Goods are of two kinds:
1. Consumption goods: These are goods, which people require for their day-to-day living. These goods get used up, or get consumed and hence the name. Example: toothpaste, exercise book, soap, television, mobile phone etc.
2. Capital goods: Capital goods are those goods, which help to produce consumption goods, or other capital goods. Example: machine that makes the toothbrush, or a machine that make the parts of another machine.
In 1931 Mr. R.F. Kahn noticed that one employment increases the total employment in the economy. For example, if there is employment in the construction of roads and bridges, this will increase the income of those who are employed in the construction works. As a result of this, demand for consumption goods will increase. When more consumption goods are demanded, it increases the price of consumption goods, assuming that supply remains constant. Consequently, when more consumption goods are sold, it increases the profit of the sellers. When profit increases, a part of it is reinvested to produce more consumption goods, as it is bringing in more profit.
Fresh investment creates more employment opportunities in the consumption goods industries. Again, for the production of more consumption goods, more capital goods, like machinery, will be required. So the production of capital goods will also increase. This will increase the employment in the capital goods industries.
Thus one employment in the construction works industry will increase the total employment in the economy.
Gross National Product is a measure of the performance of the economy of a country. It is called the yardstick of an economy's progress. A more reliable indicator is per capita income, which is national income per head. National income is said to be in equilibrium when it is exactly equal to expenditure.
National income is denoted by Y. It has two components, consumption(C) and savings(S). A part of the income is spent on consumption. That which is not spent is obviously saved. It may or may not be invested.
So we can say that Y = C + S
C is the supply of consumption goods and S is the supply of savings. This is the supply side of the picture.
National income is basically the money value of all goods and services produced in an economy during an accounting year. Total goods produced or total production is the sum total of consumption goods and capital goods. The total expenditure of the community is denoted by E. It means aggregate expenditure or effective demand. Aggregate expenditure is called effective demand because whatever is spent must be backed up by an equivalent demand.
So we can also say that E = C + I
C is the demand for consumption goods, or expenditure made by the household sector.
I is the demand for investment made by the private firms.
This is the Demand side of the picture.
National Income is said to be in equilibrium when the country spends as much as it earns, or when income is equal to expenditure. That means when the supply side Y = the demand side E.
Y = E
Or, C + S = C + I
C cancels out from both the sides of the equation, leaving S and I on either side, which are equal.
That is, S = I. So the major point is that Savings (S) is equal to investment (I), only when the national income is equal to national expenditure. Gross national income is the money value of gross national products.
Consumption: Consumption is basically the part of the income that is spent. It depends upon the disposable income (Yd). Disposable income means money income minus taxes paid.
So, Yd = Y - T
Y is the money income and T is the tax paid.
Therefore, consumption (C) is a function of disposable income (Yd).
C = f(Yd)
Consumption function: Propensity to consume: We know that Y = C + S. Delta (Δ) is the symbol used to denote change. If income increases byΔY, and consumption by ΔC, and savings by ΔS, then ΔY = ΔC + ΔS. Change in consumption due to change in income is called the consumption function. In 1936 Prof. J. M. Keynes stated in his book “The general Theory of Income, Interest and Money” that if income increases, consumption will alsoincrease, but not proportionately. For example, if the income of an individual increases by $100, consumption mayincrease by $80, and savings by $20. Here ΔY = $100, ΔC = $80 and ΔS = $20.
Marginal propensity to consume: Change in consumption induced by change in income is called Marginal Propensity to Consume.
We know that ΔY = ΔC + ΔS
Dividing both sides by ΔY,
we get ΔY/ ΔY = ΔC/ΔY + ΔS/ΔY
Or, 1 = ΔC/ΔY + ΔS/ΔY
Or, 1 = 80/100 + 20/100
Or, 4/5 + 1/5 = 1
Or, b + s = 1
“b” is the Marginal Propensity to Consume, and “s” is the Marginal Propensity to save.The sum of Marginal Propensity to Consume (b) and Marginal Propensity to save (s) is always equal to 1.
“b” can thus be defined as the ratio of change in aggregate consumption brought about by a change in national income. In a like manner we can define “s” as the ratio of change in savings to change in income, that brought it about.
According to Mr. Keynes as income increases, consumption also increases. Therefore “b” is always greater than 0 (b>0). But “b” always increases less than proportionately (b<1). Similarly “s” is always greater than 0 (s>0) but less than 1 (S<1).
Since b + s = 1, s = 1 – b. Savings is residual in nature.
“s” is the Marginal Propensity to Save.
Also read: Consumption Function and Savings Function
Subscribe to:
Post Comments (Atom)
Update(s):Post(s) under preparation: -
_______________________________________
View Chandra Bhanu's Art at Profoundfeeling.blogspot.com
_______________________________________
View Chandra Bhanu's Art at Profoundfeeling.blogspot.com
Labels
indifference curve
investment
demand-pull inflation
economy
fiscal policy
monetary policy
cost-push inflation
demand
demand for money
destabilized economy
economics
stagflation
supply of money
Opportunity Cost
Quantity Theory of Money
Theory of Consumption
World economy
automatic stabilizer
capital
choice
consumption function
current accounts deficit
deflationary gap
demand for investment
depression
derivation
effects of inflation
equilibrium
fiscal deficit
fresh investment
growth
imbalance
inflation
interest
money
perfect competition
savings
savings function
world
Accounting Profit
Adam Smith
Alfred Marshall
Diminishing Marginal Utility
Economic Profit
Equimarginal Utility
General Equilibrium Theory
IS Curve
J. M. Keynes
Keynes' Theory of employment
LM Curve
Lionel Robbins
Normal Profit
PPC
Production Possibility curve
Software system development
Utility Analysis
accelerator
account
accounting
alternative uses
autonomous investment
balance of payments
book keeping
capital goods
classical theory of the rate of interest
commodity
consumer
consumer goods
consumption
credit
debit
definition
deflation
discretionary
double entry
economic functions
economic wants
educated
education
ends
energy
ermployment
full employment
functions of money
growth rate
habit
imitation
imperfect competition
income
income analysis
income determination
income effect
induced investment
inflationary gap
investment function
knowledge
labour
less than full employment
liquidity preference theory
long run
long run equilibrium
means
monetary analysis
monetary measures
monopoly
multiplier
price
price effect
price maker
production possibility frontier
profit maximization
propensity
revealed preference analysis
sacrifice
say's Law
scarce
science
shifts of IS LM curves
short run
short run equilibrium
shut down conditions
slow down
society
stagnation
student
subsidies
subsidy
substitution effect
success
sunk capital
supply
supply of savings
technology
unproductive
wealth
world economy 2012
No comments:
Post a Comment
Want to say something? Say it!