CONSUMPTION, TAX, SAVINGS
(MACROECONOMICS)
Lecture
: Irvan Yoga Pardistya, SE., MM., Ak
By
:
Armike
Febtinugraini 1610631030049
ACCOUNTING
– A8
ECONOMIC
& BUSINESS FACULTY
SINGAPERBANGSA
KARAWANG UNIVERSITY
2016
PREFACE
Thankyou almighty God, who has given
His bless to the writer for finishing this macroeconomics assignment. Thankyou
for Mr. Irvan Yoga
Pardistya, SE., MM., Ak who given the writer the lesson of Macro
economy.Thankyou for my parents who given the writer strong support.
Hopefully
we as a student in “State Singaperbangsa Karawang University” can work more
professional by using English as the second language whatever we done. Thank
you.
Armike
Febtinugraini
NPM : 1610631030049
NPM : 1610631030049
The Keynesian Model Of Income Determination In A
Three Sector Economy
Introduction
The action of government relating to its expenditures, transfers and taxes is
called the fiscal policy. Here we focus on three fiscal policy models which are
in increasing order of complexity, with the emphasis being on the government
expenditure, taxation and the income level.
Determination
of Equilibrium Income or Output In a Three Sector Economy
Though
the government is involved in a variety of activates three of them are of greater
relevance to us in the present context. Hence we will focus on these activities
of the government, which are discussed below:
- Government Expenditure
This
includes goods purchased by the central, state and the local government and
also the payments made to the government employees.
- Transfers
These
are those government payments which do not involve any direct services by the
recipient for instance welfare payments, unemployment insurance and others.
- Taxes
These
include taxes on property, income and goods. Taxes can be classified into two
categories, direct taxes and indirect taxes. Direct taxes are levied directly
and include personal income and corporate income tax. They are paid as a part
of the price of the goods.
We
simplify our analysis by making a few postulations, which are as follows.
- The government purchases factor services from the household sector and goods and services from the firms.
- Transfer payment includes subsidies to the firms and pensions to the household sector.
- The government levels only direct taxes on the household sector. We here introduce the notion of an income leakage and an injection. In a two sector model, a part of the current income stream leaked out as saving whereas injections in the form of investment were injected into the system.
In
a three sector model taxes, like saving, are income leakages whereas government
expenditures like investment are injections.
Let
us see few illustrations relating to a three sector economy.
Illustration
21
In
a two sector economy, the basic equations are as follows:
The
Consumption function is C = 200 + 0.8Yd and investment is I = 300 millions. The
equilibrium level of income is 2500 millions. Presume the government is added
to this two sector model, which then becomes a three sector economy. The
government expenditure is at 100 millions
- Determine the equilibrium level of income in the three sector economy
- What is the multiplier affect of the government expenditure? Is it of the same magnitude as the multiplier effect of a change in the autonomous investment?
- Presume that there is a balanced budget in that the entire government expenditure is financed from a lump sum tax. Find the new equilibrium level of income in the three sector economy.
Solution
The equilibrium condition in the three sector
economy is given as
Y = C
+ I + G
Thus,
Y = 200 + 0.8Y + 300 + 100
Thus,
Y = 200 + 0.8Y + 300 + 100
Y = 600 + 0.8Y
Y – 0.8Y = 600
0.2Y = 600
Y = 600 / 0.2
The
equilibrium level of income in the three sector economy is 3,000 millions,
which is an increase by 500 millions over the two sector economy.
Government
Expenditure Multiplier
GM = Δ
Y = 1
Δ G 1 – b
Δ G 1 – b
= 1 / 1 – 0.80
= 5
Investment Multiplier, m
= Δ Y =
1
Δ I 1 – b
Δ I 1 – b
Where b is the marginal
propensity to consume,
Thus the magnitude of
the multiplier effect is the same as that of a change in government
expenditure.
G = T = 100
millions
Thus,
C = 200 + 0.8 (Y -100)
Thus,
C = 200 + 0.8 (Y -100)
C = 200
– 80 + 0.8Y
C = 120
+ 0.8Y
But, Y = C
+ I + G
Y = 120
+ 0.8Y + 300 + 100
Y
– 0.8Y = 120 + 400
0.2Y = 520
Y = 520
/ 0.2
The
new equilibrium level of income in the three sector economy, when there exists
a balanced budget is 2,600 millions.
Illustration
22
In
an economy, the full employment output occurs at 2000 millions. The marginal
propensity to consume is 0.8 and the equilibrium level of output is currently
at 1600 millions. Suppose the government aspires to achieve the full employment
output, find the change in
- The level of government expenditures
- Net lump sum tax
- The level of government expenditures and the net lump sum tax when the government aims at bringing the productivity the full employment while keeping the budget balanced
Solution
We
have, GM =
Δ Y =
1
Δ G 1 - b
Δ G 1 - b
Where, Δ G = Change
in government expenditure
b = Marginal propensity to consume
Δ Y = Change in income
GM = Government expenditure multiplier
For instance,
b = 0.80
Δ Y = 2000 – 1600
Δ Y = 400
Thus,
400 / Δ G = 1 / 1- 0.8
400 / Δ G = 1 / 1- 0.8
Δ G = 400
(0.2)
Thus,
the level of government expenditures required to achieve the full employment
output is 80 millions
We
have, GF =
Δ Y = - b
Δ T 1 – b
Where,
Δ T = Change in tax
Δ T 1 – b
Where,
Δ T = Change in tax
b = marginal propensity to consume
Δ Y = Change
in income
GF = Government
tax multiplier
As
the tax multiplier is negative, an increase in tax leads to a decrease in the
equilibrium level of income.
For instance,
b = 0.80
b = 0.80
Δ
Y = 2000
– 1600 = 400
Thus,
400 = - 0.80
Δ T 1 – 0.80
Thus,
400 = - 0.80
Δ T 1 – 0.80
-0.8
Δ T = 400 (0.20)
The net lump sum tax is
– 100 millions. There should be a decrease in lump sum tax by 100 millions
The next equation to
solve is
Δ Y =
1 (-b Δ
T + Δ Ḡ)
1 – b
1 – b
But, Δ G = Δ
T
Thus we can write
Δ Y = 1 (-b Δ Ḡ+ Δ Ḡ)
1 – b
Or
Δ Y (1-b) = Δ Ḡ(-b +1)
Thus we can write
Δ Y = 1 (-b Δ Ḡ+ Δ Ḡ)
1 – b
Or
Δ Y (1-b) = Δ Ḡ(-b +1)
Or Δ Y (1-b) = Δ
Ḡ(1-b)
Or
Δ Y = 1 – b = 1
Δ G = 1 – b
Δ Y = 1 – b = 1
Δ G = 1 – b
Δ Y = Δ
G = 400
The required increase
in the level of government expenditures and the net lump sum tax us 400
millions.
SOURCE : Agarwal,
Vanita. Macroeconomics Theory and Policy. University of Delhi. 2010. Page 73
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