3.

THE THEORY OF THE NATIONAL INCOME

(2)
3.3. The equilibrium of the national income

3.3.1. Closed economy, without public sector

Y = C + I  aggregate expenditures include only consumption and investments

- Aggregate supply turns into revenues used by households for consumption

and savings  Y = C + S = C + I;
- Aggregate expenditures: Cheltuielile agregate:
- Planned expenditures;
- Effective expenditures.
- Keynesian equilibrium: aggregate expenditures = aggregate supply
=national income.
- We assume that the aggregate expenditures are constant.

Supply

Supply = Income

Stocks decrease Stocks increase

Aggregate expenditures

45º

YE Income (Y)
Fig.3.4. Keynesian equilibrium

- Current production = aggregate expenditures + stocks’ adjustments;

- At the equilibrium point, the change of stocks is zero, planned expenditures =
effective expenditures.

C = C0 + c’Y
I0 – autonomous investments (they do not depend on the national income) 
CG = C0 + c’Y + I0 = C0 + c’Y + S

1
 Aggregate
expenditures
CG = C0 + c’Y + I0

C = C0 + c’Y

C0
45º
0 Y’ Y* Income (Y)

S,I

S = -C0 +s’Y

Investments (I0)

Y’ Y* Income (Y)
-C0
Fig. 3.5. Equilibrium in a closed economy, without a public sector

- Any modification in the autonomous investments  a modification in the

aggregate expenditures  the modification of the equilibrium national income.
ΔY 1
k= =
- The relationship between the investment multiplier ΔI s ' and the
ΔC
c '=
marginal propensity to consume ΔY : the increase of the income will be
higher as the marginal propensity to savings will be lower and so the marginal
propensity to consume will be higher  the increase of savings  the
decrease of consumption  the decrease of income: THE PARADOX OF
SAVINGS

2
 S,I

S2
S1

Investments (I0)

-C0+Δ Y 2 Y1 Income (Y)

-C0
Fig. 3.6. The paradox of savings

- An increase in savings by Δ  the decrease of the national income from Y 1 to

Y2;
- If investments had not been constant but dependant on income  the
increase of savings would have determined the decrease of investments as
well  a higher decrease of the national income;
- When society wants to save more, the effect can be a decrease of
investments and income according to the principle of the investment multiplier;

3.3.2. A closed economy, with a public sector

 Government intervenes in an economy:

1) Using taxes;
2) Consuming goods and services.
 CG = C + I0 + G;
 If the public expenditures (G) are autonomous depending on the income,
the Keynesian equilibrium is in the following graph:

Aggregate
expenditure C + I0 + G
s C + I0

C = C0 + c’Yd

C0
45º
0 Y* Income (Y)
Fig. 3.7. Equilibrium in a3closed economy, with public sector
  Consumption depends on the available income Y d; this available income is
the difference between the income and total taxes  Yd = Y – T  C = C0
+ c’Yd = C0 + c’(Y – T) = C0 + c’Y –c’T  at the equilibrium Y = C + I 0 + G
C + I + G−c '⋅T
Y= 0 0
 Y = C0 + c’Y – c’T + I0 + G  1−c '
 the multiplier of the public expenditures is:
ΔY 1
g= =
ΔG 1−c '
 The effect of the decrease of the taxes can be analysed through:
ΔY c'
m= = =c '⋅g
Δ(−T ) 1−c ' 

Any decrease in taxes goes to an increase of the income, but the income
increases more quickly in case of public expenditures increase than the
taxes decrease.

3.3.3. An open economy, with public sector

- when the economy is open, in that economy we consume what we produce, but
we consume imported goods as well and we do not consume what we export;
- net export = X – M = the difference between the value of exports and the value
of imports  CG = C + I + G + X – M;
- one of the main factors of the exports and imports is the exchange rate.
- the equilibrium in this case supposes a zero trade balance  X = M

C + I0 + G
Aggregte
expenditures C + I0 + G + X – M
Net export

Net export

C0
45º
0 Y* Venit (Y)
Fig. 3.8. Equilibrium in an open economy, with a public sector

4
- the marginal propensity to import (IMI): how much the import increases when
the income increases as well; the investment multiplier in an open economy is:
1
k=
IMI +s ' , because in an open economy, what we withdraw from the internal
market are savings and imports.