Economics
JOMO KENYATTA UNIVERSITY OF AGRICULTURE AND TECHNOLOGY
ARUSHA CAMPUS
INDIVIDUAL ASSIGNMENT
PROGRAMME: BACHELOR OF COMMERCE
UNIT NAME: INTRODUCTION TO MACROECONOMICS
UNIT INSTRUCTOR: THOMAS MAHUNDA
UNIT CODE: HBC 2211
ACADEMIC YEAR: 2012/13
SEMESTER: 1
PARTICIPANT: * MROKI, Evans
Determination of National Income by the Equality of Saving and Investment Method:
Definition and Explanation:
This approach is based on the Keynesian definitions of saving and investment. According to Keynes, the level of national income, in the short run, is determined at a point where planned or intended saving is equal to planned or intended investment. Saving as defined by Keynes is that part of income which is not spent on consumption (S = Y - C). On the other hand, investment is the expenditure on goods and services not meant for consumption. (I = Y - C). According to Keynes, if at any time, the intended saving is less than intended investment, it implies that people are spending more on consumption. The rise in consumption will reduce the stock of goods in the market. This will give incentive to entrepreneurs to increase output. Likewise, if at any time intended saving is greater than intended investment, this would mean that people are spending lesser volume of money on consumption. As a result of this, the inventories of goods will pile up. This will induce entrepreneurs to reduce output. The result of this will be that national income would decrease. The national income will be in equilibrium only when intended saving is equal to intended investment. Example and Diagram/Curve: The determination of national income is now explained with the help of saving and investment curve below:
In the above figure, income is measured on OX axis and saving and investment on OY axis. SS is the saving curve which shows intended saying at different levels of income. The investment curve is drawn parallel to the X axis which shows that investment does not change. The
ARUSHA CAMPUS
INDIVIDUAL ASSIGNMENT
PROGRAMME: BACHELOR OF COMMERCE
UNIT NAME: INTRODUCTION TO MACROECONOMICS
UNIT INSTRUCTOR: THOMAS MAHUNDA
UNIT CODE: HBC 2211
ACADEMIC YEAR: 2012/13
SEMESTER: 1
PARTICIPANT: * MROKI, Evans
Determination of National Income by the Equality of Saving and Investment Method:
Definition and Explanation:
This approach is based on the Keynesian definitions of saving and investment. According to Keynes, the level of national income, in the short run, is determined at a point where planned or intended saving is equal to planned or intended investment. Saving as defined by Keynes is that part of income which is not spent on consumption (S = Y - C). On the other hand, investment is the expenditure on goods and services not meant for consumption. (I = Y - C). According to Keynes, if at any time, the intended saving is less than intended investment, it implies that people are spending more on consumption. The rise in consumption will reduce the stock of goods in the market. This will give incentive to entrepreneurs to increase output. Likewise, if at any time intended saving is greater than intended investment, this would mean that people are spending lesser volume of money on consumption. As a result of this, the inventories of goods will pile up. This will induce entrepreneurs to reduce output. The result of this will be that national income would decrease. The national income will be in equilibrium only when intended saving is equal to intended investment. Example and Diagram/Curve: The determination of national income is now explained with the help of saving and investment curve below:
In the above figure, income is measured on OX axis and saving and investment on OY axis. SS is the saving curve which shows intended saying at different levels of income. The investment curve is drawn parallel to the X axis which shows that investment does not change. The
References: 1. Sexton, Robert; Fortura, Peter (2005). Exploring Economics. "This is the sum of the demand for all final goods and services in the economy. It can also be seen as the quantity of real GDP demanded at different price levels." 2. ^ O 'Sullivan, Arthur; Steven M. Sheffrin (2003). Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 307. 3. Australian Bureau of Statistics, Concepts, Sources and Methods, Chap. 4, "Economic concepts and the national accounts", "Production", "The production boundary". Retrieved November 2009.