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P.30. The determination of the Equilibrium level of national income, p.424.

A model of the economy.


1.     Potential national income YF.

Actual is less, if everybody would work overtime, actual would be more.

2.     Unemployment- assumed, that there is some
3.     Constant prices (no inflation) assumed.
4.     Technology stays the same.
5.     Y = GNP
6.     Investment is constant

                  It is easier to use

                  It consists of two parts autonomous is determined by factors outside economy and induced is applicable only in the case of full employment (not true).

The equilibrium.(look graph at file paper) Y=C+I or S=I.

C+I line is aggregate demand or aggregate monetary demand (AMD).

The equilibrium level is not always completely desirable (e.g. when full employment will occur above the eq. output).

The multiplier

Any investment or withdrawal will have multiple effect on economy.

K== (Kahn developed)

That is only temporary, for the change to be permanent the investment must be permanent. Also exist investment and employment multiplier. If the investment is non-autonomous (rises with income) multiplier is bigger. Modifying factors:

1.    Personal disposable income - not all investment will go to PDI (some is depreciation) so mult.

2.    Type of investment - will have different multipliers (low for defence)

3.    Time lags varies

Paradox of thrift = the more one intentionally saves the less is your income (& savings).

In inflationary economy the savings are good things while in depression they are bad.

     Deflationary and inflationary gaps occur when the equilibrium state is below or above full employment state. Gov. should intervene and it is not so expensive, because of the multiplier effect.

Nat Income limitations

1.     sector by sector breakdown

2.     variations and linkages among components

3.     the problem of measuring income

4.     international comparisation

5.     time and income ditribution problems

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