ECONOM1 Module 8 Natl Y Det

8/2/2019 ECONOM1 Module 8 Natl Y Det

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Rose Nonette C. Capadosa



ECONOM1 Module 8

National Income Determination • Demand estimation (consumption, savings,

investment, government expenditure)

• Fiscal Policy (during recession and inflation)



Demand Estimation: Consumption Function and Savings

Consumption Function/Propensity toConsume – the schedule that relates consumptionto disposable income

Marginal Propensity to Consume (mpc) –

slope of the consumption functionIndicates the percentage of each additional peso of disposableincome that will be consumed

Value is less than 1

Denoted as b (basic assumption: At zero disposable income,consumption takes place); for consumption function C = a +by

Refers to change in the level of consumption that occurs as aconsequence of a change in income (mpc= C/ Y)



SAVING – the difference

between consumption andincome (S = Y – C)

MARGINAL PROPENSITY TO SAVE (mps) – the slopeof the saving function

Expesses the ration of thechange in the level of savings

( S) that occurs as aconsequence of a change inincome ( Y) (mps = S/ Y)

Demand Estimation: Consumption Function and Savings – cont’d



Schedule of Income and Consumption(in billion pesos)

Income (Y) Consumption (C)

100 125

200 200

300 275

400 350

500 425

600 500

Source: Pagoso et al, 2002



Schedule of Income, Consumption, & Savings(in billion pesos)

Income (Y) Consumption (C) Savings100 125 -25

200 200 0

300 275 25

400 350 50

500 425 75

600 500 100




Schedule of Income, Consumption, & Savings(in billion pesos)

Income (Y) Consumption (C) Savings

100 125 -25

200 200 0

300 275 25

400 350 50

500 425 75

600 500 100




Average and Marginal Propensity to Consume(hypothetical data in million pesos)

Income (Y) Consumption(C)

APC MP

100 125

200 200 200/200 = 1 75/100=0.75

300 275 275/300=0.91 75/100=0.75

400 350 350/400=0.87 75/100=0.75

500 425 425/500=0.85 75/100=0.75

600 500 500/600=0.83 75/100=0.75




-100

0

100

200

300

400

500

600

700

0 100 200 300 400 500 600

C=C(y)

The Consumption-Savings Function

I n c o m e / C

o n s u m p t i o

n

Y=C+S

Income

100

200

S=Y-C



“The fundamental

psychological law... is

that men are disposed, asa rule and on the average,to increase theirconsumption as their

income increases, butnot as much as theincrease in their income.”

- John Maynard Keynes



Schedule of Income and Total Saving(in billion pesos)

Income (Y) Consumption(C) Savings Investment C+I

100 125 -25 50 175

200 200 0 50 250

300 275 25 50 300

400 350 50 50 400

500 425 75 50 475

600 500 100 50 600




Income= Consumption+Investment

0

100

200

300

400

500

600

700

0 50 100 150 200 250 300 350 400 450 500 550 600

C+ I

C

Income

Y=C+S

C

-50

50

S

I

Y



Investment Refers to the decision made by firms to spend on

capital goods

Determinants: economic factors, political conditions,peace and order situation, mood of investors

Components: business fixed investment, residentialconstruction, net change in business inventories



Multiplier The number of times money has changed hands and

generate income

Multiplier K K = 1/(1-mpc)

Amount of Income Generated Yg = I x K



Relevant Formulas & Symbols:

Y d = Disposable Income = Y Consumption Function: C = a + by (a= C at zero y or

the y-intercept; b=mpc or slope)

mpc = C rise

------ = --------- (slope of C function)

Y run

• Savings Function: S = Y – C

mps = S rise------ = --------- (slope of S function)

Y run

• mps + mpc = 1 S = Y - C



Relevant Formulas & Symbols-contd:

M or K = 1 1--------- = ----------

1 – mpc mps , the multiplier

• Y = I x M or I x K• Yg = G x K



A Demo Problem



CENARIO 1 (SIMPLE ECONOMY): GNI = C + S

Given: a = P50B b = 75%

1. The Consumption Function: C = 50 + 0.75 y 2. Getting the Break-even Point (C=Y):

C = a + by

C = Y

a + by = Y

Y = a + by

Y = 50 + 0.75 y

(1 – 0.75) y = 50 Y = 50

----- = 200, the pt where c = Y

0.25



SCENARIO 1 (SIMPLE ECONOMY) contd: GNI = C + S

Given: a = P50B b = 75%

The Consumption Function: C = 50 + 0.75 y

3. Getting the C & S under different Y’s:

If Y = 100 If Y = 400

C = ? C = ?

C = 50 + 0.75 y C = 50 + 0.75 y C = 50 + 0.75 (100)

= 50 + 75

= 125S = ? S = ?S = Y-C

= 100 – 125

= -25, dissavings




Given: a = P50B b = 75%


3. Getting the C & S under different Y’s:

If Y = 100 If Y = 400

C = ? C = ?

C = 50 + 0.75 y C = 50 + 0.75 y C = 50 + 0.75 (100) = 50 + 0.75 (400)

= 50 + 75 = 50 + 300

= 125 = 350S = ? S = ?S = Y-C = Y - C

= 100 – 125 = 400 - 350

= -25, dissavings = 50, + savings




Given: a = P50B b = 75%


4. Computing for MPS:If Y from 300 t0 400 If Y from 400 to 500

S from 25 to 50 S from 50 to 75

Mps = S 50 – 25 mps = ?

---- = ------------

Y 400 - 300

= 25----

100

= 0.25




Given: a = P50B b = 75%


4. Computing for MPS:If Y from 300 t0 400 If Y from 400 to 500

S from 25 to 50 S from 50 to 75

Mps = S 50 – 25 mps = S 75 – 50

---- = ------------ ----- = ----------

Y 400 - 300 Y 500– 400

= 25 = 25---- ----

100 100

= 0.25 = 0.25

( )



CENARIO 2 (ECONOMY w HH & investors):

(GNI = C + I)

Given: a = P50B b = 75% I = 501. Solving for equilibrium Y when there are values for C & I

Y = C + I, C = a + by

Y = a + by + I

Y = 50 + 0.75 y + 50 Y – 0.75 y = 100

0.25 y = 100

Y = 400, the equilibrium income



Sample Problem for C & I:

INCOME CONSUMPTION

50 100

100 125

150 150

200 175

250 200

300 225

350 250

400 275

450 300

500 325

1. Assume :

What is the equilibrium income and consumption?




INCOME CONSUMPTION

50 100

100 125

150 150

200 175

250 200

300 225

350 250

400 275

450 300

500 325

Assume :

What is the equilibrium income and consumption? 150




INCOME CONSUMPTION

INVESTMENT

C + I

50 100

100 125

150 150

200 175

250 200

300 225

350 250

400 275

450 300

500 325

2. Construct a new schedule with investment equal to 25:

What is the new equilibrium income?




INCOME CONSUMPTION

INVESTMENT

C + I

50 100 25 125

100 125 25 150

150 150 25 175

200 175 25 200

250 200 25 225

300 225 25 250

350 250 25 275

400 275 25 300

450 300 25 325

500 325 25 350


What is the new equilibrium income? 200





INCOME CONSUMPTION INVESTMENT C + I

50 100 25 125

100 125 25 150

150 150 25 175

200 175 25 200

250 200 25 225

300 225 25 250

350 250 25 275

400 275 25 300

450 300 25 325

500 325 25 350


What is the new equilibrium income? 200

CHECK: mpc = 0.5 , mps = 0.5, M = 1 / 0.5 = 2, Y = I x M = 25 x 2 = 50Ye (new) = 150 + 50 = 200




Sample Problem for C & I:3. Assume Y = 50, C = 40, I = 10, mps = 0.2, M = ?





M = 1 / mps = 1 / 0.2 = 5

a. What would be additional Income and Consumption if Investmentwere to increase by 7.5?





M = 1 / mps = 1 / 0.2 = 5


Y = add’l I x K = 7.5 x 5 = 37.5, the additional Y

Y C I S (Y-C)

I = 10 50 40 10 _______

I = 17.5 ________ _______ _______ _______





M = 1 / mps = 1 / 0.2 = 5



b. What would be total Y and C as a result of the foregoing?

Y C I S (Y-C)

I = 10 50 40 10 10

I = 17.5 _______ _______ _______ _______

(1)





M = 1 / mps = 1 / 0.2 = 5



b. What would be total Y and C as a result of the foregoing?Yt = Y 1 + Y = 50 + 37.5 = 87.5, total Y

Y = C + I, C = Y – IC = 87.5 – 17.5 = 70, total C

Y C I S (Y-C)

I = 10 50 40 10 10

I = 17.5 87.5 70 17.5 _______

(1)

(2) (50+37.5) (3)(10+7.5)(4)(87.5-17.5)





M = 1 / mps = 1 / 0.2 = 5

a. What would be additional Income and Consumption if Investment were to increase

by 7.5?



Y = C + I, C = Y – IC = 87.5 – 17.5 = 70, total C

c. Compute Additional Savings

Y C I S (Y-C)

I = 10 50 40 10 10

I = 17.5 87.5 70 17.5 _______

(1)

(2)(50+37.5) (3)(10+7.5)(4)(87.5-17.5)





M = 1 / mps = 1 / 0.2 = 5

a. What would be additional Income and Consumption if Investment were to increase

by 7.5?



Y = C + I, C = Y – IC = 87.5 – 17.5 = 70, total C

c. Compute Additional SavingsS = Y – C = 87.5 -70 = 17.5

S = Snew – Sold = 17.5 – 10 = 7.5, additional S

Y C I S (Y-C)

I = 10 50 40 10 10

I = 17.5 87.5 70 17.5 17.5

(1)

(2)(50+37.5) (3)(10+7.5)

(4)

(87.5-17.5) (5)



Reminder: Submission of Take-

home quiz on C & I function isnext meeting



CENARIO 3 (ECONOMY w HH & investors &

Government):

(GNI = C + I + G)Given: a = P50B b = 75% I = 50 Yg=100

1. Solving for full employment equilibrium Y when there

are values for C & I & G can be computed




Government):

(GNI = C + I + G)Given: a = P50B b = 75% I = 50 Yg=100

1. Solving for full employment equilibrium Y when there

are values for C & I & G can be computed Yg = G x K, M or K = 1 / 1-mpc = 1/ 1-0.75 = 1/0.25 = 4

100 = G x 4

G = 100 / 4 = 25, the Government Spending G

Y = a + by + I + G = 50 + 0.75 y + 50 + 25

= 125 + 0.75 y

(y – 0.75y) = 125

Y = 500, the full employment equilibrium Ye

(




Government – cont’d):

(GNI = C + I + G)Given: a = P50B, b = 75%, I = 50, Yg=100, G=25, Ye =500

Y,C,C+I,C+I+G

Y

P i E i (ECONOMY HH &



Practice Exercise (ECONOMY w HH &

investors & Government):

Compute and graph. Assume that C = 50 + ½ yd1. Compute for the break-even point .

2. How much is equilibrium income where Y = C + Iassuming investment is P50B?

3. How much is equilibrium income where Y = C = I + G if Government Spending is P20B?

4. Graph the aforementioned equations.

5. Compute the multiplier at each of the ff mpc’s given an

investment of P5B:Mpc Multiplier Yg (Income Generated)

50%

45%



Government Spending As determined from the HH,

investors, and government sectors, Y = C + I + G, G is value of government

spending (Yg= G x K)



Full Employment Equilibrium The level of income where there is no

available and useful resource that is wasted



Inflationary Gap Occurs when aggregate demand C + I + G exceeds

equilibrium income Y

Deflationary GapOccurs when aggregate demand C + I + G fall short of equilibrium income Y



Schedule of Income and Total Spending (in billion pesos)

Y C I G C+I + G

100 125 50 25 200

200 200 50 25 275

300 275 50 25 350

400 350 50 25 425

500 425 50 25 500




Full Employment Equilibrium

0

100

200

300

400

500

600

700

0 50 100 150 200 250 300 350 400 450 500 550 600

C+ I

C

Income

Y=C+S

C

-50

50

S

I

Y

C+I+G



Fiscal Policy When the government uses its powers to influence

total spending either directly by changingits purchasesof goods and services or indirectly by altering the

disposable incomes of persons to changes in the levelof taxation or transfer outlays



Fiscal Policies

1) Periods of deflationDeficit budget (government spending more than

what it collects through taxes) or tax cuts

2) Periods of inflationSurplus budget (government spending less than its

budget) or balanced budget or tax increases

Major Macroeconomic Effects of



Major Macroeconomic Effects of

Government Expenditure and Tax

Policy

The Expenditure Impact

The Financial Impact

The Supply Impact

ECONOM1 Module 8 Natl Y Det

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