4. AN ECONOMIC FORMULA
THAT REPRESENTS THE
FUNCTIONAL RELATIONSHIP
BETWEEN TOTAL
CONSUMPTION AND GROSS
NATIONAL INCOME
5. COSUMPTION AND INCOME:
BASIC ASSUMPTION
PERSONAL OR HOUSEHOLD CONSUMPTION
IS THE MAIN DETERMINANT OF NATIONAL
OR FACTOR INCOME
Y= Cb + ΔC
6.
7. WHERE:
Y= Cb + ΔC
Y= FACTOR INCOME
Cb= BORROWINGS FROM THE ECONOMY’S STOCK OF SAVINGS
ΔC= CHANGE IN CONSUMPTION
8. GIVEN OUR EQUATION, FIRST LET US
PRESUME THAT THE ECONOMY
INITIALLY DISSAVES BY MAKING USE
OF ITS STOCKS OF AVAILABLE SAVING
TO MEET CURRENT CONSUMPTION
NEEDS IN THE ABSENCE OF INCOME
10. AN ECONOMIC FACTOR
THAT, WHEN INCREASED
OR CHANGED, CAUSES
INCREASES OR CHANGES
IN MANY OTHER RELATED
ECONOMIC VARIABLES.
11. THE MULTIPLIER CONCEPT
THE PROCESS OF GENERATING INCOME
THROUGH THE CIRCULAR FLOW EXCHANGE
BETWEEN THE HOUSEHOLDS AND THE
FIRMS IS CALLED MULTIPLIER.
K=
1
1−(𝑀𝑃𝐶)
=
1
𝑀𝑃𝐶
12. WHERE:
K = MULTIPLIER COEFFICIENT
MPC = MARGINAL PROPENSITY TO CONSUME
MPS=1 – MPC = MARGINAL PROPENSITY TO SAVE
K=
1
1−(𝑀𝑃𝐶)
=
1
𝑀𝑃𝐶
13.
14. TAKE NOTE!
ONCE THE CONSUMPTION FROM AN INCREMENT
OF INCOME INCREASES, THE MULTIPLIER WOULD
BE LARGER. FOR INSTANCE, IF THE MPC IS 0.9
AND MPS IS 0.1, THE MULTIPLIER IS 10; IF MPC IS
0.75 AND MPS IS 0.25, THE MULTIPLIER VALUE IS
ONLY 4.
16. WE ALREADY NOTED THAT
THE ADDITIONAL INCOME
THAT THE CIRCULAR FLOW
GENERATES BY THE
MULTIPLIER PROCESS
YIELDS SAVINGS
OUTFLOWS.
17. FACTORS OF CONSUMPTION
THE RELATIVE INFLUENCES OF OTHER
FACTORS AMONG THE CONSUMING
UNITS MAY ALSO DETERMINE
CONSUMPTION SPENDING WHEN
TREATED AS AN AGGREGATE.
