input and output theory based on islamic perspective

General Equilibrium Model Using the Input-

Output Model and Its Relationship to AD and AS

relations

1

TSR for Better Civilization

A. Aggregate Demand and Aggregate Supply Simulation

B. Islamic Perspective in Demand and Supply

A. The Firm Sector

B. The Household Sector

II. Aggregate Demand and Aggregate Supply

2

Input and Output Model

C. The Government Sector

D. The Foreign Sector

E. The Financial Sector


3

The Concept of Output and Input

input-output

analysis is

essentially

based on the

assumption that

an economic

system consists

of sectors that

are interrelated


3

The Interellated five sectors: a household sector, a firm sector, a

government sector, a foreign sector, and a financial sector


3

The Firm Sector

includes the component of the circular flow associated with

the flows into and from the firm sector of an economy. We

know that the total flow of dollars from the firm sector

measures the total value of production in an economy. The

total flow of dollars into the firm sector equals total

expenditures on GDP.

production = consumption + investment + government

purchases + net exports.

This equation is called the national income identity and is

the most fundamental relationship in the national accounts


3

The Household Sector The household sector summarizes the behavior of private

individuals in their roles as consumers/savers and suppliers of

labor. The balance of flows into and from this sector is the basis of

the household budget constraint. Households receive income from

firms, in the form of wages and in the form of dividends resulting

from their ownership of firms. The income that households have

available to them after all taxes have been paid to the government

and all transfers received is called disposable income. Households

spend some of their disposable income and save the rest. In other

words,

disposable income = consumption + household savings.


3

The Government Sector The government sector summarizes the actions of all levels of government in an

economy. Governments tax their citizens, pay transfers to them, and purchase

goods from the firm sector of the economy. Governments also borrow from or

lend to the financial sector. The amount that the government collects in taxes

need not equal the amount that it pays out for government purchases and

transfers. If the government spends more than it gathers in taxes, then it must

borrow from the financial markets to make up the shortfall.

The circular flow figure shows two flows into the government sector and two

flows out. Since the flows into and from the government sector must balance,

we know that

government purchases + transfers = tax revenues + government

borrowing.


3

The Foreign Sector The circular flow includes a country’s dealings with the rest of the world. These flows

include exports, imports, and borrowing from other countries. Exports are goods and

services produced in one country and purchased by households, firms, and governments

of another country. Imports are goods and services purchased by households, firms, and

governments in one country but produced in another country. Net exports are exports

minus imports. When net exports are positive, a country is running a trade surplus:

exports exceed imports. When net exports are negative, a country is running a trade

deficit: imports exceed exports. The third flow between countries is borrowing and lending.

Governments, individuals, and firms in one country may borrow from or lend to another

country.

Net exports and borrowing are linked. If a country runs a trade deficit, it borrows from

other countries to finance that deficit. If we look at the flows into and from the foreign

sector, we see that

borrowing from other countries + exports = imports.

Subtracting exports from both sides, we obtain

borrowing from other countries = imports − exports = trade deficit.


3

The Financial Sector The financial sector of an economy summarizes the behavior of banks and

other financial institutions. The balance of flows into and from the financial sector

tell us that investment is financed by national savings and borrowing from

abroad. The financial sector is at the heart of the circular flow

The national savings of the economy is the savings carried out by the private

and government sectors taken together. When the government is running a

deficit, some of the savings of households and firms must be used to fund that

deficit, so there is less left over to finance investment. National savings is then

equal to private savings minus the government deficit—that is, private savings

minus government borrowing:

national savings = private savings − government borrowing.


3

The Matrix Matrix: input-output analysis which make up a table containing descriptions of the

distribution of output sutu sector into other sectors as inputs, and to the user /

end user as consumer goods

Transaction Matrix of Group 4 Countries

Sectors A B C Demand Total Output

A B C

Value Added

40 30 20 110

70 160 100 250

10 120 110 230

80 270 240 140

200 580 470 730

Total Output 200 580 470 730 1980

Remarks: A = Farmer Sector B = Industry Sector C = Services Sector

Sources : Data Assumption.


3

The Matrix The table can be described to the side that is, that the entire output of the

agricultural sector 200, is used for the purposes of the agricultural sector itself 40

as input; 70 to input the industrial sector, worth 10 to input the service sector,

while the remaining 80 are consumed by the user / end user as consumer goods.

Description of the table to the side this applies also to the entire output of the

industrial sector and the service sector as well as the output anyway.

Meanwhile, read the description in the table below shows that the entire output of

the agricultural sector 200 was derived from the agricultural sector itself as its

inputs 40, 30 in the form of input comes from the industrial sector, 20 in the form

of input that comes from the services sector; while the remaining 110 in the form

of value added of agriculture or often named as the primary input.


3

The TSR (interrelated of all sectors) In term of Islamic point of view, there is a Hadits “ .. pay the man ( labor) before the sweat

getting dry …..” . In our believing, Tawhid is axiom in Al-Qur’an on Shurat Al Ikhlas ….”

Got…

Nothing else but the only Allah SWT….”. The Qur’an tells parallel, consistence, maturity

and source of knowledge. Islam teach us in number, connectedness, understandable,

originate and re originate, knowledge or Science process and universal.

The earliest in our best philosophy, TSR is based on Assyuura (42) : 49 kindly find that “

… to god belongs the domination of the heavens and the earth …He creates what he

wills…. “ then please find Yassin (36) :82 “ …. Kun fayakuun…” , Science or Hidayah ( )

comes from Allah , than by sunnah will be transmitting to human , from individual , from

majelis to majelis and shurah to shurah as discourse to solve human problem . By limiting

i and interaction among pair ness of the involvement . Factor as tasbih and recursively

consensus process. In Shurah , we have agency and system . Our agency are the

institution involvement such as market , Government regulatory and participatory in

Shurah itself , etc , while our system cover wages , production, marketing and promotion ,

etc. Its relationship can be formed in term of social wellbeing function (as social

embedded)

Aggregate Demand and Supply

3

Why the Aggregate Demand Curve

Slopes Downward (1)

Aggregate demand (AD) is the economy-wide demand for

goods and services.

Like the market demand curve, the aggregate demand curve

slopes downward, but for different reasons.

The reasons for its downward slope are price-level effects:

– Wealth Effect (Real Wealth/Real Balances)

– Interest Rate Effect

– International Trade Effect (Substitution)


3

Why the Aggregate Demand Curve

Slopes Downward (2)

15 Copyright © Houghton Mifflin Company. All rights

reserved.

The Interest Rate Effect



reserved.

Why the Aggregate Demand Curve Slopes

Downward (4)



reserved.

The

Aggregate

Demand

Curve

Note that

changes in

prices result in

changes in the

aggregate

quantity

demanded.



reserved.

Factors that Affect AD

• Consumption

– Income

– Wealth

– Expectations

– Demographics

– Taxes

• Investment

– Interest Rates

– Technology

– Cost of Capital Goods

– Capacity Utilization

AD = C + I + G + XN

Government Spending

Net Exports

– Domestic & Foreign Income

– Domestic & Foreign Prices

– Exchange Rates

– Government Policy



reserved.

Non-price Determinants: Changes in

Aggregate Demand (1)



reserved.

Nonprice Determinants: Changes in




reserved.

Non-price Determinants: Changes in




reserved.

Shifting the

Aggregate

Demand Curve



reserved.

Effects of a

Change in

Aggregate

Demand

Demand-pull

inflation: rapid

increases in AD

outpace the

growth of AS,

causing price

level increases

(inflation).



reserved.

Short-run Aggregate Supply

• Aggregate Supply (AS) is the total of all the firm (market) supply curves.

• It shows the quantity of real GDP produced at different price levels.

• Short-run AS slopes upward because an increase in the price level (while production costs and capital are held constant on the short-run), means higher profit margins—firms will want to produce more.



reserved.

Aggregate

Supply



reserved.

Shape of Short-run AS (SRAS)

• In the short-run, the capital stock (the number of factories and machines, etc.) are held constant.

• Increasing the number of workers increases output, but at a diminishing rate.

• Diminishing returns manifest as an ever-steeper SRAS curve.

• In the short-run, some prices do not adjust quickly: – Labor Costs (wages)

– Contracted supplies

– “Sticky” prices effect the short-run equillibrium


27

Copyright © Houghton Mifflin Company. All rights

reserved.

The Shape of

the Short-

Run

Aggregate

Supply Curve



reserved.

The Shape of Long-run AS (LRAS) • Resource costs are NOT fixed.

– As prices rise, workers will want higher wages and will eventually get them.

• The amount of capital is not fixed—firms can build new plants and buy new equipment over the long-run.

• In the long-run, AS is set by the production possibilities curve—the capacity of the economy, and is not affected by prices, hence is vertical.



reserved.

The Shape of

the Long-Run

Aggregate

Supply Curve



reserved.

Determinants of Aggregate Supply (1)



reserved.




reserved.

Shifting the

Long-Run

Aggregate

Supply Curve

Growth occurs as the

labor force and the

capital stock grow, as

technological

innovation improves

production efficiency.



reserved.

Changes in

Short-Run

Aggregate

Supply



reserved.

Effects of a

Change in

Aggregate

Supply

Cost-push

inflation: cost

increases push

AS to the left

(relative to AD),

causing price

level increases

(inflation).



reserved.

Aggregate

Demand and

Aggregate

Supply

Equilibrium



reserved.

Aggregate

Demand and

Supply

Equilibrium



reserved.

Demand and

Supply

in Islamic

Perspective


The concept of demand in Islam assess a commodity not

everything can be for consumption or use, to distinguish between

the halal (lawful) or haram. Allah has said in Surah Al-Maidah

verse 87, 88:

Therefore, in theory the Islamic demand to discuss the demand

of goods halal, haram, and the relationship between the two.

Whereas in conventional demand, all commodities judged the

same, can be consumed or used.

Billahit taufiq wal hidayah, wassalamu ‘alaikum

wa rahmatullahi wa barokatuh.

This Smile We Expect

16

input and output theory based on islamic perspective

Economy & Finance