Income Expenditure Approach In Economics

1680 Words4 Pages

Income:
It is the consumption and savings opportunity earned by an entity within a specific time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests’ payments, rents, and other forms of earnings received... in a given period of time.

Income Determination:
This model was presented by Keynes. According to Keynes, there can be different sources of national income, such as government, foreign trade, individuals, businesses and trusts. For this he has divided different types of income into four categories. Business sector, household sector, government sector and foreign sector. Increase in income:
Income per capita has been expanding …show more content…

Some economists says that it is compulsion to have inequality but excessive inequality is very dangerous for economy.
The equilibrium condition of national income determination can be expressed as follows:

Aggregate demand = Aggregate supply
Income-Expenditure Approach:
Income-expenditure approach refers to the method in which the aggregate demand and aggregate supply schedules are used for the determination of national income.
In this method the equilibrium state is achieved as follows:-
C+I=C+S
Income Determination Multiplier:
The concept of multiplier can be understood by determining the relationship between change in national income (ΔY) and change in investment (ΔI).
Derivation:
Lets assume 2 points Y1 AND Y2
Y1 = C + I
The consumption is equal to:
C = a + bY
Y1 = a + bY1 + I
Y1 = 1/1-b (a + I)
Y2 = C + I + ΔI
Y2 = a + bY2 + I + …show more content…

Government buys of merchandise and enterprises.

Above are methods through which we measure national income. If we use any method we will obtain same result no matter which method we use, we will add value of finals goods and services.

LIMITATIONS OF INCOME DETERMINATION MODEL:
Following are some limitations of income determination model. a number of the constraints of multiplier that need to be taken into consideration whilst the use of the idea are as follows:

(a) Based on MPC:
Refers to the primary limitation of multiplier. The value of multiplier depends upon the rate of MPC. consequently in case the fee of MPC is lower, the value of multiplier could additionally be decrease. commonly as compared to developed countries charge of MPC is higher in developing nations or less advanced international locations. therefore, the cost of multiplier is also higher in developing countries. but, it isn't authentic in sensible

Open Document