Input and output theory based on Islamic Perspective

General Equilibrium Model Using the Input-
Output Model and Its Relationship to AD and AS
relations
1
TSR for Better Civilization

A. Aggregate Demand and Aggregate Supply Simulation
B. Islamic Perspective in Demand and Supply
A. The Firm Sector
B. The Household Sector
II. Aggregate Demand and Aggregate Supply
2
Input and Output Model
C. The Government Sector
D. The Foreign Sector
E. The Financial Sector

3
The Concept of Output and Input
input-output
analysis is
essentially
based on the
assumption that
an economic
system consists
of sectors that
are interrelated

3
The Interellated five sectors: a household sector, a firm sector, a
government sector, a foreign sector, and a financial sector

3
The Firm Sector
includes the component of the circular flow associated with
the flows into and from the firm sector of an economy. We
know that the total flow of dollars from the firm sector
measures the total value of production in an economy. The
total flow of dollars into the firm sector equals total
expenditures on GDP.
production = consumption + investment + government
purchases + net exports.
This equation is called the national income identity and is
the most fundamental relationship in the national accounts

3
The Household Sector
The household sector summarizes the behavior of private
individuals in their roles as consumers/savers and suppliers of
labor. The balance of flows into and from this sector is the basis of
the household budget constraint. Households receive income from
firms, in the form of wages and in the form of dividends resulting
from their ownership of firms. The income that households have
available to them after all taxes have been paid to the government
and all transfers received is called disposable income. Households
spend some of their disposable income and save the rest. In other
words,
disposable income = consumption + household savings.

3
The Government Sector
The government sector summarizes the actions of all levels of government in an
economy. Governments tax their citizens, pay transfers to them, and purchase
goods from the firm sector of the economy. Governments also borrow from or
lend to the financial sector. The amount that the government collects in taxes
need not equal the amount that it pays out for government purchases and
transfers. If the government spends more than it gathers in taxes, then it must
borrow from the financial markets to make up the shortfall.
The circular flow figure shows two flows into the government sector and two
flows out. Since the flows into and from the government sector must balance,
we know that
government purchases + transfers = tax revenues + government
borrowing.

3
The Foreign Sector
The circular flow includes a country’s dealings with the rest of the world. These flows
include exports, imports, and borrowing from other countries. Exports are goods and
services produced in one country and purchased by households, firms, and governments
of another country. Imports are goods and services purchased by households, firms, and
governments in one country but produced in another country. Net exports are exports
minus imports. When net exports are positive, a country is running a trade surplus:
exports exceed imports. When net exports are negative, a country is running a trade
deficit: imports exceed exports. The third flow between countries is borrowing and lending.
Governments, individuals, and firms in one country may borrow from or lend to another
country.
Net exports and borrowing are linked. If a country runs a trade deficit, it borrows from
other countries to finance that deficit. If we look at the flows into and from the foreign
sector, we see that
borrowing from other countries + exports = imports.
Subtracting exports from both sides, we obtain
borrowing from other countries = imports − exports = trade deficit.

3
The Financial Sector
The financial sector of an economy summarizes the behavior of banks and
other financial institutions. The balance of flows into and from the financial sector
tell us that investment is financed by national savings and borrowing from
abroad. The financial sector is at the heart of the circular flow
The national savings of the economy is the savings carried out by the private
and government sectors taken together. When the government is running a
deficit, some of the savings of households and firms must be used to fund that
deficit, so there is less left over to finance investment. National savings is then
equal to private savings minus the government deficit—that is, private savings
minus government borrowing:
national savings = private savings − government borrowing.

3
The Matrix
Matrix: input-output analysis which make up a table containing descriptions of the
distribution of output sutu sector into other sectors as inputs, and to the user /
end user as consumer goods
Transaction Matrix of Group 4 Countries
Sectors A B C Demand Total
Output
A
B
C
Value Added
40
30
20
110
70
160
100
250
10
120
110
230
80
270
240
140
200
580
470
730
Total Output 200 580 470 730 1980
Remarks:
A = Farmer Sector B = Industry Sector C = Services Sector
Sources : Data Assumption.

3
The Matrix
The table can be described to the side that is, that the entire output of the
agricultural sector 200, is used for the purposes of the agricultural sector itself 40
as input; 70 to input the industrial sector, worth 10 to input the service sector,
while the remaining 80 are consumed by the user / end user as consumer goods.
Description of the table to the side this applies also to the entire output of the
industrial sector and the service sector as well as the output anyway.
Meanwhile, read the description in the table below shows that the entire output of
the agricultural sector 200 was derived from the agricultural sector itself as its
inputs 40, 30 in the form of input comes from the industrial sector, 20 in the form
of input that comes from the services sector; while the remaining 110 in the form
of value added of agriculture or often named as the primary input.

3
The TSR (interrelated of all sectors)
In term of Islamic point of view, there is a Hadits “ .. pay the man ( labor) before the sweat
getting dry …..” . In our believing, Tawhid is axiom in Al-Qur’an on Shurat Al Ikhlas ….”
Got…
Nothing else but the only Allah SWT….”. The Qur’an tells parallel, consistence, maturity
and source of knowledge. Islam teach us in number, connectedness, understandable,
originate and re originate, knowledge or Science process and universal.
The earliest in our best philosophy, TSR is based on Assyuura (42) : 49 kindly find that “
… to god belongs the domination of the heavens and the earth …He creates what he
wills…. “ then please find Yassin (36) :82 “ …. Kun fayakuun…” , Science or Hidayah ( )
comes from Allah , than by sunnah will be transmitting to human , from individual , from
majelis to majelis and shurah to shurah as discourse to solve human problem . By limiting
i and interaction among pair ness of the involvement . Factor as tasbih and recursively
consensus process. In Shurah , we have agency and system . Our agency are the
institution involvement such as market , Government regulatory and participatory in
Shurah itself , etc , while our system cover wages , production, marketing and promotion ,
etc. Its relationship can be formed in term of social wellbeing function (as social
embedded)

Aggregate Demand and Supply
3
Why the Aggregate Demand Curve
Slopes Downward (1)
Aggregate demand (AD) is the economy-wide demand for
goods and services.
Like the market demand curve, the aggregate demand curve
slopes downward, but for different reasons.
The reasons for its downward slope are price-level effects:
– Wealth Effect (Real Wealth/Real Balances)
– Interest Rate Effect
– International Trade Effect (Substitution)

3
Why the Aggregate Demand Curve
Slopes Downward (2)

15
Copyright © Houghton Mifflin Company. All rights
reserved.
The Interest Rate Effect

16
reserved.
Why the Aggregate Demand Curve Slopes
Downward (4)

17
reserved.
The
Aggregate
Demand
Curve
Note that
changes in
prices result in
changes in the
aggregate
quantity
demanded.

18
reserved.
Factors that Affect AD
• Consumption
– Income
– Wealth
– Expectations
– Demographics
– Taxes
• Investment
– Interest Rates
– Technology
– Cost of Capital Goods
– Capacity Utilization
AD = C + I + G + XN
 Government Spending
 Net Exports
– Domestic & Foreign Income
– Domestic & Foreign Prices
– Exchange Rates
– Government Policy

19
reserved.
Non-price Determinants: Changes in
Aggregate Demand (1)

20
reserved.
Nonprice Determinants: Changes in

21
reserved.
Non-price Determinants: Changes in

22
reserved.
Shifting the
Aggregate
Demand Curve

23
reserved.
Effects of a
Change in
Aggregate
Demand
Demand-pull
inflation: rapid
increases in AD
outpace the
growth of AS,
causing price
level increases
(inflation).

24
reserved.
Short-run Aggregate Supply
• Aggregate Supply (AS) is the total of all the firm
(market) supply curves.
• It shows the quantity of real GDP produced at
different price levels.
• Short-run AS slopes upward because an increase in
the price level (while production costs and capital are
held constant on the short-run), means higher profit
margins—firms will want to produce more.

25
reserved.
Aggregate
Supply

26
reserved.
Shape of Short-run AS (SRAS)
• In the short-run, the capital stock (the number of factories and
machines, etc.) are held constant.
• Increasing the number of workers increases output, but at a
diminishing rate.
• Diminishing returns manifest as an ever-steeper SRAS curve.
• In the short-run, some prices do not adjust quickly:
– Labor Costs (wages)
– Contracted supplies
– “Sticky” prices effect the short-run equillibrium

27
reserved.
The Shape of
the Short-
Run
Aggregate
Supply Curve

28
reserved.
The Shape of Long-run AS (LRAS)
• Resource costs are NOT fixed.
– As prices rise, workers will want higher wages and will
eventually get them.
• The amount of capital is not fixed—firms can build
new plants and buy new equipment over the long-
run.
• In the long-run, AS is set by the production
possibilities curve—the capacity of the economy, and
is not affected by prices, hence is vertical.

29
reserved.
The Shape of
the Long-Run
Aggregate
Supply Curve

30
reserved.
Determinants of Aggregate Supply (1)

31
reserved.

32
reserved.

33
reserved.
Shifting the
Long-Run
Aggregate
Supply Curve
Growth occurs as the
labor force and the
capital stock grow, as
technological
innovation improves
production efficiency.

34
reserved.
Changes in
Short-Run
Aggregate
Supply

35
reserved.
Effects of a
Change in
Aggregate
Supply
Cost-push
inflation: cost
increases push
AS to the left
(relative to AD),
causing price
level increases
(inflation).

36
reserved.
Aggregate
Demand and
Aggregate
Supply
Equilibrium

37
reserved.
Aggregate
Demand and
Supply
Equilibrium

38
reserved.
Demand and
Supply
in Islamic
Perspective
The concept of demand in Islam assess a commodity not
everything can be for consumption or use, to distinguish between
the halal (lawful) or haram. Allah has said in Surah Al-Maidah
verse 87, 88:
Therefore, in theory the Islamic demand to discuss the demand
of goods halal, haram, and the relationship between the two.
Whereas in conventional demand, all commodities judged the
same, can be consumed or used.

Billahit taufiq wal hidayah, wassalamu ‘alaikum
wa rahmatullahi wa barokatuh.
This Smile We Expect
16

Input and output theory based on Islamic Perspective

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Input and output theory based on Islamic Perspective