How to calculate national income, personal income and disposable income. Personal income and personal disposable income Disposable income is calculated using the formula
The concept of “personal income” has been filled with new content and covers all types of income (as well as various bonuses, additional payments, allowances and social benefits) accrued in cash and in kind (regardless of sources of financing), including amounts of money accrued to employees in accordance with the law for time not worked (annual leave, holidays, etc.). The transition to market relations gave rise to new sources of cash income in the form of amounts accrued for payment on shares and contributions to members of the workforce in the property of the enterprise (dividends, interest). Thus, the labor income of each employee is determined by personal contributions, taking into account the final results of the enterprise, is regulated by taxes and is not limited to maximum taxes.
4. personal and disposable income
As a result, we obtain an indicator characterizing the degree of inequality, which in economic literature is called the income concentration coefficient or the Jima coefficient, which is calculated as follows: G = SODB/SOAB. coefficient This coefficient can take values from 0 to 1. The higher the value of the coefficient, the further the Lorenz curve is from the bisector and the stronger the inequality.
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When determining the Gini coefficient, they rely on a certain principle of ideal equality, which assumes that 1% of the population should receive 1% of the total income of this society. In world practice, the Gini coefficient, used to assess income in a society, is calculated for each individual year.
Personal income and personal disposable income
The general concept of bonuses is usually divided into two narrower concepts: bonuses as incentives provided by the remuneration system, and bonuses as encouragement (awards) for distinguished employees in the remuneration system. Remuneration system The bonus remuneration system involves the payment of bonuses to a predetermined circle of persons based on established specific indicators and bonus conditions.
The range of persons to be rewarded, the indicators and conditions of bonuses, the amounts of bonuses specific to each profession, position (or their maximum amounts) are provided for in the regulations on bonuses. Based on these provisions, when specific indicators and bonus conditions are met, the employee has the right to demand payment of bonuses, and the employer has the obligation to pay the amount due.
National income
Income indicators The level of income of members of society is the most important indicator of their well-being, as it determines the possibilities of an individual’s material and spiritual life: recreation, education, maintaining health, meeting basic needs. Among the factors that directly influence the amount of income of the population, in addition to the size of wages themselves, are the dynamics of retail prices, the degree of saturation of the consumer market with goods, etc.
income indicators Income inequality is considered a fairly important phenomenon. For which there are reasons. Video 2 Among the reasons for income inequality in the literature are: 1.
Differences in abilities ability 2. Education and training Education 3. Professional tastes Professional tastes 4. Ownership of property Ownership of property 5.
Dominance in the market Dominance in the market 6.
1.6 personal and disposable income
Benefits are guaranteed cash payments during a temporary break from work (to care for a child after his birth, for temporary disability, during pregnancy and childbirth), as well as to compensate for additional expenses that arise in certain cases (at the birth of a child, in the event of the death of an employee or a member of his family). Video 30 benefits A special place among social insurance benefits is occupied by unemployment benefits, which are paid from state employment funds and non-state unemployment insurance funds.
The main purpose of this benefit is to prevent a sharp drop in the income of workers who find themselves temporarily unemployed.
Personal income and its calculation
The higher the income, the higher the demand for products and services produced by various industries, the higher the quality of the products, because a motive arises to achieve better final results, its competitiveness, higher production efficiency, which means a better economic situation in the country. Therefore, regulation of income and wages is part of the policy of any state.
Thus, the incomes of the population and the sources of their formation deserve close attention, and all the problems associated with them require prompt resolution. Sources of income Rent as a source of personal income Rent (from lat.
reddita - given back, returned) - is the income received by the owner of the land when renting it out. Rent is a special type of relatively stable income that is not directly related to entrepreneurial activity.
Personal income is
In general, the formula takes the form:
- CHRND = VRND – POK.
This macro-indicator shows the amount of income that can be used by residents of the state for personal consumer expenses or set aside for the purpose of accumulation. Personal consumer expenditures include all costs associated with the purchase of services and goods by households, as well as the costs of various government organizations and public non-profit institutions that are responsible for servicing households.
Secondary distribution of income As mentioned above, all macro indicators are closely interrelated with each other and are formed in strict sequence. Thus, the redistribution of all types of income ends with the formation of disposable income, adjusted by economic sector.
Disposable income
We did not take into account here income that was not taxed or taxed but without declaration, as well as possible cases of deception by the tax authorities. In other words, real income was not taken as a basis, which alone makes it possible to identify differences in living standards.
In order to be able to compare families with different compositions, declared incomes are correlated with the number of consumption units (CU). According to the definition approved by Insee and Erostat, the first adult family member is taken for 1 PU, his spouse and other family members aged 14 years and older - for 0.5 PU, children under 14 years old - for 0.3 PU.
Thus, a family consisting of two adults and declaring an amount of 24 thousand euros in the declaration has a real income (i.e. correlated with the EP) equal to 16,000 euros.
How is disposable income different from personal income?
Moscow and Moscow region. In total, wealthy Russians increased by 60% in 2006-2007, the group with an income of 30-100 thousand dollars grew more noticeably than the rest - by 71%, the highest income group - with an income of over 5 million dollars, increased by half. In 2007, the executive director of the Development Center, Natalya Akindinova, claimed that about 50 thousand families with an income of over a million dollars live in the Moscow region.
Attention
Stratification of the population The richest In 2007, Forbes magazine claimed that the total wealth of the 14 richest citizens of Russia amounted to 26% of the country's GDP. According to Forbes as of September 2007, the total wealth of the 100 richest Russians grew by 36% over the year.
Disposable personal income differs from personal income by the amount
The following are also recommended as indicators for bonuses for workers: - growth in labor productivity; labor productivity - an increase in product output, a reduction in its labor intensity, completing specified volumes of work with a smaller number of people on time, highly efficient use of new equipment and progressive technology, etc.; Products - improving the quality of products and work: increasing the share of products of the highest quality category, the level of delivery of products from the first presentation, the absence or reduction of complaints from consumers, reducing defects, the yield of suitable products, the absence of complaints about manufactured products (works and services), etc.
Disposable personal income differs from personal income by the amount of tax on
Video 32 labor pension Non-monetary income of the population as sources of personal income The main sources of non-monetary income of the population are public consumption funds and personal subsidiary plots. Public consumption funds are a type of collective form of consumption and form the material basis for the functioning of the sphere of free services to the population.
These funds support hospitals, clinics, schools, colleges, universities, kindergartens, and cultural institutions. By providing these services free of charge, a higher level of consumption is ensured for all segments of the population. Public consumption funds Public consumption funds differ from the distribution of income through wages and property in that the benefits received do not become personal property and do not form income in the literal sense of the word for each person.
In three regions, average declared incomes are much lower than in France as a whole: in the Languedoc-Roussillon region (-13%), in the Nord-Pas-de-Calais region (-14%) and in Corsica (-17%). This lag is explained by the difference in the composition of the population of the regions in terms of socio-professional categories in the present and in the past, the level of diplomas, etc. Regions differ from each other not only in average income levels, but also in the income range available there. By taking into account two factors—average income levels and income differences—it is possible to identify the individual profile of each region. dengi
Thus, very high incomes are concentrated in the Ile-de-France region: 10% of the region’s residents live in families declaring an income of over 37,000 euros, i.e. 40% more than the top 10% of the province's income earners. In contrast, in Alsace incomes are high but distributed relatively evenly.
Personal income is the total capital that an individual receives from various sources in the process of life over a certain period of time. Personal income includes not only wages, but also a number of additional income (for example, dividends on securities, transfers, pensions, social benefits, rent, and so on). Personal income is calculated before the deduction of personal taxes accrued to the subject. That is, these are all types of income of the population, which include cash receipts from the state budget (scholarships, pensions), wages at enterprises, income from their farms, and so on, an indicator that reflects the real well-being of people and their solvency (before paying taxes ).
On modern stage personal income have enough complex structure. Their Can classify:
1. Based on changes in consumer price levels:
nominal income. This is the amount of capital that is received by a certain person in a specific period of time. This indicator reflects the real level of financial income, regardless of the level of taxes;
available income. The money that belongs to this type of profit can be used to solve personal problems and saved as your savings. At the same time, disposable income is usually lower than nominal. This is explained by the need to deduct mandatory payments and taxes from the total amount;
real income displays how many people can purchase goods with available funds over a certain period of time
2. According to the form of the unit of measurement:
monetary income. This includes scholarships, pensions, business profits, wages at enterprises, and unemployment benefits. This also includes dividends on securities, profits from real estate, interest on deposits, profits from the sale of agricultural products, income from the sale of currency, insurance payments and others;
natural income. Such profits include products that are produced on a subsidiary farm, payments from social funds, services provided by family members, and so on.
3. According to the degree of intervention of government agencies:
primary income are formed under the influence of a powerful market mechanism;
secondary income inevitably associated with changes in the country's politics.
Calculation personal income Can produce By next formula:
Personal Income = National Income - Taxes - Retained Corporate Income - Social Security Contributions + Transfers
Personal disposable income is the income that is used, i.e. available to households. It is less than personal income by the amount of individual taxes that owners of economic resources must pay in the form of direct (primarily income) taxes:
JPL = LD - individual taxes
NDP is net domestic product, which is calculated as the difference between GDP and depreciation.
Indirect taxes are included in the price of goods and services and are actually government revenues that it receives without using economic resources in the production process. Thus, indirect taxes through increased costs increase prices, but do not create any economic benefits. ND equals the sum of primary incomes of owners of production factors. The structure of income is the most important indicator of the distribution of income of various segments of the population.
Main components of national income:
1. remuneration for work (70-80%, in the Russian Federation officially 45%);
2. income of small producers (non-corporate sector) - these incomes are mixed - they cannot be divided into profits as owners and wages as employees of their own firms (several percent);
3. income from property (interest, joint-stock company profit, rent) – 15-20%.
As a rule, personal income is larger than national income due to transfer payments.
Transfer payments are benefits and subsidies received by the population from the state. These are unemployment benefits, disability benefits, free and discounted medications, subsidies for utility bills, maternity capital, pensions, scholarships, etc.
Disposable personal income- This is income that the population can dispose of at their own discretion. This is personal income minus individual taxes.
This indicator is important for analyzing the standard of living in the country, analyzing the structure of purchasing opportunities of various segments of the population, and studying the effectiveness of government regulation in the social sphere.
Price indices. GDP deflator
The GDP indicator is significantly influenced by changes in the price level. There is a distinction between nominal and real GDP.
Nominal GDP reflects the physical volume of goods and services produced in current prices in force in a given year.
Real GDP is nominal GDP adjusted for price changes or expressed in base year prices. The base year is the year from which the measurement begins or with which GDP is compared.
To bring nominal GDP to its real value, two indices are used: consumer price index (CPI) and GDP deflator.
To determine the CPI, the concept of “consumer basket” is used, which includes about 300 items of the most widely used goods.
The difference between the CPI and the GDP deflator is as follows:
The GDP deflator is calculated for a changing set of goods and is Paasche index, and the CPI is calculated for a constant set of goods and is called Laspeyres index;
The GDP deflator shows changes in prices for the entire list of products and services produced in the economy, while the CPI shows price increases only for consumer goods;
The GDP deflator takes into account changes in the structure of goods produced, but the CPI does not;
The GDP deflator shows changes in prices for products produced by national factors, and the CPI takes into account changes in prices for imported goods.
The level of nominal GDP is influenced by two factors: real growth in the production of goods and services and price fluctuations. The GDP deflator makes it possible to obtain the GDP value without taking into account changes in prices for produced goods and services:
A change in the GDP deflator reflects a change in the general price level, i.e., the process of inflation or deflation.
Adjusting nominal GDP using the CPI or GDP deflator makes it possible to make this important indicator comparable across years.
4. Economic growth: essence, types, indicators, factors
The economic growth- this is the development of the national economy in which real GDP increases. This is not a short-term, but a long-term increase and qualitative improvement of GDP and its factors of production.
The essence and significance of economic growth lies in the constant resolution of the main economic problem - the contradiction between limited economic resources and the unlimited needs of people. Economic growth allows you to simultaneously increase available resources, increase current consumption, as well as additional investments in the development of production.
Economic growth is the most important indicator of the development of the national economy.
Economic growth indicators:
· Indicator of the growth rate of real GDP;
· An indicator of the growth rate of real GDP per capita.
| GDP growth rate = (GDPt – GDPt-1): GDPt-1 | (23) |
where GDPt is the GDP of the current year;
GDPt-1 - GDP of the previous year.
Factors of economic growth:
· increasing the number and improving the quality of labor resources;
· growth in volume and improvement in the qualitative composition of fixed capital;
· improvement of technology and production organization;
· increasing the quantity and quality of natural resources used;
· growth of entrepreneurial abilities in society.
Types of economic growth:
· Extensive economic growth involves an increase in output through the use of additional resources (means of production, labor, additional financial resources).
· Intensive economic growth is associated with an increase in production efficiency and implies an increase in output per unit of resources used.
Intensive economic growth is manifested:
· in using the achievements of GDP, updating production;
· in improving the qualifications of employees;
· in improving the quality of products and updating the assortment.
If the share of real GDP resulting from intensive growth factors exceeds 50%, then the economy as a whole is characterized by a predominantly intensive type of economic growth; if less than 50% - predominantly extensive type of economic growth.
Minimum requirements for economic growth - the rate of economic growth must exceed the rate of population growth.
Questions for self-control
1. Define GDP and GNP. Why is GDP (GNP) the main macroeconomic indicator?
2. What is the difference between nominal and real GDP?
3. Why is the GDP price index called a deflator and not a GDP inflator?
4. What is the relationship between GDP (GNP) and other macroeconomic indicators?
5. What are the main types of economic growth?
6. List the main factors influencing economic growth.
TOPIC 10. Macroeconomic instability: unemployment, inflation, crises
1. Unemployment and its forms
2. Inflation and its types
3. Economic cycles
Unemployment and its forms
The International Labor Organization (ILO) defines an unemployed person as a person who did not have a job during the period under review, was actively looking for a job, and is ready to start working on it.
In accordance with Russian legislation, able-bodied citizens who do not have work and income, are registered with the employment service in order to find a suitable job and are ready to start work are recognized as unemployed.
The labor force is represented by two groups of the population: employed, i.e. participate in the creation of goods, and the unemployed.
The labor force is usually called the economically active population.
Depending on the duration of the period of unemployment, frictional, structural and cyclical unemployment are distinguished.
Frictional unemployment reflects staff turnover associated with a change of place of work, residence, education, and the transition from a low-paid to a higher-paid one. It is voluntary and limited to short periods. In developed countries, as a rule, this is 2-3% EAN.
Structural unemployment arises due to a mismatch between the structure of labor supply and demand. The structurally unemployed cannot immediately get a job without retraining or changing their place of residence. Therefore, structural unemployment is predominantly forced and long-term in nature.
Structural unemployment is associated with technological changes in the economy, as a result of which the level of qualifications of certain categories of the workforce depreciates, with scientific and technological progress, as a result of which the sectoral structure of the national economy changes. To reduce structural unemployment, it is necessary to expand the system of training and retraining of personnel, improve the skills of workers, and effective interaction between employment services and enterprises.
The level of unemployment at full employment equal to the sum of frictional and structural unemployment is called the natural rate of unemployment. The real GDP that is created at the natural rate of unemployment is called potential GDP or the productive potential of the economy. The natural rate of unemployment is the social minimum level that corresponds to the concept of full employment.
Cyclical unemployment arises in connection with a decline in production during economic crises, when the supply of labor exceeds the demand for it. During recessions, there is a reduction in aggregate demand, which causes a reduction in production. The consequence of this is a decrease in employment.
Cyclical unemployment reaches a minimum during a rise and a maximum during a decline in production and can fluctuate from 0 to 10% or more. During the Great Depression of 1929-1933. The unemployment rate in the United States has reached its highest level – 25%. To combat cyclical unemployment, it is necessary to develop special state employment programs (public works programs).
Rice. 17. Unemployment in the Russian Federation
Unemployment indicates underutilization of labor resources and, in general, underutilization of production capabilities. As a result, the country experiences a decline in economic growth and a lag in GDP growth.
American economist Arthur Okun mathematically expressed the relationship between the unemployment rate and the size of the GDP lag. In economic theory, this cause-and-effect relationship is called Okun's law according to which a 1% excess of the actual unemployment rate over the EUB leads to a lag of real GDP by 2.5% from its potential level.
Thus, it is possible to determine the economic losses of society from unemployment.
Inflation and its types
The term "inflation" was first used in North America during the Civil War of 1861-1865. to denote the process of swelling of paper money circulation. Inflatio translated from Latin means “bloating”. The essence of inflation was an excessive increase in the amount of paper money in circulation compared to the supply of goods.
Depending on what forms inflationary disequilibrium of markets takes, there are open And depressed(hidden) inflation. Open inflation manifests itself in a continued rise in the price level, while hidden inflation manifests itself in an increasing shortage of goods and services. In a market economy, inflation is open (price) in nature, while in a command-administrative economy it is suppressed. Until 1992, inflation in Russia was suppressed.
Depending on the growth rate, open inflation can occur at different speeds. In this regard, economists distinguish:
· creeping inflation, when price growth is 3-4% per year;
· galloping, when inflationary trends become rapid and the annual price increase is tens and hundreds of percent;
· hyperinflation - prices are rising at astronomical rates, reaching many thousands of percent per year.
Depending on the causes of inflation, economists distinguish between demand-side inflation and supply-side inflation. Demand inflation is generated by an excess of aggregate demand compared to real production. Buyers are directly involved in its formation.
The second form of open inflation is rising costs, which also leads to an increase in the price level. This process is called supply (cost) inflation. The cost-push theory of inflation explains price increases as a result of a double monopoly. . In the market, on the one hand, oligopolistic firms collide, and on the other, oligopolistic trade unions. The initiator of inflation can be either one or the other side, fighting to increase its share in the national income. Under pressure from trade unions, wages increase, which, however, does not reflect the growth in labor productivity, therefore, in order not to reduce profits, entrepreneurs are forced to raise prices. Entrepreneurs can also make a pre-emptive strike: include costs in prices plus a certain percentage to compensate for expected inflation.
Cost-push inflation can be formed based on rising prices for raw materials and energy. Raw materials become more expensive as production and transportation conditions change, prices for imported equipment rise, etc.
Inflation is measured using a price index, which is equal to the ratio between the price of a certain set of goods (basket) in the current year and the price of a similar basket in the base period (as a percentage). The price index determines their general level in relation to the base period.
In addition to the price index, the inflation rate is often used:
2. Inflation rate = (last year price index – current year price index): current year price index) × 100%
Inflation can be measured using the “rule of seventy.” This rule is usually used when it is necessary to determine how long it will take for the price level to double. To do this, you need to divide the number 70 by the annual inflation rate.
3. Number of years required for prices to double = 70: annual inflation rate (%).
Rice. 18. Inflation in the Russian Federation (%)
English economist A.W. Phillips was the first to try to theoretically substantiate the relationship between inflation and unemployment. In 1958, he identified an empirical relationship between the annual percentage change in nominal wages and the share of unemployed in the total labor force in England over the period 1861–1913. This relationship was illustrated by Phillips as a curve with a negative slope, indicating an inverse relationship between the variables in question. Subsequently, the curve received the name of its author.
Rice. 19. Phillips curve
Subsequently, other economists in the 50s and 60s of the twentieth century. based on an analysis of later statistical data, they confirmed the conclusions of their A.U. Phillips. According to the Phillips curve, in the period under study, wages grew slowly when unemployment was high and faster when employment was higher. Price stability and low unemployment turned out to be incompatible goals: reducing unemployment was achieved at the cost of accelerating inflation, and reducing inflation led to an increase in the number of unemployed.
Economic cycles
Economic (business) cycle - regular fluctuations in levels of production, employment and income with a frequency of 2-3 years, 10-12 years. During the cycle, there is a significant expansion or contraction of business activity in most sectors of the economy. The most striking manifestations of instability are inflation and unemployment.
The cycle can be divided into two periods: downward (fall in production) and upward (increase in production). Peaks and troughs characterize the turning points of cycles.
Fig.20. Business cycle phases
Phases of economic cycles:
· the peak is accompanied by the active commissioning of new enterprises and the modernization of old ones, an increase in production volumes, employment, investment, personal income, an increase in demand and prices and ends with a boom - a period of ultra-high employment and overload of production capacity. During a boom, the price level, wage rate and interest rate are very high. At the highest point of the cycle, called the peak, all indicators reach their maximum value.
· The growth of production is replaced by it recession. This indicates the onset of a crisis phase. Production volumes and investments are declining, and unemployment is rising. There is a sharp decrease in profits, the demand for credit is weakening, and interest rates are falling.
In phase depression The fall in GDP and the increase in unemployment are slowing down significantly, the volume of investment is close to zero.
· After a certain time, the economic system overcomes the lowest point of the cycle, called the trough, and begins revival. Income and employment are starting to rise again. When enterprises bring their production volume to the highest point reached in the previous cycle, then economic climb.
The reasons for fluctuations in business activity are various:
· service life of fixed capital of production inventories (3-4 years); machinery and equipment (8-10 years); buildings and structures (20-25 years).
· unevenness of the scientific and technological revolution. Such oscillations are known as Kondratieff cycles, lasting 50 years;
· fluctuations in the volume of money supply, etc.
Questions for self-control
1. Name the main forms of unemployment.
2. What is the natural rate of unemployment?
3. What are the causes of cyclical unemployment?
4. Name the main types of inflation.
5. Define the business cycle and name its main phases.
6. What are the main reasons for the cyclical development of the economy?
TOPIC 11. Macroeconomic equilibrium:
1. Model “aggregate demand and aggregate supply”
2. Consumption and savings
3. Investments
4. The “income-expenses” model in Keynesian theory
1. Model “aggregate demand and aggregate supply”
Aggregate demand (AD) is the real GDP that consumers are willing to purchase at any given price level. The AD curve shows the quantity of goods and services that buyers are willing to purchase at possible price levels. It shows the inverse relationship between the price level and real GDP.
· The effect of import purchases - an increase in the price level for domestic goods compared to prices abroad leads to an increase in demand for imported goods and a reduction in exports, i.e. to a decrease in net exports. And vice versa.
Non-price factors of aggregate demand:
· Changes in consumer spending;
· Changes in investment expenses related to interest rates, business taxes, technology.
· Changes in government spending
· Changes in net export expenditures associated with the national income of foreign countries, major events in world politics, and exchange rate fluctuations.
Rice. 22. Change in aggregate demand
The increase in aggregate demand is graphically illustrated by a shift of the AD curve to the right and upward as a result of an increase in consumer and investment spending, government purchases of goods and services, and spending on net exports. A decrease in aggregate demand graphically means a shift of the AD curve to the left and down if the indicated determinants tend to decrease.
Aggregate supply is the actual output offered by producers within a national economy at each possible price level.
The aggregate supply curve reflects the direct relationship between the level and the level of real output. The AS curve consists of three segments: horizontal (Keynesian), intermediate (ascending) and vertical (classical).
The Keynesian segment is characterized by underemployment. The economy is characterized by significant unemployment and underutilization of production capacity. The growth of national output is not accompanied by an increase in the price level.
The intermediate segment of the aggregate supply curve corresponds to real national production volumes close to full employment. An increase in production volume is accompanied by an increase in the price level.
The classic (vertical) segment of the AS curve characterizes a full employment economy. Firms can increase their own production only through the redistribution of economic resources, offering, for example, higher wages. Overall, national output will remain unchanged. Thus, on the classic segment of the aggregate supply curve, only the price level can change.
Rice. 23. Aggregate supply curve
In addition to the general price level, aggregate supply is influenced by numerous non-price factors (determinants):
· prices for basic economic resources;
· resource productivity;
· applied technologies;
· level of taxation and degree of state regulation of the economy.
Rice. 24. Change in aggregate supply
The increase in aggregate supply is graphically illustrated by a shift of the AS curve to the right and down as a result of an increase in the productivity of resources, a decrease in their prices, the introduction of high technologies, a reduction in the tax burden on producers and other non-price factors.
A decrease in aggregate supply graphically means a shift of the AS curve to the left and up with the opposite effect of the indicated determinants.
Graphically, macroeconomic equilibrium means the intersection of the AD and AS curves at a point whose parameters are the parameters of macroeconomic equilibrium (equilibrium price level and equilibrium production volume).
Macroeconomic equilibrium on the horizontal (Keynesian) segment of the aggregate supply curve characterizes an economy in a state of economic recession, when the dynamics of prices for produced goods and services does not have any impact on the real volume of production. Deviation from equilibrium is manifested in changes in real GDP at a relatively constant price level.
Rice. 25. Macroeconomic equilibrium in the “AD-AS” model
Equilibrium in the national market, corresponding to the intermediate segment of the aggregate supply curve, characterizes an economy close to full employment, when an increase in output becomes possible only as a result of an increase in the price level, and a reduction in output as a result of a decrease in the price level.
Macroeconomic equilibrium on the vertical (classical) segment of the aggregate supply curve characterizes a full-employment economy and corresponds to the potential volume of production, when only the price level can change.
Consumption and savings
Consumer spending is the most significant component of aggregate demand. Consumption typically accounts for more than half of total demand.
Consumer behavior depends on many factors, the main one being income. Consumption is the portion of income that is used to purchase goods and services. The consumption structure is individual, but there are general priorities that are associated with expenses for food, clothing, housing, medicines, transportation services, etc. As family income grows, expenses for durable goods, recreation, etc. increase.
The size and dynamics of consumption and savings in economics are analyzed using the consumption functions and the savings function.
The consumption (propensity to consume) graph shows the direct dependence of consumption (C) on the amount of disposable income (DI). Each point on the bisector characterizes the amount of possible income that is completely consumed.
The consumption graph is a straight line that intersects the bisector. The intersection point characterizes the amount of threshold income that is completely spent. Below the income threshold, consumer spending exceeds available income (“living on debt”). When income exceeds the threshold value, it becomes possible to make savings.
Disposable income has two main uses - consumption and savings. Savings can be defined as the non-consumable part of income, deferred consumption, future consumption. Thus, savings are the portion of disposable income that is not consumed.
Rice. 26. Graphs of propensity to consume and save
The savings schedule (S) is a derivative of the consumption schedule. The point where the savings graph intersects the income axis corresponds to zero savings. The points on the savings graph that are to the left of the zero savings point mean negative savings (living on debt). The dots on the left represent positive savings.
Average propensity to consume( average propensity to consume - APC) is the portion of disposable income that goes towards consumption. APC is determined by the formula:
With a change in the amount of disposable income, the ratio in consumer spending and the amount of savings obviously changes, i.e. the propensity to consume and save changes.
Marginal propensity to consume( marginal to consume – MPC) – shows the share of the increase in income used for consumption.
Marginal propensity to save( marginal to save - MPS) - shows the share of income growth used for savings.
Investments
In a broad sense, investments are monetary investments in any assets for the purpose of generating income. There are:
· real investments (capital investments) are investments in tangible assets (land, equipment, structures, inventories, housing construction, etc.));
· financial investments are investments in securities (for example, in the purchase of shares, bonds, etc.). In this meaning, investments are used in the theory of finance.
In economic theory, the term “investment” refers to real investment. Unlike consumer spending, which is stable, investment spending is volatile and dynamic. During periods of economic crises, investments in the purchase of equipment, inventories, industrial and housing construction are first significantly reduced.
The main factors influencing the level of investment are:
· expected rate of net profit (profitability);
· interest rate.
The interest rate is the price paid for the use of money. In the case under consideration, monetary capital is necessary to purchase real capital as an economic resource.
For making investment decisions, the real rather than the nominal interest rate plays a decisive role. The real interest rate is measured in constant prices, i.e. at prices adjusted for inflation. The nominal interest rate is measured in current prices.
Investment is profitable if the expected rate of net profit exceeds the real interest rate. And vice versa.
The level of the interest rate is of fundamental importance even in the case of investing using your own funds (reinvesting profits). In this case, the firm incurs an opportunity cost equal to the interest rate, which is the income that the firm gives up in order to make the investment.
Investment demand reflects the dependence of the volume of investment on the level of the real interest rate, which the investor compares with the expected rate of net profit. The demand curve for investment shows an inverse relationship between the interest rate and the volume of investment. Factors influencing the level of investment:
· business taxes;
· changes in technology;
· expected profits of firms;
· expenses for the purchase, maintenance and operation of investment goods.
4. The “income-expenses” model in Keynesian theory
In accordance with the Keynesian direction in economic theory, it is assumed that the engine of economic development is aggregate demand. It is he who determines the aggregate supply. It is derived from aggregate demand and focuses on expected aggregate demand.
A graph illustrating the equilibrium of an economic system as the point of intersection of planned total expenditures and income (GDP) is called the “Keynesian cross”. The "Keynesian cross" is an interpretation of the aggregate demand-aggregate supply model under conditions of rigid pricing.
The classical understanding of economics is based on the assertion that flexible pricing dominates and the price level can take any value. The Keynesian model describes the economy in the short run, which is characterized by sticky prices.
Price rigidity in the economy means that balancing supply and demand occurs not due to changes in the price level, but due to the fact that sales volumes and changes in inventory levels provide firms with information about what and how much customers want to have. The AD-AS model, therefore, can only indicate the equilibrium output, but cannot show how this equilibrium is achieved.
Therefore, to describe equilibrium in an economy with fixed prices, it is necessary to construct a graph reflecting the dependence of the magnitude of demand and supply on the volume of national income. In Fig. 27, the horizontal axis reflects national income Y, which coincides in value with the volume of national output, and the vertical axis shows the volume of aggregate demand.
Since aggregate demand equals the sum of the demand for consumer and investment goods, it can be represented graphically by summing the consumption and investment schedules at each income level.
The Keynesian cross shows how planned aggregate spending (consumer spending, investment spending, government purchases and net exports affect output). An economic system is in equilibrium only when planned total expenditures equal income (GNP).
Thus, an analysis of the “Keynesian cross” shows that the general equilibrium in the economy, established in the described way, does not necessarily correspond to a level of national income that allows for full employment. The equilibrium volume of national income in the Keynesian model is determined by people's propensity to consume, save and invest. With a low propensity to consume and invest, the equilibrium volume of production may be lower than potential (achieved with full use of resources).
Great Depression 1929-1933 was convincing evidence of the correctness of the theoretical conclusions of J. Keynes. All hopes for the ability of a market economy to cope with the global crisis that hit all highly developed countries turned out to be in vain. The economy continued to function at low levels of employment, showing no signs of recovery. According to John Keynes, only the state could bring it out of protracted stagnation. Only an increase in government spending (G) can compensate for the shortfall in aggregate demand resulting from low consumer spending and the lack of incentives for private firms to invest, and thus ensure economic equilibrium at full employment of resources. Y3 – total income corresponding to the national production volume at full employment of resources.
Rice. 27. Income-expenditure model (Keynesian cross)
Any change in expenses that make up aggregate demand (consumer, investment, government) triggers a multiplier effect, expressed in the excess of the increment in total income compared to the change in aggregate demand. At the same time, income increases turn out to be more significant than the changes in private investment and government that caused them.
The Keynesian multiplier shows how the increase in investment (public and private) affects the increase in output and income. The multiplier is a number that shows how many times the initial increase in investment must be increased to calculate the resulting increase in national income. In other words, the multiplier is the ratio of the change in the equilibrium level of national income (GDP) to the initial change in the level of expenditure that caused it.
Let’s assume that investments in the economy increased by 10 billion rubles. If, thanks to this, the country’s total (national) income increases by 20 billion rubles, then in such an economy the multiplier is equal to 2.
From this formula it follows that the greater the marginal propensity to consume (the smaller the marginal propensity to save), the greater the multiplier. This means that the greater the final increase in national income due to increased investment.
Questions for self-control
1. What are the main reasons for the downward sloping nature of the aggregate demand curve?
2. Describe the features of the aggregate supply curve.
3. What is the ratchet effect?
4. What does the “aggregate demand - aggregate supply” model explain?
5. What is the relationship between the propensity to consume and the propensity to save? How to show this relationship graphically?
6. What is the difference between real and financial investments?
7. Why is the graphical model of the Keynesian theory of macroeconomic equilibrium called the “Keynesian cross”?
8. Describe the multiplier effect.
Related information.
Disposable personal income (DPI) is income used, those. available households.
It is less than personal income by the amount of individual taxes that owners of economic resources must pay in the form of direct, primarily income, taxes, as well as personal interest payments on loans, etc.:
RLD = LD - Individual taxes.
Households spend their disposable income on personal consumption (WITH) and personal savings (S):
RLD = Y d = C + S.
SNA indicators provide a quantitative assessment of total output and total income and do not fully reflect changes in the quality of life. To characterize the level of well-being, we use average per capita indicators, such as:
GDP per capita:
national income per capita:
To allow cross-country comparisons, these figures are calculated in US dollars.
However, these indicators are very imperfect and cannot accurately reflect quality of life. Their main flaws are that they:
averaged(if one person has two cars, and another has none, then on average each person has one car);
do not take into account many qualitative characteristics of the level of well-being(two countries with the same national income per capita may have different levels of education, life expectancy, morbidity and mortality rates, crime rates, etc.);
are calculated in a single measure (usually US dollars), but ignore the different purchasing power of the dollar in different countries (for 1 dollar in the USA and, for example, in India you can buy a different number of goods);
do not take into account the negative consequences of economic growth(degree of environmental pollution, noise, gas pollution, etc.).
Net economic welfare
In order to more accurately assess the level of well-being, in 1972 two American economists - Nobel Prize laureate James Tobin and William Nordhouse proposed a method for calculating an indicator called net economic welfare.
This indicator, in addition to GDP, includes a valuation of everything that improves well-being but is not taken into account in GDP, for example: the amount of free time for raising children and self-improvement; self-employment; increasing the level of education; improving the level and quality of medical care, etc. At the same time, when calculating this indicator, the cost of everything that worsens the quality of life and reduces the level of well-being is subtracted from the GDP value, for example: morbidity and mortality rates, crime rates, environmental pollution, negative consequences of urbanization, etc.
