Wk 7 26/03/07
Team members: Sinead, Martina,Mark, Shane and Jason
PBL to:
(a) work out figures in Table 3.4 Godley
(b) calc for period 2 if theta is now 30%
(c) calc for period 3 if theta is now 30%
note a = alpha, t = theta, d = delta
theta = t = .2 for (a) & .3 for (b); G = 20
(a)
Y = G/(a1-a1*t) = 38.5
T = t*Y = 38.5*0.2 = 7.7
YD = Y - T = 38.5 - 7.7 = 30.8
C = a1*YD + a2*H-1 = 30.8*0.6 + 0.4*0 = 18.5
dHh = YD - C = 30.8 - 18.5 = 12.3
dHs = G - T = 20 - 7.7 = 12.3
H = dHh + H-1 = 12.3 + 0 = 12.3 - {note dHh and not dH as in notes}
(b) formulae as before...
Y = 34.48
T = 0.3*34.48 = 10.34
YD = Y - T = 34.48 - 10.34 = 24.14
C = 0.6*24.14 + 0.4*0 = 14.48
dHs = 20 - 10.34 = 9.65
dHh = 24.14 - 14.5 = 9.65
H = 9.64 + 0 = 9.65
(c)
Y = 34.48 (as per period 2) + a2*H-1
Note - we need to calc as such as system is recursive!
a2*H-1 is MPC out of past wealth, H-1 for previous period.
=> 34.48 + 0.4*9.65 = 38.36
T = 0.3*38.36 = 11.5
YD = 38.36 - 11.5 = 26.86
C = 0.6*26.86 + 0.4*9.65 = 16.11 + 3.86 = 19.98
dHs = 20 - 11.5 = 8.5
dHh = 26.86 - 18.35 = 8.5
H = 8.5 + 9.65 = 18.15
Monday, March 26, 2007
Friday, March 16, 2007
EC6012 – Monday Week 5 – Chapter 3 "The Simplest Model with Government Money" Summary
Firstly, we define two methods of money creation: “Outside” (i.e. Government) and “Inside” (i.e. Private) money. The former is created when a government makes payments and the opposite is when the said government receives taxes. The latter is created by banks via loans and its’ opposite is the repayment of said loans. We initially postulate a simple model, SIM, and build from there. SIM assumes:
1. A closed economy.
2. All transactions occur in government money, i.e. no private banks.
3. Demand-led, i.e. unlimited labour force.
SIM has 6 items, e.g. Money (H) which is a source for households, therefore, positive and negative for government (as it’s debt, therefore a use). From this, for Households, Production and Government we build a behavioural matrix describing inter-transactional relations (except Output, which only appears once) between these sectors such that all columns and rows in this matrix sum to zero. It’s entities are:
1. Households 2. Production 3. Govt
1. Consumption -Cd +Cs
2. Govt. Expenditure +Gs -Gd
3. Output [Y]
4. Wages +W.Ns -W.Nd
5. Taxes -Ts +Td
6. Change in money stock -Hh +Hh
(Where s, d, h, w and N equate to supply, demand, household, cash, wages and employment respectively)
From this we start to build our equations:
3.1. Cs = Cd
3.2. Gs = Gd
3.3. Ts = Td
3.4. Ns = Nd
…where state demand equals supply.
How can we ensure equality between sales and purchases, given production might differ from supply, and supply from demand?
We employ the Keynesian/Kaleckian quantity adjustment mechanism. By this, producers produce exactly what is demanded, i.e. no inventories. Also firms sell whatever is demanded, i.e. no rationing.
We add to SIM by defining Disposable income (i.e. household wages minus tax) as:
3.5. YD = W*Ns - Ts
Further we define Tax rate on taxable income (q) as:
3.6. Td = q*W*Ns and Consumption (being dependent on YD and past wealth accumulated H-1) as:
3.7. Cd = a*YD+a2*Hh-1
Government spending, not covered by taxes is met via issuing of debt (i.e. cash money), so
3.8. Hs = DHs - Hs-1 = Gd - Td
Household wealth is the excess of income over expenditure. We say Hh represents household cash, so:
3.9. DHh = Hh - Hh -1 = YD – Cd
Finally, we define national income identity thusly:
3.10. Y = Cs + Gs
…from income perspective is:
3.10. Nd = Y/W
…this completes SIM. Wages are assumed fully exogenous.
The Walrasian principle dictates the removal of one redundant equation to avoid over-determination. Said equation is:
3.12. DHh = DHs
…because savings must equal investment.
Previous equations yield Y* (equilibrium) as:
3.13. Y* = G/ 1 - a1*(1 - q)
..but this is only short-run/temporary equilibrium, i.e. not steady-state. We use 3.7. to solve for long-term. It says that consumers spend current income PLUS savings, hence income level rises despite fixed government expenditure.
We define steady-state as state whereby stock and flows (i.e. key variables) remain in constant relationship to each other. If variable levels are constant, as per SIM, the steady-state is stationary i.e. no government surplus or deficit. Hence:
3.14. Y* = G/q
…G/q is called fiscal stance. Stationary dictates consumption must equal disposable income. Previous equations yield:
3.15. YD* = C* = G*(1 - q)/ q
Finally we define stationary value of household wealth as:
3.16. H* = [(1 - a1)/a2] * YD* = a3*YD* = a3*G*[(1 - q) /q] where a3= (1 - a1)/ a2
The a3 coefficient is the stock-flow norm of households. Combined with Modigliani’s consumption function, it means when households earn more than expected, more is saved. This assumes consumption depends on lagged wealth besides current disposable income.
Uncertainty is brought into SIM by making consumption depend on expected (e), not actual, income. Ergo, households can only guess expected disposable income: Hd. So
3.17. DHd = Hd - Hh-1 = YDe - Cd
Since end of period money stock must differ from that initially demanded we say:
3.18. Hh - Hd = YD - Yde
Thus money acts as a buffer in that it allows people to transact without knowing exactly what their income and expenditure levels will be.
SIM is now more recursive in that expected, not realized, income is used. If we assume expected income equals that realized previously:
3.19. Yde = YD - 1
..which builds SIMEX. People here amend consumption based on wealth and future income changes.
We solve Y for intermediate situations thusly:
3.20. Y = (G + a2)*(H-1)/(1 - a1)*(1 - q)
…so proving Keynes claim that money links each period with the next. The intermediate stock of money is:
3.21. Hh = (1 - a1)*(1 - q)*Y + (1 - a2)*H-1
…the last two intermediate equations are out-of-equilibrium, but temporary since they’re the values that would be achieved in each period.
1. A closed economy.
2. All transactions occur in government money, i.e. no private banks.
3. Demand-led, i.e. unlimited labour force.
SIM has 6 items, e.g. Money (H) which is a source for households, therefore, positive and negative for government (as it’s debt, therefore a use). From this, for Households, Production and Government we build a behavioural matrix describing inter-transactional relations (except Output, which only appears once) between these sectors such that all columns and rows in this matrix sum to zero. It’s entities are:
1. Households 2. Production 3. Govt
1. Consumption -Cd +Cs
2. Govt. Expenditure +Gs -Gd
3. Output [Y]
4. Wages +W.Ns -W.Nd
5. Taxes -Ts +Td
6. Change in money stock -Hh +Hh
(Where s, d, h, w and N equate to supply, demand, household, cash, wages and employment respectively)
From this we start to build our equations:
3.1. Cs = Cd
3.2. Gs = Gd
3.3. Ts = Td
3.4. Ns = Nd
…where state demand equals supply.
How can we ensure equality between sales and purchases, given production might differ from supply, and supply from demand?
We employ the Keynesian/Kaleckian quantity adjustment mechanism. By this, producers produce exactly what is demanded, i.e. no inventories. Also firms sell whatever is demanded, i.e. no rationing.
We add to SIM by defining Disposable income (i.e. household wages minus tax) as:
3.5. YD = W*Ns - Ts
Further we define Tax rate on taxable income (q) as:
3.6. Td = q*W*Ns and Consumption (being dependent on YD and past wealth accumulated H-1) as:
3.7. Cd = a*YD+a2*Hh-1
Government spending, not covered by taxes is met via issuing of debt (i.e. cash money), so
3.8. Hs = DHs - Hs-1 = Gd - Td
Household wealth is the excess of income over expenditure. We say Hh represents household cash, so:
3.9. DHh = Hh - Hh -1 = YD – Cd
Finally, we define national income identity thusly:
3.10. Y = Cs + Gs
…from income perspective is:
3.10. Nd = Y/W
…this completes SIM. Wages are assumed fully exogenous.
The Walrasian principle dictates the removal of one redundant equation to avoid over-determination. Said equation is:
3.12. DHh = DHs
…because savings must equal investment.
Previous equations yield Y* (equilibrium) as:
3.13. Y* = G/ 1 - a1*(1 - q)
..but this is only short-run/temporary equilibrium, i.e. not steady-state. We use 3.7. to solve for long-term. It says that consumers spend current income PLUS savings, hence income level rises despite fixed government expenditure.
We define steady-state as state whereby stock and flows (i.e. key variables) remain in constant relationship to each other. If variable levels are constant, as per SIM, the steady-state is stationary i.e. no government surplus or deficit. Hence:
3.14. Y* = G/q
…G/q is called fiscal stance. Stationary dictates consumption must equal disposable income. Previous equations yield:
3.15. YD* = C* = G*(1 - q)/ q
Finally we define stationary value of household wealth as:
3.16. H* = [(1 - a1)/a2] * YD* = a3*YD* = a3*G*[(1 - q) /q] where a3= (1 - a1)/ a2
The a3 coefficient is the stock-flow norm of households. Combined with Modigliani’s consumption function, it means when households earn more than expected, more is saved. This assumes consumption depends on lagged wealth besides current disposable income.
Uncertainty is brought into SIM by making consumption depend on expected (e), not actual, income. Ergo, households can only guess expected disposable income: Hd. So
3.17. DHd = Hd - Hh-1 = YDe - Cd
Since end of period money stock must differ from that initially demanded we say:
3.18. Hh - Hd = YD - Yde
Thus money acts as a buffer in that it allows people to transact without knowing exactly what their income and expenditure levels will be.
SIM is now more recursive in that expected, not realized, income is used. If we assume expected income equals that realized previously:
3.19. Yde = YD - 1
..which builds SIMEX. People here amend consumption based on wealth and future income changes.
We solve Y for intermediate situations thusly:
3.20. Y = (G + a2)*(H-1)/(1 - a1)*(1 - q)
…so proving Keynes claim that money links each period with the next. The intermediate stock of money is:
3.21. Hh = (1 - a1)*(1 - q)*Y + (1 - a2)*H-1
…the last two intermediate equations are out-of-equilibrium, but temporary since they’re the values that would be achieved in each period.
EC6012 – Monday Week 5 – 12/03/07.
Group members present:
* Alex, Martina, Mark,Sinead and Jason.
* PBL - exercise & presentation was done on the Multiplier effect
First post, answers to Problem 4:
EC6012 – Problem 4
Q.1.1 Why must the Vertical Columns sum to zero?
They describe the sums of money that actually change hands and therefore represent a system of accounting identities. The change in the amount of money held in one sector must always equal the difference between receipts and payments in the other sectors.
Q.1.2 Why must the Horizontal Rows sum to zero?
The rows represent the Circular Flow of Income. Flows move in a zero sum space – i.e. ‘everything comes from somewhere and everything goes somewhere’ (Godley & Lavoie, pg. 6). Every component in the matrix must have an equivalent component elsewhere. Therefore flows must always equal zero e.g. consumption is a receipt of money by business but a payment by households.
Q.2 Write out an explanation for each row.
§ Consumption – In each period, the households consume either their disposable income or the wealth they have accumulated in previous periods or both. Consumption therefore must be some proportion alpha of the flow of disposable income and the opening stock of money.
§ Government Expenditure – The government buys services and pays for them with money (-Gd). Production companies/business sector receive this money in return for services rendered (+Gd). Thus this row will always sum to zero.
§ Output – In this case output is a positive flow (though not of cash) for the business sector as goods and services are produced within this sector thus creating a profit. For the households, Output is a negative flow as they are ultimately the ones producing the output.
§ Factor Income – The wage bill is denoted as a wage rate (W) times employment (N). The production sector supplies services to the household sector and the government and also demands a volume of employment at a wage rate which is exogenously determined. The s and d denote ‘supply’ and ‘demand’. Households earn income (+W.Ns) while the production sector pays employees (-W.Nd), thus the row also sums to zero.
§ Taxes – Households who earn income are subject to tax on their wages (-Td) while the government earns taxes as receipts from each employee (+Td). Again this row will sum to zero.
§ Change in money stock – Money (H) is a liability for the government, i.e. it is public debt or the debt of the government. On the other hand, money (H) is an asset for the household as it represents their accumulated wealth at a particular point in time. +change Hs in the Government sector is given by the difference between government receipts and expenditures in that period. Because there are no tangible assets in this matrix, additions to cash holdings constitute the saving of the households.
* Alex, Martina, Mark,Sinead and Jason.
* PBL - exercise & presentation was done on the Multiplier effect
First post, answers to Problem 4:
EC6012 – Problem 4
Q.1.1 Why must the Vertical Columns sum to zero?
They describe the sums of money that actually change hands and therefore represent a system of accounting identities. The change in the amount of money held in one sector must always equal the difference between receipts and payments in the other sectors.
Q.1.2 Why must the Horizontal Rows sum to zero?
The rows represent the Circular Flow of Income. Flows move in a zero sum space – i.e. ‘everything comes from somewhere and everything goes somewhere’ (Godley & Lavoie, pg. 6). Every component in the matrix must have an equivalent component elsewhere. Therefore flows must always equal zero e.g. consumption is a receipt of money by business but a payment by households.
Q.2 Write out an explanation for each row.
§ Consumption – In each period, the households consume either their disposable income or the wealth they have accumulated in previous periods or both. Consumption therefore must be some proportion alpha of the flow of disposable income and the opening stock of money.
§ Government Expenditure – The government buys services and pays for them with money (-Gd). Production companies/business sector receive this money in return for services rendered (+Gd). Thus this row will always sum to zero.
§ Output – In this case output is a positive flow (though not of cash) for the business sector as goods and services are produced within this sector thus creating a profit. For the households, Output is a negative flow as they are ultimately the ones producing the output.
§ Factor Income – The wage bill is denoted as a wage rate (W) times employment (N). The production sector supplies services to the household sector and the government and also demands a volume of employment at a wage rate which is exogenously determined. The s and d denote ‘supply’ and ‘demand’. Households earn income (+W.Ns) while the production sector pays employees (-W.Nd), thus the row also sums to zero.
§ Taxes – Households who earn income are subject to tax on their wages (-Td) while the government earns taxes as receipts from each employee (+Td). Again this row will sum to zero.
§ Change in money stock – Money (H) is a liability for the government, i.e. it is public debt or the debt of the government. On the other hand, money (H) is an asset for the household as it represents their accumulated wealth at a particular point in time. +change Hs in the Government sector is given by the difference between government receipts and expenditures in that period. Because there are no tangible assets in this matrix, additions to cash holdings constitute the saving of the households.
Monday, March 5, 2007
Keynes Summary of Chapter 7 - The Meaning of Saving and Investment
The purpose of The General Theory is to address the question as to what determines the employment of the available resources in the monetary-entrepreneur economy. It is the firm, as the entrepreneurs’ entity, which employs resources that is the key to addressing this issue. Keynes highlights profit as the motivating factor in this economy. He had to see demand from the sellers and buyers point of view and to go from the individual seller and the individual buyer to the economy as a whole. This involved Keynes establishing the exact relationship between an income (and hence savings and investment) and an output in any period.
The theory of the supply of output as a whole expressed in terms of the employment of the resources required to produce the output as a whole makes up the supply side of Keynes theory of employment. Based on the idea that firms undertake production to sell output at a profit to consumers and investors.
In order to formulate the demand for output as a whole Keynes separated the demand for goods and services into those purchased for consumption and those purchased for investment purposes.
Keynes placed expectations at the center of his analysis both of production and of investment. Time usually passes between the seller forming expectations and the buyer deciding to buy the output. For this reason the two aspects of demand may be different.
Income as a stream over time cannot be continuously used for immediate consumption purposes unless people are to live on a day to day basis. Part of current income is therefore set aside for immediate consumption and part for future production and consumption. To form his theory of the demand for output in terms of employment he measures consumption and income in terms of wage-units. Expenditure for consumption purposes comes directly out of income while expenditure for investment comes from past and present savings. The entrepreneur must incur certain costs in order to acquire capital for investment. It is necessary to pay a price for the commodity if it is being purchased from another entrepreneur or incur the costs of directly employed factors and of other inputs if the entrepreneur produces the capital himself. Taking this into consideration the entrepreneur must have access to the necessary financial means to pay for these outlays and must insure the expected yield is higher than outlay.
Income proper is equal to the value of output but when you take costs such as user costs into consideration it is based on net income that the entrepreneur decides what to spend on consumption. A persons ability to consume depends on his income and a decision to not consume now is seen as a decision to save. Saving allows the individual to have provisions in the future, the amount of this provision depends on the individuals time preferences.
Keynes only takes expenditure on newly produced output for investment purposes into account and proposes that the “exchange of old investments” and “creation and discharge of debts” cancels out when looking at the investment for the economy as a whole. Keynes proposes that investment has to be induced while he says that consumption is a “habitual propensity” limited by income. The inducement for investment is the expectations of a profitable return on the output rather than a desire to have output available for future consumption.
The point of effective demand for the firm is the point at which a particular level of production and employment offer the maximum attainable profit levels. Keynes and Robertson both take an increase of savings over investment to mean that income is falling even though they phrase it differently while an increase of investment over savings is said to induce entrepreneurs to increase both employment and output.
Obviously with a change in output and employment there will be a change in wage-units i.e. money wage of a labour unit and therefore distribution of this asset amongst borrowers and lenders. “Forced saving” needs to be compared against a standard rate of saving and Bentham when dealing with this concept was looking at an increase in the quantity of money and a full employment scenario.
Keynes believes the principle that saving always involves investment or there cannot be investment without saving to be a sounder view than there can be investment without saving. To show this he states no one can save unless they first own an asset or no one can acquire an asset unless someone parts with their asset or produces an asset of that value.
Saving and spending are two sided affairs. What one individual spends becomes another persons’ income and therefore allows that individual to save a part of his income. If one person consumes less to save more this affects the savings levels of another so the economy as a whole does not benefit from such actions. In regards to the monetary economy money is seen to affect motives and decisions. Keynes notes that the amount of money people hold is dependant on their incomes and prices of securities primarily which is seen as the natural alternative to money. Income, prices and the amount of money the bank creates are all interlinked and this is the main proposition of the monetary theory. Basic economic theory highlights the fact that there cannot be a buyer without a seller or vice versa. The individual looks at his demand as a one sided transactions where as in the case of formulating economic theory this is not the case for the aggregate.
The theory of the supply of output as a whole expressed in terms of the employment of the resources required to produce the output as a whole makes up the supply side of Keynes theory of employment. Based on the idea that firms undertake production to sell output at a profit to consumers and investors.
In order to formulate the demand for output as a whole Keynes separated the demand for goods and services into those purchased for consumption and those purchased for investment purposes.
Keynes placed expectations at the center of his analysis both of production and of investment. Time usually passes between the seller forming expectations and the buyer deciding to buy the output. For this reason the two aspects of demand may be different.
Income as a stream over time cannot be continuously used for immediate consumption purposes unless people are to live on a day to day basis. Part of current income is therefore set aside for immediate consumption and part for future production and consumption. To form his theory of the demand for output in terms of employment he measures consumption and income in terms of wage-units. Expenditure for consumption purposes comes directly out of income while expenditure for investment comes from past and present savings. The entrepreneur must incur certain costs in order to acquire capital for investment. It is necessary to pay a price for the commodity if it is being purchased from another entrepreneur or incur the costs of directly employed factors and of other inputs if the entrepreneur produces the capital himself. Taking this into consideration the entrepreneur must have access to the necessary financial means to pay for these outlays and must insure the expected yield is higher than outlay.
Income proper is equal to the value of output but when you take costs such as user costs into consideration it is based on net income that the entrepreneur decides what to spend on consumption. A persons ability to consume depends on his income and a decision to not consume now is seen as a decision to save. Saving allows the individual to have provisions in the future, the amount of this provision depends on the individuals time preferences.
Keynes only takes expenditure on newly produced output for investment purposes into account and proposes that the “exchange of old investments” and “creation and discharge of debts” cancels out when looking at the investment for the economy as a whole. Keynes proposes that investment has to be induced while he says that consumption is a “habitual propensity” limited by income. The inducement for investment is the expectations of a profitable return on the output rather than a desire to have output available for future consumption.
The point of effective demand for the firm is the point at which a particular level of production and employment offer the maximum attainable profit levels. Keynes and Robertson both take an increase of savings over investment to mean that income is falling even though they phrase it differently while an increase of investment over savings is said to induce entrepreneurs to increase both employment and output.
Obviously with a change in output and employment there will be a change in wage-units i.e. money wage of a labour unit and therefore distribution of this asset amongst borrowers and lenders. “Forced saving” needs to be compared against a standard rate of saving and Bentham when dealing with this concept was looking at an increase in the quantity of money and a full employment scenario.
Keynes believes the principle that saving always involves investment or there cannot be investment without saving to be a sounder view than there can be investment without saving. To show this he states no one can save unless they first own an asset or no one can acquire an asset unless someone parts with their asset or produces an asset of that value.
Saving and spending are two sided affairs. What one individual spends becomes another persons’ income and therefore allows that individual to save a part of his income. If one person consumes less to save more this affects the savings levels of another so the economy as a whole does not benefit from such actions. In regards to the monetary economy money is seen to affect motives and decisions. Keynes notes that the amount of money people hold is dependant on their incomes and prices of securities primarily which is seen as the natural alternative to money. Income, prices and the amount of money the bank creates are all interlinked and this is the main proposition of the monetary theory. Basic economic theory highlights the fact that there cannot be a buyer without a seller or vice versa. The individual looks at his demand as a one sided transactions where as in the case of formulating economic theory this is not the case for the aggregate.
Keynes Summary of Chapter 6 - Income,Income, Saving and Investment
Income
To comprehensively define income we first state:
A – Sales, A1 – cost of sales, G – Capital Equipment. Some part of A+G-A1 will pertain to Capital Equipment before current period. To define income of current period, we deduct from A+G-A1 an amount that refers to value given by equipment from previous period. Calculating said sum enables us to define income. There exists two methods for attaining such: one (i) pertains to production; the other (ii) to consumption.
(i) We define G as net result of maintenance and depreciation for capital equipment during production of output. B’ is that spent on maintenance even if not used in production. Having spent B’, G’ is the worth of it at period end i.e G’ – B’ is, assuming its’ not used to produce A, maximum net value conserved from previous period. Further G-A1 is that used to produce A. So (G’-B’)-(G-A1) is U, user cost of A. A’s factor cost, F, is amount paid out to other factors of production. And prime cost of output A is F + U.
Income then is excess of output value over prime cost, and is causally significant for employment. We assume user cost is positive, since it’s negative only when an entrepreneur has increased capital equipment by his own labour. We note aggregate Consumption (C) as ∑A-A1 and aggregate investment (I) as ∑A1-U. And –U is an entrepreneurs investment (with U his disinvestment) relating to his own equipment. Hence consumption = A and investment = -U where A1=0. Also, effective demand is I an entrepreneur expects to get. An aggregate demand function relates various hypothetical employment quantities to expected output yields; and effective demand is the point on it which becomes effective as, related to supply, it equates to employment level which maximises entrepreneur’s profits.
(ii) Involuntary losses can affect capital equipment values, so-called “Acts of God”. These are “insurable risks”. We define supplementary cost (V) as excess depreciation over user cost. Subtracting income and gross profit from V yields net income and net profit. So, aggregate net income is equal to A – U – V. Windfall loss pertains to changing equipment value, due to unforeseen factors. Net income is crucial when an entrepreneur decides his spending limits. Another is the windfall gain/loss on capital account. His consumption is determined by excess of current account proceeds over sum of prime and supplementary costs – a windfall loss has lesser impact than equivalent supplementary.
Supplementary costs estimation depends on accounting method used, thou its’ expected value is known. The allowance for supplementary costs can be calculated on the basis of current values and expectations at the end of an accounting period. It is more accurate when doubt exists to assign an item to the capital account and to only include what supplementary costs are definitely belong there. Supplementary costs are important because they effect consumption.
Savings and Investment
Any reservations regarding the meaning of savings stems from doubts regarding it’s components, which are simplistically income and expenditure. As income is defined earlier expenditure remains indistinct. Furthermore as expenditure refers to the value of goods sold to consumers during that period it is the definition of a consumer-purchaser which we seek. A distinction between consumer-purchaser and investor-purchaser serves as an inevitable distinction between consumer and entrepreneur thus defining A1 as the value of what one entrepreneur buys from another. Consumption then equals the total sales made during the period less the total sales made by one entrepreneur to another or ∑ (A – A1). With this definition for consumption and with income equalling A –U it follows that saving equals A1 – U with net saving equal to A1 – U – V.
The part of the income which has not passed into consumption being current investment allows us to derive A1 – U as the investment for the period while A1 – U – V allows for impairment in value giving the net investment. Traditional usage of the great majority of economics implies:
Income = value of output,
current investment = the part of current output not consumed
saving = income-consumption
Therefore saving = investment.
In addition to this relationship saving can be defined as a mere residual and the act of investment causes saving to increase by a corresponding amount. This is due to psychological habits which offer the market the opportunity to settle allowing readiness to buy to equal readiness to sell.
To comprehensively define income we first state:
A – Sales, A1 – cost of sales, G – Capital Equipment. Some part of A+G-A1 will pertain to Capital Equipment before current period. To define income of current period, we deduct from A+G-A1 an amount that refers to value given by equipment from previous period. Calculating said sum enables us to define income. There exists two methods for attaining such: one (i) pertains to production; the other (ii) to consumption.
(i) We define G as net result of maintenance and depreciation for capital equipment during production of output. B’ is that spent on maintenance even if not used in production. Having spent B’, G’ is the worth of it at period end i.e G’ – B’ is, assuming its’ not used to produce A, maximum net value conserved from previous period. Further G-A1 is that used to produce A. So (G’-B’)-(G-A1) is U, user cost of A. A’s factor cost, F, is amount paid out to other factors of production. And prime cost of output A is F + U.
Income then is excess of output value over prime cost, and is causally significant for employment. We assume user cost is positive, since it’s negative only when an entrepreneur has increased capital equipment by his own labour. We note aggregate Consumption (C) as ∑A-A1 and aggregate investment (I) as ∑A1-U. And –U is an entrepreneurs investment (with U his disinvestment) relating to his own equipment. Hence consumption = A and investment = -U where A1=0. Also, effective demand is I an entrepreneur expects to get. An aggregate demand function relates various hypothetical employment quantities to expected output yields; and effective demand is the point on it which becomes effective as, related to supply, it equates to employment level which maximises entrepreneur’s profits.
(ii) Involuntary losses can affect capital equipment values, so-called “Acts of God”. These are “insurable risks”. We define supplementary cost (V) as excess depreciation over user cost. Subtracting income and gross profit from V yields net income and net profit. So, aggregate net income is equal to A – U – V. Windfall loss pertains to changing equipment value, due to unforeseen factors. Net income is crucial when an entrepreneur decides his spending limits. Another is the windfall gain/loss on capital account. His consumption is determined by excess of current account proceeds over sum of prime and supplementary costs – a windfall loss has lesser impact than equivalent supplementary.
Supplementary costs estimation depends on accounting method used, thou its’ expected value is known. The allowance for supplementary costs can be calculated on the basis of current values and expectations at the end of an accounting period. It is more accurate when doubt exists to assign an item to the capital account and to only include what supplementary costs are definitely belong there. Supplementary costs are important because they effect consumption.
Savings and Investment
Any reservations regarding the meaning of savings stems from doubts regarding it’s components, which are simplistically income and expenditure. As income is defined earlier expenditure remains indistinct. Furthermore as expenditure refers to the value of goods sold to consumers during that period it is the definition of a consumer-purchaser which we seek. A distinction between consumer-purchaser and investor-purchaser serves as an inevitable distinction between consumer and entrepreneur thus defining A1 as the value of what one entrepreneur buys from another. Consumption then equals the total sales made during the period less the total sales made by one entrepreneur to another or ∑ (A – A1). With this definition for consumption and with income equalling A –U it follows that saving equals A1 – U with net saving equal to A1 – U – V.
The part of the income which has not passed into consumption being current investment allows us to derive A1 – U as the investment for the period while A1 – U – V allows for impairment in value giving the net investment. Traditional usage of the great majority of economics implies:
Income = value of output,
current investment = the part of current output not consumed
saving = income-consumption
Therefore saving = investment.
In addition to this relationship saving can be defined as a mere residual and the act of investment causes saving to increase by a corresponding amount. This is due to psychological habits which offer the market the opportunity to settle allowing readiness to buy to equal readiness to sell.
ec6012 PBL exercise 1 Defining term answers
EC6012 – group pbl exercise 05 March 07
Group Members: Alex, Martina, Sinead, Jason and Shane
Wages – financial remuneration accorded to an individual in exchange for performing stated work. It is an income for the individual and expenditure for the employing firm.
Consumption – household expenditure on a range of goods and services. It is an expenditure. Income from buying goods and services. Added value one attains for owning a given asset. It is a transfer for the use of goods.
Rent – amount a firm or an individual will pay to hire an asset for a given period. It is an expenditure. For an individual or a firm, it is classed as an income.
Govt. Expenditure – day to day expenditure by a govt for the running of an economy. It is an expenditure for the govt. For an individual or a firm, it is classed as an income.
Manu Output – total amount of manufacturing goods a firm produces. Output.
Interest Payments – amount paid by a debtor on loans. It is an expenditure. From the perspective of an entity lending finance, it is considered an income. Can be thought of as an output – think banks lending.
Loans – sum of money given or received by lending institutions to firms or individuals on the understanding of agreed lending rates. Both income and expenditure. (Savings is a stock and investment is a flow) Engine of value creation in an economy.
Bank Deposits – sums of money lodged into a banking institute. Income for individual, expenditure for financial firm.
Bonds – fixed long term loans with set repayments given by a corporation or a government. Income for individual, expenditure for financial firm or government.
Equities – item or goods bought purely for investment purposes. Income now, expenditure later.
Money balances – given in exercise. How much money – wealth in the form of readily available purchasing power – consumers and firms actually hold at a given moment.
Group Members: Alex, Martina, Sinead, Jason and Shane
Wages – financial remuneration accorded to an individual in exchange for performing stated work. It is an income for the individual and expenditure for the employing firm.
Consumption – household expenditure on a range of goods and services. It is an expenditure. Income from buying goods and services. Added value one attains for owning a given asset. It is a transfer for the use of goods.
Rent – amount a firm or an individual will pay to hire an asset for a given period. It is an expenditure. For an individual or a firm, it is classed as an income.
Govt. Expenditure – day to day expenditure by a govt for the running of an economy. It is an expenditure for the govt. For an individual or a firm, it is classed as an income.
Manu Output – total amount of manufacturing goods a firm produces. Output.
Interest Payments – amount paid by a debtor on loans. It is an expenditure. From the perspective of an entity lending finance, it is considered an income. Can be thought of as an output – think banks lending.
Loans – sum of money given or received by lending institutions to firms or individuals on the understanding of agreed lending rates. Both income and expenditure. (Savings is a stock and investment is a flow) Engine of value creation in an economy.
Bank Deposits – sums of money lodged into a banking institute. Income for individual, expenditure for financial firm.
Bonds – fixed long term loans with set repayments given by a corporation or a government. Income for individual, expenditure for financial firm or government.
Equities – item or goods bought purely for investment purposes. Income now, expenditure later.
Money balances – given in exercise. How much money – wealth in the form of readily available purchasing power – consumers and firms actually hold at a given moment.
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