MEASUREMENT OF EQUILIBRIUM LEVEL OF NATIONAL INCOME

•NATIONAL INCOME

•Money value of all the final goods and services produced by a company during a given period of time

•How to measure Equilibrium level of National Income?

Does measuring equilibrium level means the methods of measuring National Income?

NOIn fact we are talking about how much should be the national income of the country

By saying this, we actually mean to say that the country should produce that much which is being demanded by the people of the country

Which means that neither some of the goods remain unsold nor their should be any shortage of the goods required

GOODS PRODUCED = GOODS DEMANDED

•Aggregate Demand

Demand should not be limited only to the Consumer’s Demand but the demand for Producer’s Good or Investment Goods should also be included

CONSUMER DEMAND+

PRODUCER DEMAND

•Aggregate Supply

Similarly the production should also be for both types of Goods i.e., Consumption Goods and Investment Goods

Consumption Goods+

Investment Goods

Therefore the Equilibrium Level of National Income will be when-• The total demand for all the types of goods i.e., AD is

equal to total supply of all types of goods i.e., AS• Or S = I

Equilibrium Level:Aggregate Demand = Aggregate Supply

Savings = Investment

•Table

Y C S I AD AS=Y AD-AS TREND

100 90 10 40 130 100 30 EXPANSION

200 180 20 40 220 200 20 EXPANSION

300 270 30 40 310 300 10 EXPANSION

400 360 40 40 400 400 0 EQUILIBRIUM

500 450 50 40 490 500 -10 CONTRACTION

600 540 60 40 580 600 -20 CONTRACTION

Y=IncomeC=ConsumptionS=Savings

I=InvestmentAD=Aggregate DemandAS=Aggregate Supply

•AD = ASAt income level Rs. 400, AD is Equal to AS and this level will be treated as equilibrium level of national income as whatever is demanded in the Economy is being supplied alsoBefore reaching this level, producers will think of Expansion as the demand is moreAnd if producers go beyond this level, all the goods produced will not be sold thus producers will think of Contraction

•Graph

Y=AS=C+S

AD=C+I

C

E : AD=AS

I N C O M E

CONSUMPTION

400200 600

CONTRACTION

EXPANSION

Y

X45’

0

•S = ISaving is such an act that reduces amount of demand and,Investment on other hand is such which encourages in increasing demandAt income level Rs. 400, S is Equal to I and this level will be treated as equilibrium level of national income as at this level, the gap between S and I becomes Zero

•Graph

400

40

0

I

S

I N C O M E

INVESTMENT

-Y

Y

X

• Is S always Equal to I

Two important equations of Keynes-• Y = C + I• Y = C + S

From this, it is evident that I should be equal to S. But it is not always possible as they are done by different persons and it is not always possible that the thinking of savers and investors are same

•Classical Economists says-

Both of them (I & S) should be equal and if there is any dis equilibrium then change in rate of interest can bring in equality between the two

•But Acc. to Keynes-It is not necessary that both should always be equal as they are done by different persons.And equality in the equation is in connection with the real investment and real savings.

Real savings

Planned Investment Unplanned InvestmentThought of before starting any economic activity

Not thought earlier but takes place automatically

•Table

Y C S I AD AS=Y AD-AS TREND

100 90 10 40 130 100 30 EXPANSION

200 180 20 40 220 200 20 EXPANSION

300 270 30 40 310 300 10 EXPANSION

400 360 40 40 400 400 0 EQUILIBRIUM

500 450 50 40 490 500 -10 CONTRACTION

600 540 60 40 580 600 -20 CONTRACTION

Y=IncomeC=ConsumptionS=Savings

I=InvestmentAD=Aggregate DemandAS=Aggregate Supply

•ConclusionWe can conclude that when we talk about the equality between Savings and Investment, then this equality is in regards to real investment and real savingsPlanned Investment and Real Investment will be equal only at the point of equilibrium of national income because the planned investment will be Zero at this level

•THANK YOU. . .