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Question
Explain national income determination through the two alternative approaches. Use Diagram.
Solution
Aggregate demand and aggregate supply approach
The equilibrium level of income is attained only when the aggregate demand is equal to the aggregate supply. It is the level of output where producers plan to produce an amount of good which is equal to consumers’ plans to purchase the amount of good. Thus, equilibrium is struck where the planned output (AS) is equal to the planned expenditure (AD) during a period of time
Saving and Investment Approach
The equilibrium is determined at a point where the saving and investment are equal to each other, i.e. leakages = injections
In the diagram, SS shows the saving curve and II shows the investment curve, and the investment curve shows autonomous investment. Savings is equal to investment at Point E, where the saving curve SS and the investment curve intersect each other.
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