CLASS 12 PPT ON DETERMINATION OF INCOME AND EMPLOYMENT MADE BY AMITESH YADAV

2. Aggregate Demand
 It refers to the total value of final
goods and services which all the
sectors of an economy are planning
to buy at a given level of income
during a period of year accounting.

3. Components of aggregate
demand
 Private Consumption Expenditure-It refers to the
total expenditure incurred by households on purchase
of goods and services during an accounting year.
 Investment Expenditure-It refers to the total
expenditure incurred by all private firms on capital
goods.
 Government Expenditure-It refers to the total
expenditure incurred by government on consumer
goods and capital goods to satisfy the common needs
of the economy.
 Net Exports-The difference between exports and
imports is termed as net exports.

4. Components of aggregate
demand

5. Aggregate Supply
 Aggregate Supply refers to money value of
final goods and services that all the
producers are willing to supply in an
economy in a given time period.

6. Aggregate
Supply=National Income
 The sum Total of these factor incomes(i.e.
rent+wages+interest+profit) at domestic
and National level is termed as National
Income. So, we can say that aggregate
supply(AS) and national income(Y), are
one and the same thing.

7. Components of Aggregate
Supply(AS) or National Income(Y)
 National Income(Y)=Consumption(C)+Saving(S)
OR
Y=AS+C+S

8. Consumption Function
(Propensity to Consume)
 Consumption function refers to functional
relationship between consumption and
national income.
C=F(Y)

9. Types of Propensities to
consume
 Average Propensity to Consume(APC)
 Marginal Propensity to
Consume(MPC)

10. Average Propensity to Consume
 It refers to the ratio of consumption
expenditure to the corresponding level
of income.
APC = C/Y
Where , APC=Average propensity to
consume; C=Consumption; Y=Income

11. Marginal Propensity to
consume
 It refers to the ratio of change in
consumption expenditure to change in
total income
 MPC= C
Y

12. Difference Between APC and MPC
APC MPC
 It is the ratio of
consumption expenditure
(C) to the corresponding
level of income(Y) at a
point of time.
 APC can be more than one
as long as consumption is
more than national income,
i.e. till the break even
point.
 When Income increases ,
APC falls but a rate less
than that of MPC.
 APC=C/Y
 It is the ratio of change in
consumption expenditure
to change in income over a
period of time.
 MPC cannot be more than
one as change in
consumption cannot be
more than change in
income.
 When Income increases ,
MPC also falls but a rate
more than that of APC.
 MPC= C
Y

13. Saving Function
(Propensity to save)
 Saving functions refers to the functional
relationship between saving and national income.
S=f(Y)
Where, S=Saving; Y=National Income; f=Functional
relationship

14. Average Propensity to
Save
 Average propensity to save refers to the
ratio of saving to the corresponding level
of income.
APS=Saving/Income

15. Marginal Propensity to
consume
 Marginal propensity to save refers to the
ratio of change in saving to change in
total income.
MPS=Change in Saving
Change in Income

16. Investment function
 Investment refers to the expenditure
incurred on creation of new capital
assets.
 It includes the expenditure incurred on
assets like
machinery,building,equipment,rawmateri
al,etc.

17.  The Investment expenditure is classified
under two heads-
 Induced Investment
 Autonomous investment

18. Induced Investment
 It is directly influenced by the income
level. It is made when marginal
efficiency of investment is more than the
rate of interest.

19. Autonomous investment
 It refers to the investment which is not
affected by changes in the level of
income and is not induced solely by
profit motive.

20. Ex-Ante Saving &
Investment
 Ex-Ante Saving-It refers to the amount
which savers plan to save at different
levels of income in an economy.
 Ex-Ante Investment-It refers to the
amount which investors plan to invest at
different levels of income in an economy.

21. Ex-post Saving & Ex-post
Investment
 Ex-post Saving-It refers to the actual
saving in an economy during a year.
 Ex-post Investment-It refers to the actual
investment in an economy during a year.

22. Full Employment
 It refers to a situation in which all those
people, who are willing and able to work
at the existing wage rate, get work
without any undue difficulty.

23. Involuntary Employment
 It refers to a situation in which all those
people, who are willing and able to work
at the existing wage rate, do not get
work.

24. The components of aggregate
demand are :
 Demand for goods and services for
private consumption also called
private final
 consumption expenditure.
 Demand for private investment
 Demand for goods and services by
the government
 Net exports.

26.  In the AD or(C+I) curve shows the desired
level of expenditure by consumers and
firms corresponding to each level of
income. The economy is in equilibrium at
point 'E' where (C+I) curve intersects the
45^ line.
 'E' is the equilibrium point because at this
point, the level of desired spending on
consumption and investment exactly
equals the level of total output.
 OY is the equilibrium level of output
corresponding to point E.
 The Equilibrium level of income is Rs400
crores, when AD (or C+I)=AS =Rs400
crores.

27. When AD is more than AS
 When planned spending (AD) is more
than planned output (AS), then (C+I)
curve lies above the 45^ line . It means
that consumer and firms together would
be buying more goods than firms are
willing to produce. As a result, the
planned inventory would fall below the
desired level.

28. When AD is less than AS
 When AD<AS, then (C+I) curve lies
below the 45^ line. It means that
consumers and firms together would
be buying less goods than firms are
willing to produce AS a result, the
planned inventory would rise.
 Saving and Investment Approach
 Equilibrium level of income is
determined at the level where
planned saving is equal to planned
investment, i.e., when S=I.

30.  In Fig , Investment curve is parallel to
the X-Axis because of the autonomous
character of investments. The Saving
curve (S) Slopes upwards showing that
as income rises, saving also rises.
 The economy is in equilibrium at a point
'E' where saving and investment curves
intersect each other.
 At point 'E', ex-ante saving is equal to
ex-ante investment.
 OY is the equilibrium level of output
corresponding to point E.

31. When Saving is more than
Investment
 If planned saving is more than
planned investment after point 'E', it
means that households are not
consuming as much as the firms
expected them to. As a result, the
inventory rises above the desired
level.

32. When Saving is less than
Investment If planned saving is less than
planned investment before point 'E' ,
it means that households are
consuming more and saving less
than what the firms expected them to.
As a result, planned inventory would
fall below the desired level.

33. Full Employment Equilibrium
 It refers to a situation when
aggregate demand is equal to the
aggregate supply at full employment
level.

34. Underemployment
Equilibrium
 It refers to a situation when
aggregate demand is equal to the
aggregate supply at a level where the
resources are not fully employed.

35. Over Full Employment
Equilibrium
 It refers to a situation when AD is
Equal to AS beyond the full
employment level.

36. Multiplier
 It refers to the ratio of change in
income( Y), to a change in investment
(^I).K=^Y/^I. The minimum value of
multiplier can be one and the
maximum value can be infinity.
 Multiplier is directly related with the
MPC, i.e., K=1/1-MPC.
 Multiplier is inversity related with the
MPS, i.e., K=1/MPS.

37. Working of Multiplier
 It is based on the fact "One person's
expenditure is another person's
income". So , multiplier expresses
the relationship between an initial
increment in investment and the
resulting increase in aggregate
income

38. Excess of Demand
 It refers to a situation when AD>AS
corresponding to the full employment
level of output in the economy.

39. Inflationary Gap
 It shows the gap by which actual AD
exceeds the Ad required to establish
full employment equilibrium.

40. Reasons for Excess Demand
 Rise in the propensity to consume
 Reduction in taxes
 Increase in Government Expenditure
 Increase in Investment
 Fall in Imports
 Rise in Exports
 Deficit Financing

41. Impact of Excess Demand
 Excess demand leads to inflation
without any increase in output and
employment as the economy is
already operating at the full
employment level.

42. Deficient Demand
 It refers to a situation when Ad<AS
corresponding to the full employment
level of output in the economy.

43. Deflationary Gap
 It shows the gap by which actual AD
falls short of the AD required to
establish full employment
equilibrium.

44. Reasons for Deficient
Demand
 Decrease in this propensity to
consume
 Increase in taxes
 Decrease in Government Expenditure
 Fall in Investment Expenditure
 Rise in Imports
 Fall in Exports

45. Impact of Deficient Demand
 Deficient demand leads to fall in
prices which, in turn, leads to fall in
the output and employment level.

46. Measures to correct Excess
Demand
 Decrease in Government Spending:
In this Fiscal measure, central
government needs to reduce its
expenditure in order to decrease level
of aggregate demand.
 Decrease in Availability of Credit:
Central Bank aims to reduce
availability of credit through
'Monetary Policy' . It includes :

47. Quantitative Instrument:
 Increase In Bank rate
 Open Market Operation(Sale of
securities)
 Increase in legal reserve
requirements

48. Qualitative Instrument:
 Increase in margin requirements
 Moral Suasion (Advise to discourage
Lending)
 Selective Credit Controls(Introduce
Credit Rationing)

49. Measures to correct Deficient
Demand
 Increase in Government Spending: In
this Fiscal measure, central
government needs to increase its
expenditure in order to raise the level
of aggregate demand.
 Increase in Availability of Credit :
Central Bank aims to reduce
availability of credit through
'Monetary Policy' . It includes :

50. Quantitative Instrument:
 Decrease In Bank rate
 Open Market Operation(Purchase of
securities)
 Decrease in legal reserve
requirements

51. Qualitative Instrument:
 Decrease in margin requirements
 Moral Suasion (Advise to encourage
Lending)
 Selective Credit Controls(Withdraw
Credit Rationing)