Econ 203

Study Session 2
Determination of National Income

Equilibrium: AD =SS Approach
Section and Subsection Headings:
Introduction
1.0 Learning Outcomes
2.0 Main Content
2.1 Components of Aggregate Demand
2.2 Aggregate Supply
2.3 Product Market Equilibrium
3.0 Study Session Summary
4.0 Self-assessment questions (SAQs)
5.0 Additional Activities (Videos, Animations & Out of Class activities)
6.0 References/Further Readings
Introduction
In this section, we are building on what you learned in previous sections. You learn
the national income accounting and understand that national income is equal to
national output and national expenditure. Thus the national income accounting you
learn falls within the scope of the product market. To determine equilibrium in the
product market, we will leverage the expenditure approach. That is Y= C + I. Note
that the concepts of C, I and Y connote either ex-post measure or ex-ante measure.
In the previous sections, we deal with the ex-post measure, which represents their
actual accounting values. In this section, we will deal with their ex-ante value,
which describes the process through which these values are determined. In this
section, we will look at the ex-ante measure of the component of aggregate
demand and aggregate supply. Thereafter, we will determine the equilibrium
output in the product market.
Study Session Learning Outcomes
When you have studied this session, you should be able to:
1.1 Explain the component of aggregate demand theoretically and graphically
1.2 Explain the components of aggregate supply
1.3 Determine equilibrium in the product market using the AD=AS approach
1.1 2.0 Main Content

1.2 2.1 Aggregate Demand Components
1.2.1 2.1.1 Background
In line with the Keynesian theory, there are two approaches to the determination of
income and output:
1.Aggregate demand=Aggregate supply Approach and

2.Saving=Investment Approach.
1.2.2 2.1.2 Key Assumptions
1. Firms are assumed to be price takers, that is at given price level firms are willing
to sell any amount of the output at that price level.
2.Investment is assumed to be autonomous and thus does not depend on the
income level.
3.We assumed a two-sector economy with only households and firms. Therefore,
total aggregate demand is equal to total consumption expenditure plus total
investment expenditure functions respectively and can be expressed as:
AD=C+I
Where, C = Aggregate demand for consumer goods and I = Aggregate demand for
investment goods.
4.A short-run aggregate supply curve is perfectly elastic or flat
Thus, aggregate demand is the total amount of goods demanded in an economy.
Therefore, aggregate demand = Consumption demand + investment demand, which
is synonymous with AD=C+I.
We shall discuss each of the components in detail
Consumption Demand
The consumption function is the functional relationship between income and
consumption expenditure. The most common form of short-run consumption
function is C= a +by
Where a is both the intercept term of the function and represents autonomous
consumption. In Keynesian theory, autonomous consumption refers to the
necessary consumption level to guarantee survival, which does not depends on
current income but on past savings, borrowing or even charity. On the other hand,
b represents both the slope of the consumption function and the Marginal
Propensity to Consume (MPC). In Keynesian theory, MPC implies that current
consumption expenditure depends primarily on current income and it varies
directly with disposable income as contained in his 'fundamental psychological
law'. In general, the theory suggested that an individual increases his consumption
expenditure when his income increases. Even though, the increase in consumption
expenditure is less than the increase in income
Figure 2. 1 Consumption Function
In above Figure 2.1, national income is measured along the X-axis while consumption demand
[C] is measured along the Y-axis. Curve C represents the community consumption function: C =
a + by, which is an upward-sloping curve that indicates as income increases the amount of
consumption demand also increases. It can be observed that curve C does not start from the
origin but from point a. The gap between 0 to point a represent the autonomous component of
consumption that is the consumption even at zero level of income
In-text Question 1:
What do we refer to as consumption function?
In text Answer 1
A consumption function expresses the functional relationships between

consumption expenditure and all its determinants.
Investment Demand
Investment demand is the second component of aggregate demand, which is

independent of the income level of the community but depends on the interest rate
and marginal efficiency of capital. Marginal efficiency of capital is the expected
rate of profit the business community anticipates to get via investment in capital
assets. Even though, income affects investment demand indirectly. The
transmission mechanism in practices is that rise in community income leads to an
increase in the demand for goods and service, which give a positive signal to the
business community that profit will rise soon.
Figure 2. 2 Investment Function
This rise in profit expectation by the business community will bring about a rise in
the marginal efficiency of capital, which in turn will lead to a rise in investment
demand. The investment demand function is presented in Figure 2.2 above.
In-text Question 2:
What do we refer to as an investment function?
In-text Answer 1:
An investment function is independent of the income level of the community but
depends on the interest rate and marginal efficiency of capital
Aggregate demand function
To obtain the aggregate demand function, Figure. 2.3, the investment function
curve is added to the upward-sloping consumption function curve to derive the
aggregate expenditure curve C+I. To show that the level of investment is constant
and the investment function is independent of the income level, a parallel distance
between the C curve and the C+I curve is maintained.
Even though, investment demand can change with either change in the rate of
interest or marginal efficiency of capital.
Figure 2. 3 Aggregate Demand Function
1.3 2.2 Aggregate Supply/ Output

In a free market economy, the level of national income and employment depends
upon the equilibrium between aggregate expenditure and aggregate output in the
short run. Also, Keynesian theory maintained that national income is the total
monetary value of goods and services produced in an economy in a given year as
prices and wages remain constant in the short run.
1.3.1 2.2.1 Constituents of aggregate output
1.The total supply of final consumer goods and services or output in a given year
and
2.The output of capital or producer goods, which are also used in producing further
goods.
Aggregate output, also referred to as aggregate supply depends upon the stock of
capital, the amount of labour used and the state of technology. Thus it is also the
short-run production in the form of Y=(N, K, T) where y is national income, K is
the constant amount of capital stock, T is the constant state of technology and N is
labour employed which is a variable factor.
45-degree line as aggregate output with (fixed prices)
Figure 2. 4 Aggregate Output
To derive the aggregate output, we need to compare GDP or N.Y. with aggregate
expenditure or aggregate demand which is represented on the vertical axis. For this
purpose, we draw a 45-degree line from the origin which helps to transfer GDP or
N.P. from the horizontal axis to the vertical axis. This 45-degree line is called the
income line. So y = C+ S because income can either be consumed or saved
1.3.2 2.2.2 Equilibrium National Income/Product Market Equilibrium
Explanation
In the Keynesian two-sector model, the equilibrium level of national income is

achieved through the intersection of aggregate demand and aggregate supply
curves, where the C + I curve represents the aggregate expenditure while the 45-
degree 0Z line represents the aggregate supply of output. Firms provide supply
goods and services to the market based on the expectation that potential buyers will
buy them. Equilibrium will always exist in the goods/ product market when the
total output of goods and services produced is equal to the total demand for them
as represented by aggregate expenditure. Meaning that in equilibrium aggregate
expenditure must equal aggregate output since aggregate output or GDP equals
national income. Therefore, the following equilibrium condition holds
AE=GDP=Y.
Figure 2. 5 National Income Equilibrium
The equilibrium condition is met at point E in Figure 2.5 where the aggregate
expenditure curve or C+I curve intersects the 45degree line, which corresponds to
the income level OY1. Therefore, national income cannot be in equilibrium at a
level smaller than OY1, since aggregate expenditure exceeds aggregate supply. At
this income level, demand will be met by the firms selling goods from their stocks
or inventories. As a result, the inventories of goods are below the desired levels.
On the other hand, the equilibrium level of national income cannot be greater than
OY1, because at any level greater than OY1 aggregate expenditure or demand
[C+I] falls short of aggregate output. This will cause an increase in inventories of
goods with the firms beyond the desired levels. Thus a deficiency in aggregate
demand relative to the aggregate supply of output will lead to a fall in national
income and output until the level OY1 is reached where aggregate
expenditure[C+I]is equal to the value of aggregate output. Thus, OY1 is the
equilibrium level of national income.
Activity 1.1
1.4
Activity Timing: 10 minutes 3.
Activity Text: With the aid of a diagram explain the components of

aggregate demand
0 Study Session Summary

This section is devoted to the determination of equilibrium in the product market,
which is sometimes referred to as the determination of equilibrium national
income. This is so because the total goods and services produced in an economy
(output) must be purchased by different economic agents (expenditure) and the
owners of the product will receive income in return (income).
SAQ 1. 2.1 (test Learning Outcomes 1.1)
With the aid of a diagram explain aggregate demand
SAQ 1.2.2 (test Learning Outcomes 1.2)
With the aid of a diagram explain the aggregate supply
With the aid of a diagram, determine the equilibrium in the product market using the aggregate
demand=aggregate supply approach.
1.5 5.0. Additional Activities (Videos, Animations & out of Class activities)
e.g.
a. https://youtu.be/4tUZUiK3R2s
1.6 6.0 References/Further Readings
Anyanwu, J. C., & Oaikhenan, H. E. (1995). Modern macroeconomics: Theory and
applications in Nigeria. Department of Economics & Statistics, University
of Benin.
Blanchard, O., & Sheen, J. (2013). Macroeconomics; Australasian Edition. Pearson

Higher Education AU
Jhingan, M. (2003). Macroeconomic Theory. Varinda Publication Ltd. In Dehli.
Krugman, P., & Wells, R. (2012). Economics 3rd Edition (Chapters 1-20). In: New
York: Worth Publishers.
Krugman, P. R., & Wells, R. (2009). Economics. Macmillan.
Mankiw, N. G. (2015). Principles of Macroeconomics (Mankiw's Principles of

Economics). In: Massachusetts, United States: Cengage Learning.
Study Session 3
Determination of National Income
Equilibrium: Savings =Investment Approach
Introduction
2.0 Main Content

2.1 Saving = Investment Approach
Introduction
This section is built on the previous section. In this section, we shall focus on the
alternative approach to the determination of equilibrium in the product market.
Specifically, in this section, we shall discuss the injection-leakage approach to
determine equilibrium in the product market
1.1 Explain the savings and investment function
1.2 Determine product market equilibrium using the S=I approach

1.8 2.1 Investment = Saving approach to product market equilibrium
This approach is sometimes referred to as the injection equal to the leakage
approach. Investment is an injection into the economy, which could increase
aggregate expenditure (AD) and boost economic growth (income). That is
investment spending will multiply via the multiplier effect to increase income.
While saving on the other hand is a leakage out of the economy. That is, it is a
stock of money not spent, which could lower aggregate expenditure (AD) and
income. At equilibrium S=I always.
Income earned Yd can either be consumed all that Y d = C or part of it is saved and
the other part is consumed. That is to say, disposable income has two components:
Yd = C + S.
1.8.1 2.1.1 Saving Function
Savings on the other hand has two components also: S = Y –C recall that C = a +
by. As such S = -a + (1-b)y
Components of the savings function
1.Autonomous this saving: S1 = -a

2.Induce saving: S2 = (1-b)y
Where (1-b)y is called the MPS is equal to the slope of the savings function.
The savings function is a relationship between income and savings. The most
common form of short-run savings function is S = -a + (1-b)y. Where - a is the
autonomous dissaving and it is the intercept term of the savings function it is the
amount that the house will draw out from their wealth or borrow to consume when
no income is earned. Whereas (1-b) represents the slope of the savings function. It
also represents the amount of saving induced by earners of disposable income.
Figure 3. 1 Savings Function
In Figure 3.1 above, national income is measured along the x-axis also called real output and
savings is shown on the y-axis. In the above figure a curve S has been drawn, which represents
the savings function S = -a + (1-b)y of the community, which slopes upward from the left to the
right. This implies that as income increases the amount of saving by the people of the community
also increases.
In-text Question 1:
Define savings function.
In text Answer 1
The savings function represents the relationship between income and savings.
1.8.2 2.1.2 Investment Function
Investment Demand
Investment demand here depends on the interest rate and marginal efficiency of
capital. Marginal efficiency of capital is the expected rate of profit the business
community anticipates to get via investment in capital assets. Even though, income
affects investment demand indirectly. The transmission mechanism in practices is
that rise in community income leads to an increase in the demand for goods and
service, which give a positive signal to the business community that profit will rise
soon.
Figure 3. 2 Investment Function
This rise in profit expectation by the business community will bring about a rise in
the marginal efficiency of capital, which in turn will lead to a rise in investment
demand. The investment demand function is presented in Figure 3.2 above.
In-text Question 2:
What do we refer to as an investment function?
In-text Answer 1:
An investment function is independent of the income level of the community but
depends on the interest rate and marginal efficiency of capital
1.9 2.2 Equilibrium in the Product Market

It has been observed that for national income to be at an equilibrium level, planned
savings must be equal to planned investment in the Keynesian injection-leakage
approach to the national income equilibrium determination. There will be
equilibrium in the goods/ product market when total withdrawals from the
economy are equal to the total injection in the economy. That is S=I. The
equilibrium is reported in Figure 3.3 below:
Figure 3. 3 Equilibrium in the product market
In Figure 3.3 above, the savings function S= -a + (1-b)y curve intersects the
autonomous investment line at point e 2, which satisfies the equilibrium condition
and corresponds to equilibrium income level Y 2. Income cannot be in equilibrium
at any level lesser than 0Ye. At this level, investment exceeds savings. On the other
hand, the equilibrium level of national income cannot be greater than 0Y2 , because
investments fall short of saving.
Activity 1.1
Activity Timing: 10 minutes
Activity Text: With the aid of a diagram explain the savings function.
1.10 3.0 Study Session Summary

This section is devoted to the determination of equilibrium in the product market,
which is sometimes referred to as the determination of equilibrium national
income. This is so because the total goods and services produced in an economy
(output) must be purchased by different economic agents (expenditure) and the
owners of the product will receive income in return (income).
With the aid of a diagram explain the saving function
With the aid of a diagram, determine the equilibrium in the product market using
the injection-leakage approach.
e.g.
a. https://youtu.be/gAdFpDrHr9Y

of Benin.

Higher Education AU.

SAQs Answers
SAQ Answer 1.1.1 (test Learning Outcomes 1.1 in Module 1: Session 1)
Consumption refers to a household's expenditure on goods and services which
yield utility in the current period. In macroeconomic analysis, consumption
expenditure refers to expenditures by the household sector on currently produced
final goods and services. Saving represents the difference between income and
consumption. The reasoning is that income is either consumed or saved.

Thus saving is defined as the amount of income per period that is not consumed by
economic units.

The MPC refers to the fraction of additional disposable income that is consumed
while the average propensity to Consume (APC) refers to the proportion (fraction)
of total income that is spent on consumption, being the ratio of total consumption
to total income (disposable or national). The reason why the MPC is constant is
because it is the MPC that tells us how much additional spending will be induced
by each naira change in income.

MPC refers to the fraction of additional disposable income that is consumed. While
Average propensity to consume refers to the proportion (fraction) of total income
that is spent on consumption, being the ratio of total consumption to total income
(disposable or national). Given the change in Y, ∆Y, the ∆S/∆Y is the ratio of the
change in S to the change in Y, just as ∆C/∆Y is the ratio of the change in C to the
change in Y. Since ∆Y must be devoted to either ∆C or ∆S, the two ratios ∆C/∆Y
and ∆S/∆Y must add up to 1. If the MPC is positive but less than 1 and is the same
for any change in income, then it follows by subtraction, since MPS = 1- MPC,
that the MPS must also be positive but less than 1 and that it must also be the same
for any change in income. Since what is not consumed is by definition saved, the
MPS can be defined in a manner analogous to the definition of MPC as the ratio of
the change in savings to the change in income (disposable or national). Thus, it is

the slope of the saving function. Like the MPC, the value of MPS is greater than
zero but less than 1: MPC + MPS = 1.

Consumption function
Figur.1 Consumption function

In above figure 1, national income is measured along the X-axis while
consumption demand [C] is measured along the Y-axis. Curve C represents the
community consumption function: C = a + by, which is an upward-sloping curve
that indicates as income increases the amount of consumption demand also
increases. It can be observed that curve C does not start from the origin but from
point a. The gap between 0 to point a represent the autonomous component of
consumption that is the consumption even at zero level of income

Figure.1 Aggregate Output
To derive the aggregate output, we need to compare GDP or N.Y. with aggregate
expenditure or aggregate demand which is represented on the vertical axis. For this
purpose, we draw a 45-degree line from the origin which helps to transfer GDP or
N.P. from the horizontal axis to the vertical axis. This 45-degree line is called the
income line. So y = C+ S because income can either be consumed or saved.

Figure.2 National Income Equilibrium
The equilibrium condition is met at point E in Figure 5 where the aggregate
expenditure curve or C+I curve intersects the 45degree line, which corresponds to
the income level OY1. Therefore, national income cannot be in equilibrium at a
level smaller than OY1, since aggregate expenditure exceeds aggregate supply. At
this d income level, demand will be met by the firms selling goods from their
stocks or inventories. Consequently the inventories of goods are placed below the
desired levels. On the other hand, the equilibrium level of national income cannot
be greater than OY1, because at any level greater than OY1 aggregate expenditure
or demand [C+I] falls short of aggregate output.

Figure 1. Savings Function
In Figure 1 above, national income is measured along the x-axis also called real
output and savings is shown on the y-axis. In the above figure a curve S has been
drawn, which represents the savings function S = -a + (1-b)y of the community,
which slopes upward from the left to the right. This implies that as income
increases the amount of saving by the people of the community also increases.

Figure.2 Equilibrium in the product market
In Figure 2 above, the savings function S= -a + (1-b)y curve intersects the

autonomous investment line at point e2, which satisfies the equilibrium condition
and corresponds to equilibrium income level Y2. Income cannot be in equilibrium
at any level lesser than 0Ye. At this level, investment exceeds savings. On the
other hand, the equilibrium level of national income cannot be greater than 0Y2,
because investments fall short of saving.
Study Modules
1.13 1.0 MODULE 1: Openness in the Goods and Financial Markets
Contents:
Study Session 1: Definition of International Trade and Views on International
Trade
Study Session 2: Barriers to International Trade and International Trade Argument
Study Session 3: International Trade Theories
Study Session 4: Foreign Trade Multiplier
Study Session 1
Definition of International Trade and
Views on International Trade
Introduction
2.0 Main Content
2.1 Definition of International Trade
2.2 Views on International Trade

Introduction
The starting point is to read through the course guidelines, which are already in
your possession. If you have not, I strongly recommend you do so right now before
reading your study materials. You must do so because it provides a comprehensive
outline of the materials you will cover on a Session-to-Session basis, starting with
the topic you are about to study: The definition of International Trade and Views
on International Trade. The Session gives you an idea of what is meant by
international trade and the views of scholars regarding the conduct and benefits of
international trade.
1.1Define international trade

1.2Extract the views of scholars regarding the conduct and benefits of
international trade

1.15 2.1 Definition of International Trade
International trade involves the exchange of goods and services across
international boundaries. In other words, it is concerned with the economic
transactions between countries. These transactions could be in tangible economic
goods such as imports and exports of commodities, financial assets or the
rendering of an economic service.
What distinguishes international trade from domestic trade, is that in domestic
trade you use local currency in the transaction while in international trade you need
foreign currency to conduct transactions.
Export are domestically produced goods made to be sold abroad while imports
are foreign-produced goods sold in the domestic market.
Net export is also referred to as trade balance. There will be a trade deficit in a
situation, in which the trade balance value is negative Y-(C+I+G) = 0 and a
surplus in the case of a positive value .
1.15.12.1.1 Factors that Affect Net Export
Net export can be affected by the following factors such as consumer tastes both at
home and abroad, prices of goods both at home and abroad, and the exchange rate,
voyage and government policies toward international trade.
With the division of labour and specialisation, the highest possible output of all
kinds of goods and services for the whole world will be achieved. This means that
each country concentrates on the production of those commodities which it can
produce more economically than other countries and for which it has an advantage
as compared with other countries. This is called the principle of comparative cost
or comparative advantage and it forms the basis of international trade.
If full advantage is to be taken of the principle of comparative cost there must be
multilateral trade, by which is meant complete freedom to import from any part of
the world. Not only will this make for the most efficient use of the economic
resources of the world but it will also increase the volume of world trade. If trade is
regulated by bilateral agreements between countries, then the quantities exchanged
will be determined by the lesser amount required by the two parties to the
agreement. The prevalence of bilateral trade will result in a considerable decline in
the total trade of the world.
In text Question 1
What do you understand by International Trade?
In text Answer 1
International Trade is concerned with the economic transactions between
countries. These transactions could be in tangible economic goods such as
imports and exports of commodities, financial assets or the rendering of an
economic service
1.16 2.2Views on International Trade

The earliest writers on international trade gave special emphasis to the role of the
state in general economic activities. They measured the gains from trade by the
quantum of precious metals (notably gold and silver) that a country could
accumulate through trade with its partners. For this purpose, exports which are
believed to enrich the state were encouraged while imports were discouraged.
However, the classical economists took a different view on trade. They on their
part measured the gains from trade by the increase in efficiency that could be
achieved by concentrating on those activities in which an economy had a
competitive advantage, and they urged the state to abstain completely from
regulating foreign trade.
Modern economists measure the gains from trade in much the same way as
classical economists, but they pay more attention to the role of the government in
the conduct of economic activities. For them, trade and other international
exchanges are influenced by many economic policies, including those adopted for
domestic purposes.
Activity 1.1
Activity Timing: 3 minutes
Activity Text: In your word, summarise scholars' views concerning the conduct and
benefits of international trade
1.17 3.0 Study Session Summary

This session has thrown light on the meaning of international trade as well as the
view of scholars regarding the conduct and benefits of international trade
What is international trade?
State the views on international trade.
e.g.
a. https://www.youtube.com/watch?v=afcOtoZznQU
b. https://www.youtube.com/watch?v=lFUG307RI4I
of Benin.
Balami, D. H. (2006). Macroeconomic Theory and Practice. Salawe Print Limited:

Maiduguri

Higher Education AU

Study Session 2
Barriers to International Trade and
International Trade Argument
Introduction
2.0 Main Content
2.1 Barriers to International Trade
2.2 International Trade Argument
Introduction
In session 1, we discussed the definition of international trade and examine
different views on international trade. In this section, I will build on the
aforementioned and discuss the barriers to international trade and examine both
economic and non-economic arguments about free trade.
1.1Identify and discuss the barriers to international trade

1.2 Discuss both the economic and non-economic arguments about international
trade

1.21 2.1 Barriers to International Trade
Barriers to international trade are certain appendages imposed by the government
to restrict the free flow of international goods and services. Below are some of the
barriers:
1.21.12.1.1 Embargo
An embargo is a political agreement that restricts a foreign country from either

exporting or importing goods or services. It is the most direct form of trade
restriction. Even though it is difficult to enforce in the modern day.
1.21.22.1.2 Tariffs
Tariffs are custom taxes or duties. Associated with tariffs are certain appendages,
such as prohibitive tariffs which are meant to prevent citizens from importing
particular commodities. Tariffs are the most common form of barriers and it retards
international specialisation.
1.21.32.1.3 Subsidy
Government subsidy to some industries makes domestic goods cheaper to produce

than their foreign counterpart, as such it discourages the import of such goods.
1.21.42.1.4 Quotas
This is a form of quantity restriction imposed by a country's customs to regulate

the volume of international transactions.
In text Question 1
List the barriers to international trade.
In text Answer 1
Answer: embargo, tariff, subsidy and quotas
1.22 2.2 International Trade Arguments

There are several arguments about free trade both economic and non-economic.
1.22.12.2.1 Non-economic argument
The non-economic arguments have to do with national security.

1. If you allow free trade, you allow international specialisation then you are
limited to what you specialise in. For instance, if you cannot produce certain goods
at a lower cost, you can import them and produce the goods you can produce at a
lower cost.
2. There is also the argument on the protection of favourite and pressure
groups. The government will choose to produce products of favourite groups and
import products of pressure groups as a sort of punishment.
3. Protection of scenery, that if you allow the defects of comparative advantage
you may be only able to export gold and minerals which involves the destruction
of the scenery and environment.
1.22.22.2.2 Economic argument
1. Income distribution: If you allow free trade then income is distributed in

the interest of a particular group that is the group involved in the industry with
comparative advantage. However, this is a weak argument. There is going to be
diffusion because the group is going to bring over commodities from other people.
With this interdependence in the economy, you can use taxation to avoid the
concentration of wealth in a few hands.
2. The Infant Industry Argument: Protect the home industry which is young
until it is mature enough to face international maturity. But how long will the
infant industry protection take place? Thus in Nigeria, the argument for
protectionism may be absolute.
3. Revenue Collection Argument: Huge amount of money is got from tariffs.
If these countries get involved in free trade where will they get this huge income
from? This argument is not a stronger one. A country can increase tariffs only if
the commodities are price elastic.
Activity 1.1 1.23
Activity Timing: 10 minutes 3
Activity Text: With the aid of a table differential between economic and non-economic
arguments about international trade?
.0 Study Session Summary

You have realised in this session that the free flow of goods and services across
international borders can be affected by government policies such as embargo,
tariffs, subsidies and quotas. Also in the section, both economic and non-economic
arguments about international trade were discussed.

List the barriers to international trade you know.
List some of the non-economic arguments about international trade
e.g.
b. https://youtu.be/sP-htT8oS10
c. https://youtu.be/50GDYghMg2k

of Benin.
Balami, D. H. (2006). Macroeconomic Theory and Practice. Salawe Print Limited:

Maiduguri

Higher Education AU


Econ 203

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Study Session 2

Determination of National Income

2.0 Main Content

2.1 Components of Aggregate Demand

2.2 Aggregate Supply

2.3 Product Market Equilibrium

3.0 Study Session Summary

4.0 Self-assessment questions (SAQs)

5.0 Additional Activities (Videos, Animations & Out of Class activities)

6.0 References/Further Readings

1.1 Explain the component of aggregate demand theoretically and graphically

1.2 Explain the components of aggregate supply

1.1 2.0 Main Content

1.Aggregate demand=Aggregate supply Approach and

We shall discuss each of the components in detail

What do we refer to as consumption function?

A consumption function expresses the functional relationships between

Investment demand is the second component of aggregate demand, which is

Figure 2. 2 Investment Function

What do we refer to as an investment function?

Aggregate demand function

Figure 2. 3 Aggregate Demand Function

1.3 2.2 Aggregate Supply/ Output

45-degree line as aggregate output with (fixed prices)

Figure 2. 4 Aggregate Output

1.3.2 2.2.2 Equilibrium National Income/Product Market Equilibrium

In the Keynesian two-sector model, the equilibrium level of national income is

Activity Text: With the aid of a diagram explain the components of

0 Study Session Summary

Blanchard, O., & Sheen, J. (2013). Macroeconomics; Australasian Edition. Pearson

Jhingan, M. (2003). Macroeconomic Theory. Varinda Publication Ltd. In Dehli.

Krugman, P. R., & Wells, R. (2009). Economics. Macmillan.

Mankiw, N. G. (2015). Principles of Macroeconomics (Mankiw's Principles of

2.0 Main Content

3.0 Study Session Summary

4.0 Self-assessment questions (SAQs)

5.0 Additional Activities (Videos, Animations & Out of Class activities)

6.0 References/Further Readings

1.1 Explain the savings and investment function

1.2 Determine product market equilibrium using the S=I approach

1.7 2.0 Main Content

1.8.1 2.1.1 Saving Function

Components of the savings function

1.Autonomous this saving: S1 = -a

Define savings function.

1.8.2 2.1.2 Investment Function

Figure 3. 2 Investment Function

What do we refer to as an investment function?

1.9 2.2 Equilibrium in the Product Market

Figure 3. 3 Equilibrium in the product market

Activity Timing: 10 minutes

1.10 3.0 Study Session Summary

1.12 6.0 References/Further Readings

Blanchard, O., & Sheen, J. (2013). Macroeconomics; Australasian Edition. Pearson

Jhingan, M. (2003). Macroeconomic Theory. Varinda Publication Ltd. In Dehli.

Krugman, P. R., & Wells, R. (2009). Economics. Macmillan.

Mankiw, N. G. (2015). Principles of Macroeconomics (Mankiw's Principles of

yield utility in the current period. In macroeconomic analysis, consumption

expenditure refers to expenditures by the household sector on currently produced

consumption. The reasoning is that income is either consumed or saved.

SAQ Answer 1.1.2 (test Learning Outcomes 1.2 in Module 1: Session 1)

SAQ Answer 1.1.3 (test Learning Outcomes 1.3 in Module 1: Session 1)

Average propensity to consume refers to the proportion (fraction) of total income