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Income and Expenditure Model

Keynesian’s theory was given to understand the Great Depression. The word macro economics is largely based on the concept of National Income and its components. Thus, the economy at the macro level can be improved if the components of the national income are increased so that the national income is also increased. In order to increase the components of national income e. g. GDP, GNP etc it should be noted that the demand and supply in the country should be increased and balanced (Buchanan, 1990).

This increase in the demand and supply will affect the employment level and thus the earnings of the individuals. The main source of increase in the demand is the consumer. Thus we can say that consumers have a great role in reviving the economy at the macro level. This can be said because the consumers contribute around two third of the total spending in US. In this study we will discuss the consumers affecting the demand and supply model. Moreover, we will show an illustrative analysis of the multiplier effect through the analysis of income and expenditure model (Foulks, 2008).

And finally we will be explaining that how the income and expenditure model demonstrate that the economy

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in recession can be revived. ASSUMPTIONS Before continuing this study any further we will make some assumption so as to increase the ease of understanding the topic and the whole study. • We will get rid of the difference between the gross domestic product (GDP) and the net domestic product and will assume that the capital consumption allowance is zero.

• We will assume that the indirect taxes and the statistical discrepancies are zero so that we can eliminate the difference between net domestic income and domestic product. • Our third and final assumption will be about the corporate profits and the net receipts. We will assume these to be zero so that the domestic income exclusive of net taxes is equal to the disposable personal income. An equation has been formed to express the above mentioned assumptions. The equation is stated below: Disposable Net Income + Net Taxes = Domestic Income = Domestic product


The distribution of the total income of the consumer between what he spends and what he saves play an important role in the circular flow and the revival of the economy at the macro level. THE INCOME-EXPENDITURE MODEL According to the income and expenditure model the circular flow in the economy reaches equilibrium only when the total demand of a county is equal to the total supply of the country. If the demand and supply are not equal then problems may occur. For example if the demand is decreased the goods of the producers will be left idle in their warehouses.

As a result they will reduce their production and the circular flow will fall (Khuaja, 2000). On the other hand, if the demand for the foods is increased the producers will be short of finished goods. To overcome this shortage they would increase their production level. Thus, the circular flow will fall. The Keynesians theory is based on these concepts. The Planned Expenditure Schedule The graphs plotted for the planned expenditure schedule in the later sections of this study, show the relationship between the overall planned expenditure of the goods and services and the overall income.

There are four main components of planned expenditure schedule namely consumption schedule, investments, net exports and government purchases. Consumption: The basis for the construction of the planned expenditure schedule is the consumption schedule. In our study we will be assuming the income tax to be nil and the autonomous net taxes to be fixed at $ 100 billion. Thus we will take the impact of consumption when plotting the income and expenditure model or any of its diagrams.

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