by

Ambigah Sandran
National
Income
Equilibrium

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LEARNING OBJECTIVES
The students will be able to learn :
The concept of equilibrium.

by
The consumption, savings theory, investment

Ambigah Sandran
and factors influencing investments.
The circular flow in two, three and four sector
economies.
The equilibrium in closed and open economy-
two, three and four sector economies.

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LEARNING OUTCOMES
At the end of the lecture, students will be able to :
Understand the concept of equilibrium.

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Explain the consumption, savings theory,

Ambigah Sandran
investment and factors influencing investments.
Explain the circular flow in two, three and four
sector economies.
Determine the equilibrium in closed and open
economy- two, three and four sectors economies.

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INTRODUCTION
This topic mainly focusing on how to achieve an
equilibrium national income.

by
Ambigah Sandran
National income equilibrium is a situation of
equilibrium achieved by a countrys economic
activities.
National income equilibrium is a representation
of a situation where the desire of firms to produce
goods and services is equal to the total
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expenditure that will be spent in the economy.
SAVING THEORY
Savings divided into autonomous savings and
induced savings

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Autonomous savings refers to the part of savings

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that does not depend on the income level and
occurs when there is autonomous consumption.
Autonomous consumption is the expenditure
incurred by the consumer if there is no income.
Induced savings is a part of the income and it
depends on the quantum of the savings. The
higher the income, the higher the amount of
saving and vice versa.
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 20 November 2017

Investment Theory

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Investment:

Ambigah Sandran
Refers to the spending on purchases and accumulation of capital
goods buildings, equipment and additions to inventories.

Autonomous Induced
Investment Investment

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 INVESTMENT THEORY
1. Autonomous Figure 2: Autonomous investment
investment is a fixed Investment

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and independent of

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income.
the amount of investment
can be influence by other
Autonomous
factors such as interest
Investment
rates, repayments rates,
business expectation and
technology developments.
0
Income
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Deviga & Karunagaran, 2010, pp. 252

 INVESTMENT THEORY
Figure 3: Induced investment
Investment
1. Induced investment

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depends on the

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Induced national income.
Investment
As national income
increases, induced
investment will also
increase since a higher
national income
0 attracts more investor
Income to invest. 8

Deviga & Karunagaran, 2010, pp. 252

 INVESTMENT THEORY

Rate of
interest

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Ambigah Sandran
Expectation of Rate of
the future return
Factor
influencing
investment

Technologies Government
changes policies
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 GOVERNMENT SECTOR
Government spending can b classified into two
categories: purchase of goods and services, and
transfer payments.

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Ambigah Sandran
Government spending is an injection into the spending
stream.

Government also can reduce national income by

imposing taxes.

Taxes are leakages from the spending stream.

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 FOREIGN SECTOR

Foreign sector involves the imports and exports of

goods and services.

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Ambigah Sandran
Export s are goods and services that are sold to
foreign countries.

Imports are goods and services that purchased from

foreign countries.

Net export is the difference between export and

import. 11
 DETERMINATION OF EQUILIBRIUM:
TWO SECTOR ECONOMY
Figure 4: Circular flow for two sector economy

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Ambigah Sandran
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Deviga & Karunagaran, 2010, pp. 254

 DETERMINATION OF EQUILIBRIUM:
THREE SECTOR ECONOMY
Figure 7: Circular flow for three sector economy

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Ambigah Sandran
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Deviga & Karunagaran, 2010, pp. 259

 DETERMINATION OF EQUILIBRIUM:
FOUR SECTOR ECONOMY
Figure 10: Circular flow for three sector economy

by
Ambigah Sandran
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Deviga & Karunagaran, 2010, pp. 265

SUMMARY
A sector economy consists of households and firms.
A three sector economy consists of households, firms
and the government sector.

by
Ambigah Sandran
A four sector economy consists of households, firms,
the government sector and the foreign sector.
National income equilibrium in two sector, three
sector and four sector can be determined using
graphical, tabular or mathematical equation methods.
National income equilibrium in two sector, three
sector and four sector economy will be achieved when
aggregate supply is equal to aggregate demand and
injection is equal to leakage.
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KEY TERMS:
Term Definition

Aggregate Total demand for goods and services in the

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Ambigah Sandran
demand economy.

Aggregate Total quantity of goods and services produced in

supply the economy.

A withdrawal from the income- expenditure

Leakage
stream.

Additional spending to the income- expenditure

Injection
stream.

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KEY TERMS:
Term Definition

Breakeven Level at which households consume all their

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Ambigah Sandran
income income.

Spending on purchases and accumulation of

Investment
capital goods.

Autonomous
Fixed and independent of income.
investment

Induced
Depends on the natonal income.
investment

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KEY TERMS:
Term Definition

Exports Goods and services sold to foreign countries.

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Goods and services purchased from foreign
Imports
country.

Net export Difference between export and import.

Autonomous
Amount of tax that is independent of income.
taxes

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