Chapter 4: Determination of Income and Employment

Comprehensive vocabulary flashcards covering the key economic concepts and formulas from Chapter 4 on the determination of national income and employment.

Models

Theoretical tools capable of describing the processes which determine the values of macroeconomic variables such as national income, price level, and rate of interest.

Ceteris paribus

A stylisation typical of theoretical exercises which literally means 'other things remaining equal'.

Ex post measures

Actual or accounting values of items like consumption and investment as measured by the activities within the economy in a certain year.

Ex ante measures

The planned or intended values of variables such as consumption, investment, or output of final goods.

Consumption function

A description of the relation between consumption and income, often expressed as $C = \bar{C} + cY$.

Autonomous consumption

The level of consumption that is independent of income, denoted as $\bar{C}$, which takes place even if income is zero.

Induced consumption

The component of consumption that shows dependence on income, represented by the term $cY$ in the consumption function.

Marginal Propensity to Consume (MPC)

The rate of change of consumption as income changes, denoted as $c$ and calculated as $\frac{\Delta C}{\Delta Y}$. It typically lies between $0$ and $1$.

Savings

The part of income that is not consumed, defined by the equation $S = Y - C$.

Marginal Propensity to Save (MPS)

The rate of change in savings as income increases, denoted as $s$ and equal to $1 - c$.

Average Propensity to Consume (APC)

The consumption per unit of income, calculated as $\frac{C}{Y}$.

Average Propensity to Save (APS)

The savings per unit of income, calculated as $\frac{S}{Y}$.

Investment

The addition to the stock of physical capital (machines, buildings, roads) and changes in the inventory of a producer.

Autonomous investment

Investment demand that is assumed to be a positive constant $\bar{I}$ and does not depend on the level of income.

Inventory

The stock of finished goods or output produced which is not sold and remains with the firm.

Inventory investment

The change in inventory, which can be positive (rise in stocks) or negative (depletion of stocks).

Unplanned inventory investment

Changes in inventory that occur when actual sales differ from the planned level of sales, leading to an unintended accumulation or run-down of stocks.

Disposable income

The income remaining for households after taxes have been imposed by the government, expressed as $Y_d = Y - T$.

Aggregate Demand (AD)

The sum total of ex ante consumption expenditure and ex ante investment expenditure in a two-sector model ($AD = C + I$).

Investment multiplier

The ratio of the total increment in equilibrium value of final goods output ($\Delta Y$) to the initial increment in autonomous expenditure ($\Delta A$), expressed as $\frac{1}{1 - c}$.

Paradox of Thrift

The theory stating that if all people in the economy increase the proportion of income they save (MPS), the total value of savings in the economy will either decline or remain unchanged.

Full employment level of income

The level of income where all the factors of production are fully employed in the production process.

Deficient demand

A situation where the equilibrium level of output is less than the full employment level because demand is not enough to employ all factors of production.

Excess demand

A situation where the equilibrium level of demand is higher than the level of output produced at full employment, leading to price increases in the long run.

Effective demand principle

The assumption that in the short run, with fixed prices and perfectly elastic supply, aggregate output is determined solely by the level of aggregate demand.