Topic 1: National income and the multiplier
This model is based on the UK economy. The Uk economy is an open economy, so we will use the equation Y= C+I+G+(X-M).
We found data on the different variables that are involved in finding the National income that allowed us to construct a national income model. We used figures for 2014.
UK National Income model approximations
The variables we need include:
• A consumption function, C = a + b(Y-T)
• An import demand function, M = k + mY
• Exogenous variables, representing investment, I*, exports, X*, government expenditure, G*
• A tax revenue function, T = tY + T*
• Equilibrium condition for Y
National income in the uk
In 2014 the GDP in the UK came to $2522.26 Billion. We will use this …show more content…
This is because the parameter ‘b’, is the marginal propensity to consume, which is one of the key factors in the multiplier equation in an open economy. Reductions in the marginal propensity to consume means that people spend proportionately less of each additional income than before. The reduction in b, going from 0.65 to 0.5, causes the multiplier to fall from 1.67 to 1.39. This also has an affect on the national income model, as it reduces the consumption. The overall effect is that it reduces the national income, as it causes it to go to 21.33, where in the original model it was …show more content…
Although in this example it is the marginal propensity to import that is changing, which is the letter ‘m’. Contrasting with the previous imports change, this one has an affect on the multiplier as m is involved in it. Since ‘m’ is a leakage, when it is reduced it causes the multiplier to increase. When m fell from 0.15 to 0.05, it caused the multiplier to increase to 1.92. A reduction in m means that per additional income, less is spent on imports, meaning that there are fewer leakages in the economy. Therefore it will cause the national income to increase, with it going up to
This model is based on the UK economy. The Uk economy is an open economy, so we will use the equation Y= C+I+G+(X-M).
We found data on the different variables that are involved in finding the National income that allowed us to construct a national income model. We used figures for 2014.
UK National Income model approximations
The variables we need include:
• A consumption function, C = a + b(Y-T)
• An import demand function, M = k + mY
• Exogenous variables, representing investment, I*, exports, X*, government expenditure, G*
• A tax revenue function, T = tY + T*
• Equilibrium condition for Y
National income in the uk
In 2014 the GDP in the UK came to $2522.26 Billion. We will use this …show more content…
This is because the parameter ‘b’, is the marginal propensity to consume, which is one of the key factors in the multiplier equation in an open economy. Reductions in the marginal propensity to consume means that people spend proportionately less of each additional income than before. The reduction in b, going from 0.65 to 0.5, causes the multiplier to fall from 1.67 to 1.39. This also has an affect on the national income model, as it reduces the consumption. The overall effect is that it reduces the national income, as it causes it to go to 21.33, where in the original model it was …show more content…
Although in this example it is the marginal propensity to import that is changing, which is the letter ‘m’. Contrasting with the previous imports change, this one has an affect on the multiplier as m is involved in it. Since ‘m’ is a leakage, when it is reduced it causes the multiplier to increase. When m fell from 0.15 to 0.05, it caused the multiplier to increase to 1.92. A reduction in m means that per additional income, less is spent on imports, meaning that there are fewer leakages in the economy. Therefore it will cause the national income to increase, with it going up to