Equilibrium national income in a frugal economy, Managerial Economics

Equilibrium National Income in a Frugal Economy

Saving and investment are examples of two categories of expenditure called withdrawals and injections.  A WITHDRAWAL is any income that is not passed on in the circular flow.  Thus if households can earn income and not spend it on domestically produced goods and services, this is a withdrawal from the circular flow.  Similarly, if firms receive money from the sale of goods and do not distribute it as payments to factors, this is a withdrawal from the circular flow.

AN INJECTION is an addition to the incomes of domestic firms that does not arise from the expenditure of domestic households or arise from the spending of domestic firms. 

The effects of withdrawals and injections is to interfere with Equilibrium income.  Withdrawals by reducing expenditure exert a contractionary force on national income.  If, for example, households decide to increase their savings and correspondingly reduce the amount they used to spend buying consumption goods from firms, this reduces the incomes of firms, and reduces the payments they will make to factors of production.  Injections, by raising expenditure, exert an expansionary force on national income.  If, for example, firms sell machines to other firms, their incomes and payments to household for factor services will rise without there having been an increase in household expenditure.

Thus for equilibrium National Income to exist, firm spending should be equal to firm receipts.  Thus, denoting consumption by C, saving by S and Investment by I, there is equilibrium if:

                                        C + S = C + I


                                                    S = I

i.e. there is equilibrium when savings are equal to investments.

953_frugal economy.png


To measure the National Income in a frugal economy, through the output and Expenditure approach, the National Income Accountant includes production of goods for inventories as part of total expenditure since the firm certainly spends money on the factor services necessary to produce goods for its own inventories.  The accountant calculates the economy's total output as the actual expenditure on final goods and services sold, plus the market value of final commodities currently produced and added inventories.  This definition makes total expenditure the same thing as the value of all final commodities produced and thus ensures that the measured value of expenditure is identical with the value of total output in any economy.

Posted Date: 11/28/2012 6:41:01 AM | Location : United States

Related Discussions:- Equilibrium national income in a frugal economy, Assignment Help, Ask Question on Equilibrium national income in a frugal economy, Get Answer, Expert's Help, Equilibrium national income in a frugal economy Discussions

Write discussion on Equilibrium national income in a frugal economy
Your posts are moderated
Related Questions
Q. What is Labour Requirements on the production capacity? Labour Requirements: Spending on labour is one of the most vital elements of cost of production. Dependable and cor

THE LAW OF DIMINISHING RETURNS  (LAW OF VARIABLE PROPORTIONS) One of the most important and fundamental principles involved in economics called the law of diminishing return

Organization for Economic Development (OECD) An international organization found in Paris France in 1961, to act as a worldwide forum to stimulate world trade and

Reasons for Shift in Demand Curve Shifts in a price-demand curve may occur due to the change in one or more of other determinants of demand. Consider, for illustration, decreas

Macro-economic policy objectives The major macro-economic policy objectives which the governments strive to achieve are: i. Full employment One of the main objectives

The emergence of managerial economics as a separate course of management studies can be attributed to at least three factors: 1.      Growing complexity of business designs maki

the overall idea of market segmentation

a. Explain why the demand for a particular brand is more elastic than the demand for all cigarettes. If Lucky Strike raised its price by 1% in 1918, was the price elast

What is Normative economics It is concerned with varied corrective measures which a management undertakes under different circumstances. It deals with goaldevelopment, goal det

STAGFLATION The term stagflation is a recent arrival in economic literature derived from joining together the stage of stagnation and flections of inflation. The term has been