INCOME DETERMINATION IN

THREE SECTOR MODEL

KEYNESION CROSS ANALYSIS

THREE SECTOR MODEL COMPONENTS CONSUMPTION ( C ) INVESTMENT ( I )GOVERNMENT ( G )TAX [LUMSUM] ( T )TRANFER PAYMENTS ( TR )

GOVERNMENT OBJECTIVES

Create more jobsFaster economic growth Welfare

INCOME DETERMINATION – WITH GOVERNMENT EXPENDITURE AND WITHOUT TAX Y = C + I + G

Where C = a + by Thus Y = a+ by + I + G Y - by = a + I + G Y (1 – b) = a+ I + G

Y = 1/1- b * (a + I + G) A = a + I + G

So Y = 1/1-b * A

INCOME DETERMINATION – WITH GOVERNMENT EXPENDITURE AND LUMSUM TAX

Lumsum tax : The which is fixed by the government and it doesn’t vary with the changes in income.

The effect of tax : there is fall in the disposable income of the consumer thus the purchasing power decreases.

INCOME DETERMINATION – WITH LUMSUM TAX AND TRASFER PAYMENTS Transfer payments : These are payments made by the government to certain sections of society at the cost of the taxpayers. These are one side since those who receive such payments do not provide anything to the government.

 

INCOME DETERMINATION IN AN OPEN ECONOMY

Y = C + I+ G+ NX (assuming NX>0)S = I +G +NX (the only leakage = the sum three injections, assuming away taxesNo undesired changes ( accumulation or exhaustion ) in stocks

TIME FOR QUESTIONS AND DISCUSSIONS

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