National Income

Equation and Multipliers

Shafqat Mehmood Khan
Asst. Professor
Economics (LGU)
 Key Points
• In this lecture, we will learn the following things:-
i. Derivation of National Income Equilibrium Equation
ii. Derivation of Multiplier (Investment Multiplier)
iii. Numerical Examples of Determining
i. Equilibrium National Income (Y)
ii. Consumption (C)
iii. Investment (I)
iv. Disposable Income (Yd)
v. Saving (S)
 Derivation of National Income
Equilibrium Equation
>>Given Y=C+I+G -------- (1)
for C=Co + cY
I=Io
G=Go

Put the value of C, I and G in (1)

We will get
Y= C0+ cY + Io + Go
 NI Equation (…continue)

>>After than, take the term cY to the left of the equation.

It will be like:-
Y- cY = Co + Io + Go

Taking common Y from the right side, we get:-

Y(1-c) = Co+Io +Go

 NI Equation (…continue)

• after it divide the equation with (1-c) on both sides. we get

Y= 1/(1-c) [Co+Io +Go]
or
Watch the youtube video to
understand easily. The link
Y= 1/(1-c[Co] + 1/(1-c) [Io] + 1/(1-c) [Go] is provided in google class
room
where 1/(1-c) is the investment multiplier.
c=MPC
 Multiplier
• The additional shifts/multiple increase in
National Income that result when there is a K=5 shows that if Investment
change in investment/ consumption/ is increased by 1 unit, the
Government spending. National Income would be
• It is denoted by K increased by 5 times
• K = 1/(1-c) where c =MPC
• Let MPC = c = 0.80
• Then K = 1/(1-0.80)
K = 1/0.20 = 5
• Investment Multiplier (K):
• (K) = 1/(1-c) or K = 1/(1-MPC) or K = 1/MPS
• Consumption Multiplier
• K = 1/(1-MPC)
• Government Expenditure Multiplier
• K = 1/(1-MPC)
 Examples

• C=40+0.85Y compare it with C=Co+cY here Co=40, c=0.85

• S=-20+0.15Y compare it with S=-So+sY here So=20, s=0.15
• I=45+0.10Y compare it with I=Io+eY here Io=45, e=0.10

• And s=MPS, c=MPC

c+s=1
Numerical Examples. Q.1
 Numerical Examples. Q.1
• Q.1 Given Consumption function Solution
C=40+0.85Y, I=Io =100, G=Go=20 Given Y=C+I+G --------(1)
a. Determine Equilibrium National Step 1: Put the values of C
Income (Y) (=40+0.85Y), I=Io, and G=Go in
b. Consumption (C) equation (1). We get:-
c. Saving (S) Y=40+0.85Y +Io + Go ----- (2)
If Y=C+I+G
 Numerical Examples-Q.1 (..continue)
• Now put the values of Io (=100) Y(1-0.85) = 160
and Go (=20) in equation (2). We
get:- 0.15Y = 160
Y=40+0.85Y +100 + 20 or Y = 160/0.15
Y= 40+100+20+0.85Y or Y= 1066.67
Y=160 + 0.85Y or a) This is Equilibrium National
Y - 0.85Y= 160 or Income
 Numerical Examples-Q.1 (..continue)
• To find Consumption, put the value • To find Saving
of Y=1066.67 in C=40+0.85Y Since we know that
Y=Consumption + Saving
Like C=40 + 0.85(1066.67)
or Y = C+S
C=40 + 906.67 And so S = Y – C
C= 946.67 So S = 1066.67 – 946.67
b) This is Consumption S = 120
c) This is Saving
Numerical Examples. Q.2
 Numerical Examples-Q.2
• Q. Given Consumption function Solution
C=40+0.85Yd,
• I=Io =100, G=Go=20, T=To=20 Given Y=C+I+G --------(1)
a. Determine Equilibrium National Income Step 1: Put the values of C
(Y)
b. Disposable Income (Yd) (=40+0.85Yd), I=Io, and G=Go in
equation (1). We get:-
c. Consumption (C)
(T=taxes) Y=40+0.85Yd +Io + Go ----- (2)
If Y=C+I+G & Yd=Y-T
 Numerical Examples-Q.2 (…continue)
Now Put the value of Yd=Y-T, we get Y=160 + 0.85Y – 17 or
Y=40+0.85(Y-T) +Io + Go Y=160-17+0.85Y or
Now put the values of Io (=100) and Y = 143 +0.85Y or
Go (=20) and T (=20) in equation (2). Y-0.85Y = 143 or
We get:- Y(1-0.85) =143
Y=40+0.85(Y-20) +100 + 20 or 0.15Y = 143
Y= 40+100+20+0.85Y-0.85(20) or Y = 143/0.15
Y = 953.33 (National Income)
 Numerical Examples-Q.2 (…continue)
• To find Consumption, put the value • To find Disposable Income
of Yd=933.33 in C=40+0.85Yd
Given Yd = Y – T
Like C=40 + 0.85(933.33)
So Yd = 953.33 – 20
C=40 + 793.33
Yd = 933.33
C= 833.33
c) This is Consumption
b) This is disposable income
Numerical Examples. Q.3
 Numerical Examples-Q.3
• Q.3. C = 40 + 0.6Yd, IO = 80, GO = 30, TO = 10, S = -40 + 0.4Yd,
Yd=Y-T
Find the value of national income (Y) in three sector economy through:
• Aggregate Demand/Aggregate Supply method (Y=C+I+G)
• Saving - Investment method. (S=I)
 Numerical Examples-Q.3 (…continue)
• Aggregate Demand/Aggregate Supply method (Y=C+I+G)

Note: It is the same method as we have done before in Q.1 & Q.2
 Numerical Examples-Q.3 (…continue)
• Saving - Investment method. (S=I) Yd = 120/0.45
• Given S= -40 + 0.45Yd, and Yd = 266.67 (disposable income)
I=Io=80
Since Saving = Investment or Given Yd = Y – T
S=I OR Y = Yd + T
So -40 + 0.45Yd = 80 So Y = 266.67 + 10
0.45Yd = 80 + 40 Y = 276.67
0.45Yd = 120
(this is National Income)
 More to Do
1. Given C = 60 + 0.75Yd, IO = 80, GO = 30, TO = 20, Yd=Y-T
Find Y, C, Yd and S. (using Y=C+I+G)

2. Given S= -30 + 0.18Y, I=-40 + 0.25Y, Find Y, S, I (using saving-investment

model)

3. Challenge:
Given C = 60 + 0.75Yd, I=70 + 0.25Yd, GO = 30, TO = 20, Yd=Y-T
Find Y, C, I, Yd.