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1 Simple Keynesian Model National Income Determination Four-Sector National Income Model.

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Presentation on theme: "1 Simple Keynesian Model National Income Determination Four-Sector National Income Model."— Presentation transcript:

1 1 Simple Keynesian Model National Income Determination Four-Sector National Income Model

2 2 Outline Four-Sector Model Import Function M = f(Y) Export Function X = f (Y) Net Exports X - M Aggregate Expenditure Function E = f(Y) Output-Expenditure Approach: Equilibrium National Income Ye

3 3 Outline Factors affecting Ye Expenditure Multipliers k E Tax Multipliers k T Balanced-Budget Multipliers k B Injection-Withdrawal Approach: Equilibrium National Income Ye

4 4 Four-Sector Model With the introduction of the foreign sector (i.e. w/ households C, firms I, government expenditure G) aggregate expenditure E consists of one more component, net exports X- M. E = C + I + G + (X - M) Still, the equilibrium condition is Planned Y = Planned E

5 5 Import Function Imports M is usually assumed to be a function of national income Y. M = M ’ M = mY M = M ’ + mY M and Y are assumed to be positively correlated. M = M ’ + mY is the typical form being used

6 6 Import Function Autonomous Imports M ’ this is the y-intercept of the import function M ’ is an exogenous variable, i.e., independent of the income level Y and is determined by forces outside the simple Keynesian 4-sector model

7 7 Import Function Marginal Propensity to Import MPM = m this is defined as the change in imports per unit change in income Y, i.e., m =  M /  Y it is the slope of tangent of the import function it is usually assumed to be a constant m = 0 or m is a +ve number MPM is also an exogenous variable

8 8 Import Function Average Propensity to Import APM it is the ratio of total imports to total income, i.e., APM = M / Y it is the slope of ray of the import function APM  when Y  except M = mY when MPM = APM = m

9 9 Import Functions M = M’ y-intercept = M’ slope of tangent = 0 slope of ray  as Y  M = mY y-intercept = 0 slope of tangent = m slope of ray = m M = M’ + mY y-intercept = M’ slope of tangent = m slope of ray  as Y  M Y M Y M Y

10 10 Export Function X = f (Y) this is a relationship between the amount of exports X and national income Y it is usually assumed to be an exogenous function X = X ’ We always consider the amount of net exports, i.e., X - M Net exports = X - M = X ’ - M ’ - mY

11 11 Net Exports When net exports is positive, i.e., when X > M, the external sector BOP is in surplus When net exports is negative, i.e., when X < M, the external sector BOP is in deficit When net exports is zero, i.e., when X = M, the external sector BOP is in balance {Trade deficit/surplus v.s. Budget deficit/surplus}

12 12 Net Exports X = X’ M = M’ + mY Y1Y2Y3 How can you determine Ye from this diagram? Y M, X External Deficit External Surplus

13 13 Aggregate Expenditure Function E = C + I + G + (X - M) C = C ’ + cYd T = T ’ + tY I = I ’ G = G ’ X = X ’ M = M ’ + mY E =

14 14 Aggregate Expenditure Function E =

15 15 Output-Expenditure Approach In equilibrium Y = E Y = ()Y = Y = Y = k E * E ’ k E = E ’ =

16 16 Factors affecting Ye Change in E ’ If X ’  E ’   E  Y  If M ’  E ’   E  Y  Change in slope of tangent of E / k E If m   c-ct- m   E steeper  Y 

17 17 Import Multiplier k M It is the ratio of change in national income Y to a change in autonomous import M ’  Y =  M ’ 1 - c - m + ct

18 18 Injection-Withdrawal Approach S = -C’+cT’-T’ + (1-c)Yif T = T’S, T, M, I, G, X Y T = T’ M= M’+ mY I+G+X=I’+G’+X’


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