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Lecture Outline - 11b - Keynesian Economics - MACHEMATICS

The document discusses Keynesian economic models to determine national income. It presents a two-sector model where consumption (C) equals 100 + 0.75 times income (Y), investment (I) equals 200. This yields an equilibrium income of 1200 and consumption of 1000. A three-sector model includes taxes, yielding an equilibrium income of 1500, consumption of 1000, taxes of 300, and savings of 200. The multiplier process is explained, showing how an initial change in investment is multiplied across rounds of spending.

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Dhanushka Rajapaksha
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122 views6 pages

Lecture Outline - 11b - Keynesian Economics - MACHEMATICS

The document discusses Keynesian economic models to determine national income. It presents a two-sector model where consumption (C) equals 100 + 0.75 times income (Y), investment (I) equals 200. This yields an equilibrium income of 1200 and consumption of 1000. A three-sector model includes taxes, yielding an equilibrium income of 1500, consumption of 1000, taxes of 300, and savings of 200. The multiplier process is explained, showing how an initial change in investment is multiplied across rounds of spending.

Uploaded by

Dhanushka Rajapaksha
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Determination of Income

Prof. ND Samarawickreme
Keynesian Economics
Keyness consumption function
C = f (Y)
C=a+bY
When income is zero people still consume using their savings.
Let us assume that the Consumption function takes the following form:
TWO- SECTOR ECONOMY
C= 100 + 0.75 Y
I= 200
Y=C+I
Y = 100 + 0.75 Y + 200
Y 0.75 Y = 100+200
Y (1 - 0.75) = 300
Y=

300
=
(1 0.75)

300
=
0.25

300
4
= 300 *
1
1
4

C = 100 + 0.75 (1200) = 1000


S=YC
S = Y- (100 + 0.75 Y)
S = Y 100 0.75 Y
= -100 +Y 0.75 Y
S = - 100 + 0.25 Y
S = 1200 1000 = 200
In this economy S = I and is in equilibrium.

= 1200

S = 200 and I = 200

Aggregate expenditure

C= 100 + 0.75 Y + 200

45 0

2200
2000
1800
1600

C= 100 + 0.75 Y

1400
1200

S= I =200

1000
800
600
400

THREE SECTOR MODEL

200 Y

=C+I+G

-100C= 100
200+ 0.75
400 Yd
600

S
-I

800

1000 1200 1400 1600 1800 2000 2200


National Income = National output =Y

I= 200
G = 300
Yd = Y T
T=tY
If t= 20 %
Yd = Y 0.2 Y
Y=C+I+G
Y = 100 + 0.75 (Y 0.2Y) + 200 + 300
Y = 100 + 0.75Y 0.15Y + 200 + 300
Y 0.75 Y + 0.15 Y= 100+200 +300
Y (1 - 0.75 + 0.15) = 600

Y=

600
=
(1 0.75 + 0.15)

600
=
0.4

600
=
4
10

600 *

10
4

= 600 *

5
= 1500
2

C = 100 + 0.75 (1200 0.2Y) = 1000


S = Yd C
S = (Y- 0.2Y) - (100 + 0.6 Y)
S = 0.8Y (100 + 0.6 Y)
= -100 +0.8Y 0.6 Y
S = - 100 + 0.2 Y
S = -100 +0.2 (1500) = 200
T = 0.2 Y
T = 0.2 (1500) = 300
LEAKAGES

INJECTIONS

200

300

200

300

Aggregate expenditure

45 0

2200
2000
C= 100 + 0.6 Y + 200 +300

1800
1600

C= 100 + 0.6 Y

1400
S + T= I + G
=200

1200
1000
800
600

FOUR-SECTOR MODEL

400

S = -100 +0.2 Y

200
-200

T = 0.2Y

200

400

600

800

1000 1200 1400 1600 1800 2000 2200

Y = C + I + G +(X-M)
C= 100 + 0.75 Yd
I= 200
G = 300
X = 600
M = 200
Yd = Y T
T=tY
If t= 20 %
Yd = Y 0.2 Y
Y = C + I + G + (X M)
Y = 100 + 0.75 (Y 0.2Y) + 200 + 300 + (600 -200)
Y = 100 + 0.75Y 0.15Y + 200 + 300 + 400
Y 0.75 Y + 0.15 Y= 100+200 +300 + 400
Aggregate expenditure

Y (1 - 0.75 + 0.15) = 1000


1000
Y=
=
(1 0.75 + 0.15)

1000
=
0.4

2600

1000
10
= 1000 *
4
4
10

5
= 1000 * = 2500
2

45 0

2400
2200

T = 0.2 Y

S = - 100 + 0.2 Y

2000

T = 0.2 (2500) = 500

S = -100 +0.2 (2500) = 400

1800
1600
1400
1200
1000

I + G + (X M)
C= 100 + 0.6 Y

LEAKAGES

INJECTIONS

+ M

+ X

400

500

+ 200

200

300 + 600

800
T = 0.2Y
S = -100 +0.2 Y

600
400
T =500

200
-200

200

400

600

800

S= 400

1000 1200 1400 1600 1800 2000 2200 2400 2600 Y

C= 100 + 0.6 Y + 200 +300 + 400

C= 100 + 0.6 Y + 200 +300

Working of multiplier process


Assume that b= 0.8, I = 100
Round of income
Generation
First round
Second round
Third round
Fourth round
Fifth round
------Last round
Total Income

Consumer
spending
-75.00
64.00
51.20
40.96

Income
generation

Symbolically

100
80.00
64.00
51.20
40.96

I
bI
b2I
b3I
b4I

0.00

bn I

500.00

Y = I + b I + b2I + b3I+ b4I .. bn I


= I (1 + b + b2 + b3 + b4 + . bn )
Geometric series can be approximated as: (1 + b + b2 + b3 + b4 + . bn )

1
= (1 b)
I *

1
(1 b)

= 100 *

1
1
=
(1 0.8) (0.2)

1
1
= 100 *
(1 0.8)
(0.2)

= 100 *

1 5
=
1 1
5

1
5
= 100 * = 500
1
1
5

Our model
Y =a +b Y +I
a +I
1
=
* (a + I)
(1 b )
(1 b)
Y =100 + 0.75 Y + 200
100 + 200
1
1
Y* =
=
* (100 + 200) =
* (300) =1200
(1 0.75)
(1 0.75)
0.25
1
1
4
Multiplier is :
=
=
1
0.25
1
4
Y* =

With Tax:
Y* =

a +I
(1 b +bt )

1
* (a + I)
(1 b +b t)

Y =100 + 0.75 Y + 200 + 300


100 +200 +300
1
1
Y* =
=
* (100 + 200 +300) =
* (600) =1500
(1 0.75 +0.15 )
(1 0.6)
0.4
1
1
2.5
Multiplier is :
=
=
4
0.4
1
10

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