The Keynesian Model of National Income Determination

National income determination

The component parts of the model

Cd, W, J

The 45° line
Cd + W (=Y)

£100bn

O

£100bn

Y

The consumption function
120

Y C
∆C = 8 ∆Y = 10

100

Consumption (£bn)

80

60

50 40
20

mpc = ∆C / ∆Y = 8/10 = 0.8

0 0 20 40

50 60

80

100

120

140

Y (£bn)

120

The consumption of domestic product
Y C

100

Consumption (£bn)

80

Cd
60

40

20

0 0 20 40 60 80 100 120 140

Y (£bn)

Cd, W

The W function
Cd + W (=Y)

W

O

Y

Cd, W

The W and Cd functions
Cd + W (=Y) Cd

W

O

Y

Cd, W

The W and Cd functions
Cd + W (=Y)

100

Cd

70

W
30

O

100

Y

National income determination

Equilibrium (a) W = J

Cd, W, J

Deriving equilibrium national income

W

O

Y

Cd, W, J

Deriving equilibrium national income

W a b
O Y1

J
Y

Cd, W, J

Deriving equilibrium national income

W c d
O Y2

J
Y

Cd, W, J

Deriving equilibrium national income

W

x

J
Y

O

Ye

National income determination

Equilibrium (b) Y = E

Cd, W, J

Deriving equilibrium national income
Y = Cd + W

W

J
O

Y

Cd, W, J

Deriving equilibrium national income
Y = Cd + W E = Cd + J Cd J

W

J
O

Y

Cd, W, J

Deriving equilibrium national income
Y = Cd + W E = Cd + J Cd

e f W

J
O Y1

Y

Cd, W, J

Deriving equilibrium national income
Y = Cd + W E = Cd + J g h Cd

W

J
O Y2

Y

Cd, W, J

Deriving equilibrium national income
Y = Cd + W E = Cd + J Cd z

W

x

J
Y

O

Ye

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