elementary theory of income determination

ELEMENTARY THEORY OF INCOME DETERMINATION PERFORMANCE OBJECTIVE At the end of this chapter, students should be able to: Identify sectors in the national economy and explain the flow of inputs, outputs and income among the sectors. Draw simple diagrams illustrating the circular flow of income, Explain the concepts of savings, investment and consumption and relationship among those concepts. 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 equilibrium level of income.

INTRODUCTION TO ELEMENTARY THEORY OF INCOME DETERMINANT

The total income of a country is a reflection of real capital investment in that particular country. The volume of investments is determined mainly by certain factors. These factors include expectation of entrepreneurs, rate of interest, savings, marginal efficiency of capital, and consumption.

Circular Flow of Income determinant

The circular flow of income refers to the flow of payments and receipts for factor services and for currently produced output passing between domestic firms and households. In other words, it describes the flow of payment from businesses to households in exchange for labour and other productive services and the return flow of payments from households to businesses in exchange for goods and services.. ELEMENTARY THEORY OF INCOME ELEMENTARY THEORY OF INCOME

To make discussion on circular flow of income simple, a two sector economy, which involves households and firms, will be used. The households supply factors of production (input) to firms which need them for production purposes. In return, they are paid wages, interest, rents and profits, which constitute their income.

ELEMENTARY THEORY OF INCOME

The members of the households use their incomes to purchase goods and services produced by the firms. This pattern of consumption expenditure made by households constitutes income for firms.

This process leads to the formation of an income flow. The firms again use the income to purchase the productive service of households. Income, therefore, continues to flow in a circular flow of income. While income flows in one direction, goods as in Fig. 49.1, and services produced by the firms and the productive services of households flow in the other direction.

FACTORS AFFECTING CIRCULAR FLOW OF INCOME

Savings: This constitutes part of income which is not consumed immediately. They have the tendency to reduce the expenditure of the households and firms

  • Injection: Injection to fund into the circle is an increase in the incomes of (2) households and firms beside their normal processes of selling productive resources and manufactured goods.
  • Taxes: Taxes tend to reduce the volume

            of fund in circulation as it reduces the expenditure of firms and households  ELEMENTARY THEORY OF INCOME        

  •  Withdrawal: Withdrawal tends to reduce the amount of fund in the circular flow of income.
  • Aids and grants: Aids and grants from government or other sources increase

the volume of fund in the circular flow 49.5 of income.

  •  Import and export: While imports involve expenditure on foreign made (1) goods and services leading to withdrawals from circular flow of (2) income, exports provide funds leading

to injection into the circular flow of income.

  •  Investment: Investments created an (3) additional income, leading to injection

into the circular flow of income

159. TAPE WORM
160. ROUND WORM OF PIGS
161. LIVER FLUKE
162. ECTO PARASITES
163. TICK
ELEMENTARY THEORY OF INCOME

  1. loans for businesses
  2. how to establish enterprises
  3. what is a firm
  4. price equilibrium
  5. scale of preference
  6. concept of economics
  7. economic tools for nation building
  8. budgeting

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