elementary theory of income determination, At the end of this chapter, students should be able to:. Identify sectors in the national economy and explain the elementary theory of income determination, outputs and income among the sectors.
Explain simple concepts like the marginal propensity to consume and the marginal propensity to save and their relevance to the growth of national income.
Explain and illustrate the determination of the equilibrium level of income equilibrium
The elementary theory of income determination refers to the basic framework used to explain how the level of national income is determined in an economy.
It is based on the idea that the total income in an economy is determined by the total spending or aggregate demand in that economy.
According to this theory, there are four main components of aggregate demand that determine the level of national income:
Consumption (C): Consumption refers to the total spending by households on goods and services. It is influenced by factors such as disposable income, consumer confidence, and interest rates. The theory assumes that a portion of income is spent on consumption.
Investment (I): Investment represents the spending by businesses on capital goods, such as machinery, equipment, and infrastructure.
It includes both private investment by firms and public investment by the government. Investment is influenced by factors such as interest rates, expected returns on investment, and business confidence.
Government Spending (G): Government spending includes all expenditures by the government on goods, services, and infrastructure.
It includes spending on defence, education, healthcare, infrastructure projects, and transfer payments such as social welfare programs. Government spending is determined by fiscal policy decisions made by the government.
Net Exports (NX): Net exports represent the difference between exports (X) and imports (M). If a country’s exports exceed its imports, it has a trade surplus and contributes to national income. On the other hand, if imports exceed exports, it has a trade deficit, which reduces national income.
The elementary theory of income determination can be summarized by the equation:
Y = C + I + G + NX
Where: Y represents national income (output) C represents consumption I represents investment G represents government spending NX represents net exports
The equilibrium level of national income occurs when aggregate demand equals aggregate supply. In other words, it is the level at which the total spending in the economy matches the total production.
At equilibrium, there is no tendency for national income to change unless there are changes in the components of aggregate demand.
It’s important to note that the elementary theory of income determination provides a simplified framework and does not account for all the complexities and interdependencies within an economy.
There are other factors, such as taxes, savings, interest rates, and international capital flows, that can also affect income determination
ELEMENTARY THEORY OF INCOME DETERMINATION PROCESS
The elementary theory of the income determination process is a simplified economic model that explains how national income is determined in an economy.
It is often associated with the Keynesian economic theory and provides a basic framework for understanding the factors that influence aggregate income and output.
The key components of the elementary theory of income determination process include consumption, saving, investment, and government spending. Here’s a step-by-step overview of the process:
Consumption (C): Consumption refers to the spending by households on goods and services. It is influenced by factors such as disposable income, consumer confidence, and interest rates. In the elementary theory, consumption is assumed to be a function of income, with a portion of income being spent on consumption.
Saving (S): Saving is the portion of income that is not spent on consumption. It represents the amount of income that households choose to save for the future. In the elementary theory, saving is also assumed to be a function of income, with saving increasing as income rises.
Investment (I): Investment refers to spending by firms on capital goods, such as machinery, equipment, and buildings. Investment is influenced by factors such as interest rates, business confidence, and expectations of future profitability. In the elementary theory, investment is considered autonomous, meaning it is determined independently of income.
Government Spending (G): Government spending represents the expenditures by the government on goods, services, and public investments. It includes areas such as infrastructure, defence, healthcare, and education. In the elementary theory, government spending is also considered autonomous and independent of income.
Aggregate Demand (AD): Aggregate demand is the total spending on goods and services in an economy. It is calculated as the sum of consumption (C), investment (I), and government spending (G). Mathematically, AD = C + I + G.
Equilibrium Output (Y): Equilibrium output refers to the level of income and output where aggregate demand (AD) equals aggregate supply. In the elementary theory, aggregate supply is assumed to be fixed in the short run. The equilibrium output occurs at the point where aggregate demand intersects the aggregate supply curve.
Multiplier Effect: The multiplier effect is a key concept in elementary theory. It states that an initial change in autonomous spending, such as an increase in investment or government spending, leads to a larger change in equilibrium output.
This occurs because the increase in spending creates income for workers, who in turn spend a portion of their income, creating further income and so on. The multiplier effect amplifies the initial change in spending.
Overall, the elementary theory of the income determination process provides a simplified framework for understanding the interplay between consumption, saving, investment, and government spending, and their impact on aggregate income and output in an economy.
It is important to note that this is a basic model, and real-world economies are more complex with additional factors and dynamics at play.
The volume of investments is determined mainly by certain factors. These factors include the expectation of entrepreneurs, rate of interest, savings, marginal efficiency of capital, and consumption.
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18. IRRIGATION AND DRAINAGE