdrawals CIRCULAR FLOW OF INCOME EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • Injections (J) and Withdrawals (W) C D = C T - M J = I + G + X W = S + T + M AE = C T + I + G + X – M EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Y C T I G X M S T C D J W AE 0 20 25 35 10 10 -20 0 10 70 -10 80 100 90 25 35 10 20 0 10         200 160 25 35 10 30 20 20         300 230 25 35 10 40 40 30         400 300 25 35 10 50 60 40        
    • Equilibrium Level of National Income – Injections and Withdrawals Y W/J 200 W = S+T+M E J= X + G + I 70 EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • Aggregate Expenditure Y AE 200 80 AE 1 100 300 140 200 260 EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • Equilibrium Level of National Income – 45  Diagram Y AE E 1 45  200 Y=AE AE 1 200 EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • National Income Equilibrium and Disequilibrium EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Condition W = J or Y = E W > J or E < Y J > W or E > Y Classification Equilibrium Disequilibrium Disequilibrium Effect Income is Stable Income Contracts Income Expands
    • Equilibrium Level of National using Equations
      • Given that:
      • C T = 0.7Y+20
      • I = 25, G = 35, X = 10
      • M = 0.1Y+10
      •   C D = 0.6Y +10
      •   Formulate an equation which gives aggregate expenditure as a function of Y.
      • Use this equation to calculate the equilibrium level of national income.
      EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • Equilibrium Level of National using Equations
      • What is the new equilibrium level of national income if government expenditure increases by 10.
      • What is the change in national income and the value of the multiplier.
      • Use another method to determine the value of the multiplier.
      EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • An Increase in Aggregate Expenditure EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Y AE E 1 45  200 Y=E 225 E 2 120 130 AE 2 AE 1
    • An Increase in Injections EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Y AE 200 W 225 E 1 E 2 J 1 = X + I + G 1 J 2 = X + I + G 2 80 70
    • June 2009
      • Q6 You are given the following information about a closed economy:
      • C = 200 + 0.5Y
      • G = 500
      • I = 500
      • Where, C, G and I, refer, respectively, to consumer, government and investment expenditures, and where Y refers to national income.
      EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • June 2009
      • (a) Determine the equilibrium level of national income. (5 marks)
      • (b) (i) Explain what happens to the equilibrium level of national income if the marginal propensity to consume (mpc) increases to 0.75. (10 marks)
      • (ii) Explain what happens to the equilibrium level of national income if the country now trades and net exports of 500 are added to the expenditure function. (10 marks)
      EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • June 2008
      • Q6 Using a Keynesian Cross Diagram and starting from a position of equilibrium, explain how the following affect the level of national income in an economy:
      • (a) an increase in the marginal propensity to consume; (5 marks)
      • (b) an increase in the marginal propensity to import; (10 marks)
      • (c) the full employment level of income is greater than the existing equilibrium level of
      • national income. (10 marks)
      EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • Inflationary and Deflationary Gaps
      • The inflationary and deflationary gaps exist whenever the equilibrium income level for the economy does not correspond to the full employment level of income.
      • An inflationary gap exists when the equilibrium level of income exceeds the full employment level of income Y F.
      • A deflationary gap exists when the equilibrium level of income is below the full employment level of income Y F.
      EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • Inflationary Gap EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) Y E X Y E AE 1 45  Y F Y=E Y E1 FE Output Gap
    • Deflationary Gap Y E F G E AE 2 45  Y F Y=E Y E2 FE Output Gap EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • Fiscal Policy
      • Fiscal policy is the management of the economy through the level of government expenditure and taxation.
      • That is, the government can use this demand management tool to achieve its macroeconomic objectives by manipulating the fiscal budget.
      • Since it involves public spending and taxation, the arm of government which is in charge of this policy option is the Ministry of Finance.
      EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • Expansionary or Reflationary Fiscal Policy
      • Increase in government spending
      • Decrease in Taxes
      EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) 45  FE Y=E AE 1 AE 2 E 1 E 2 F G AE 0 Y Y 1 Y F
    • Deflationary or Contractionary Fiscal Policy
      • Decrease in government spending
      • Increase in Taxes
      EDWARD BAHAW - Economic Principles and Their Application to Business (ABE) 45  FE Y=E AE 1 AE 2 E 1 E 2 Y Y 1 Y F 0 AE
    • Dec 2009
      • Q7 (a) Explain what is meant by the following terms and use an appropriate diagram to illustrate each of your answers:
      • (i) An inflationary gap
      • (ii) A deflationary gap (12 marks)
      • (b) Explain how fiscal policy can be used to eliminate an inflationary gap. (13 marks)
      EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)
    • June 2009
      • Q7 Using aggregate demand (AD) and aggregate supply (AS) analysis, explain how the equilibrium position of an economy would be affected by each of the following:
      • (a) a decrease in government expenditure; (5 marks)
      • (b) an increase in the price of oil (assume the economy is an oil importer); (10 marks)
      • (c) an increase in the domestic rate of interest. (10 marks)
      EDWARD BAHAW - Economic Principles and Their Application to Business (ABE)