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Income-expenditure model

Macroeconomic goods market model for determining the equilibrium national income. The macroeconomic supply of goods corresponds to the national income and is completely elastic in terms of prices up to the limit of capacity. The equilibrium income is determined solely by the effective demand, which in the simplest case is composed of the income-dependent consumer goods demand and the autonomous investment demand. The income-expenditure model can be described by the following system of equations:

Ys = Y;

Ys = Yd;

Yd = C + I;

C = C0 + c * Y (0

I = I0;

where: Ys = planned supply of goods; Yd = planned demand for goods; Y = realized goods production (macroeconomic income); C = consumer demand; C.0 = autonomous consumption; c = marginal consumption rate; I.0 = autonomous investment. The equilibrium income is shown graphically

YG = 1 / (1 - c) * (C0 + I0)

at the intersection of the goods supply and demand curve (see figure “Income-expenditure model”). The goods supply function graphically agrees with the 45 ° line, while the aggregated demand curve results from the vertical aggregation of the consumption function and the horizontal investment function. Since the marginal consumption rate c is less than one, the aggregate demand curve has a smaller slope than the macroeconomic goods supply function, so that an overall economic equilibrium exists.

In contrast to the classical theory, the equilibrium income is YG determined only by the autonomous demand components and does not necessarily have to adjust itself to full employment of the labor force. So it can be compatible with a state of underemployment in the labor market. Since the vertical difference between supply and consumption functions corresponds to macroeconomic saving S and the vertical difference between demand and consumption functions corresponds to macroeconomic investment I, Y applies to equilibrium incomeG the equality of planned macroeconomic savings and planned investment demand:

S (YG) = I.0.

The households plan when equilibrium Y is presentG Not consuming as much income as the companies intend to invest. The condition S = I can therefore also be understood as the equilibrium condition of the goods market (or a mirror image of a capital market). However, this assumes that the planning of the market participants is based on correct expectations. For example, do the companies plan an offer that is greater than the equilibrium national income YG fails, the planned and realized production is above the actual demand; part of the production is then not deductible and leads to an unplanned increase in inventory, which in turn represents an unplanned investment. The condition S = I then only applies ex post (in the sense of the agreement of realized values), while it is violated ex ante, since the planned saving of households - provided they expect higher goods supply and income - is now greater than that planned investment.

Cf. related key article Macroeconomic total models of closed economies.