national income accounting. national income accounting income and expenditure 1. income is the...
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NATIONAL INCOME
ACCOUNTING
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INCOME AND EXPENDITURE
1. Income is the earnings of individuals.
2. The income of a corporation is called revenue.
3. One way that government derives income is through taxing individual and firms.
What is Income?
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INCOME AND EXPENDITURE
What is Expenditure?
1. Expenditure is what individual, firms and the government spend on.
- Expenditure of Individuals is denoted as C.
- Expenditure of firms (corporations) is denoted as I
- Expenditure of governemnt is denoted as G.
The National Expenditure/Income
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In any economy, we expect Income = Expenditure
National Income/Expenditure is = C + I + G
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GTo Calculate the Expenditure of an Economy
The total or aggregate expenditure of an economy that does not import or export any goods and services is calculated by using the formula below:
Aggregate Expenditure = C + I + G (without imports or exports)
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Aggregate Expenditure (AE) and Aggregate Demand (AD)
Aggregate Expenditure is also called Aggregate Demand (AE = AD). This means that to calculate Aggregate demand we also use the AE formula:
AD = C + I + G (without exports (X) and imports (M))AD = C + I + G + (X – M) (with exports and imports)
Note: Some countries do not have an import & export sector as they are closed and self sufficient. (eg some remote pacific Island country)
*We call the (X-M) component the external economy.While the (C+ I + G) is called the domestic economy.
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GAggregate Demand (AD)
Aggregate demand is the total expenditure of an economy . It consist of the spending of consumers (C) + firms (I) + government (G) + (X-M).
AD
The AD curve looks like a normal demand curve but is actually different from a demand curve. AD is the total demand of the whole country at a certain price level while the regular demand curve represents a the demand of a person, a firm or an industry for a good or service.
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GAggregate Demand (AD)If any of the components in the AD are increased or decrease, the AD will shift right and left accordingly.
AD
ASIncrease
CorIorGor X
Decrease
CorIorGor X
GPL
GDP (Y)
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GAggregate Demand (AD)If any of the components in the AD are increased or decrease, the AD will shift right and left accordingly.
AD
ASIncrease
CorIorGor X
Decrease
CorIorGor X
GPL
GDP (Y)
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How Taxes Affect Consumption and Investments
C= (Income – Tax)
From the formula above if tax increases, then consumption (C) and investments (I) decreases.
Quiz 1
What would consumption be if the average income of Singaporeans was $60,000 and the tax rate was 10%?
Quiz 2
What would happen to Aggregate Demand or GDP when taxes increase?
Average C wll drop to $54,000
GDP will decrease as C & I decreases. AD shifts left.
I = (Revenue – Tax)
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GRecap: Aggregate Demand (AD)If taxes increased, the AD will shift left accordingly.
AD
ASIncrease
CorIorGor X
Decrease
CorIorGor X
GPL
(Y)GDP1GDP2
GDP 1 < GDP 2 the gross dometic product has decreased
GPL1GPL2
GPL 1 > GPL 2 the general price level has decreased
Aggregate Demand and Economic Growth
When aggregate demand shifts left and GDP decreases, we say that the economic growth of a country has been reduced.
ie GDP2 < GDP1(after AD has shifted left)
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How Interest Rate (r) Affect C & I
C & I borrow money from the bank to spend.
Quiz 1
In 2013 Interest rates fell from a year ago 6.5% to 5%, how will C & I adjust their expenditure.
Quiz 2
What would happen to Aggregate Demand and economic growth when interest rate (r) increases?
C & I will increase their expenditure
GDP will decrease as C & I will decrease. AD shifts left.
If r decreases, then it would be cheaper for C & I to borrow and to spend.
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GRecap: Aggregate Demand (AD)If any of the components in the AD are increased or decrease, the AD will shift right and left accordingly.
AD
ASIncrease
CorIorGor X
Decrease
CorIorGor X
GPL
(Y)GDP1GDP2
GDP 1 < GDP 2 the gross dometic product has decreased
GPL1GPL2
GPL 1 > GPL 2 the general price level has decreased
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How will increasing money supply affect C & I
The government can increase money supply in an economy (eg. Printing money and distributing it via the banks).
Quiz 1Explain how economic growth will be affected when government decreases money supply.
AnswerWhen government reduces the money supply, there will be less easily available money circulating in the economy and as such consumption and investment will be decreased causing GDP to be reduced and economic growth to fall.
When there is more money circulating in the economy, it becomes easier and cheaper for consumers and firms to obtain money to spend. ie. C + I will increase.
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How Government Spending can affect C & I
When Governement (G) spends, it will influence GDP directly since :
AD (GDP ) = C + I + G
Question
If government spending can directly influence the GDP of a country, what does this imply about the power of Government?
Answer
This implies that government has the power to influence or increase the GDP (and ultimately economic growth) when the economy is not doing well. It can also decrease the GDP to bring down inflation when the GPL is too high.
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Government Policies – Demand Side
Any government policies that government implement that can affect the aggregate demand to increase or decrease are called demand-side policies.
Demand Side Policies Consist of:
- Fiscal Policies : a. Government influencing AD/GDP via
increasing/decreasing taxes.b. Government influencing AD/GDP via increase/decreasing government spending (G)
- Monetary Policy:a. Government influencing AD/GDP via increasing
or decreasing money supply.b. Increasing, decreasing the interest rate.
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GQ1: The economy of the United States has not been growing for the last 5 years. Explain the policies the Fed (US central bank) implement to spur economic growth. (6 points) Hint: slide 17
1. Gov. can use fiscal policy:• Reduce Taxes • Increase government spending (eg.on infrastructure, retraining
etc)• Appropriate diagram to illustrated
2. Monetary policy:• Increase money supply so as to make funds more readily
available for consumers and firms to spend.• Decreasing the interest rate.
Answer:
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INGFiscal & Monetary Policies
If government wants to spur economic growth, they could use the demand side polices of either fiscal or monetary policies.
AD
AS Fiscal -Decrease Tax-Increase G
Monetary -Decrease Interest Rate -Increase MS.
GPL
(Y)GDP2GDP1
GDP 1 < GDP 2 the gross domestic product has decreased
GPL2GPL1
GPL 2 > GPL 1, ie GPL has increased, increasing inflation.
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1. Gov. can use fiscal policy:• Increase Taxes • Decrease government spending (eg.on infrastructure, retraining
etc)• Appropriate diagram to illustrated
2. Monetary policy:• Decrease money supply so as to make funds more readily
available for consumers and firms to spend.• Increase interest rate to make it more expensive to borrow
and spend.
Answer:
Q2. If a country is suffering high prices (as in high inflation), what policy tool can the Gov. use to tame inflation? (6 points)
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AD
AS Fiscal-Decrease G-Increase T
MonetaryDecrease Money Supply
GPL
(Y)GDP1GDP2
But GDP 2 < GDP 1. the gross domestic product has decreased lowering economic growth.
GPL1GPL2
GPL 1 > GPL 2 the general price level has decreased, thus lowering inflation by lowering GPL.
If government wants to lower inflation, they could use the demand side polices of either fiscal or monetary policies.
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