Economics 4

Economics

What is the purpose of `natural rate` for income (Y), income growth (y) and unemployment (U)? Please explain with graph to show your work.

National income is the monetary value of all goods and services produced in an economy within a given period of time, the measurement of national income helps to indicate the economic performance of a country, and also an indicator of social welfare of a countries population. The national income value is also used to compare the economic performance of two countries and also two periods of time in country to indicate the growth rate of an economy. [1]

Unemployment is the percentage measure of unemployed people in an economy and also an indicator of idle resources, as an economy gets near full employment the greater is rate of inflation and the greater is the rate of employment, this is indicated by the Phillips curve and also Keynes model of national income. [2]

According to Keynes Y = C + I + G where Y is national income, C is consumption, I is investment and G is government expenditure. He argued that aggregate demand (agg d) is equal to agg d = C + I + G, and that aggregate demand equal aggregate supply at the equilibrium income level.

y 1                y e                        y2             employment

Aggregate Demand

Economics

Aggregate demand = C + I        + G

Aggregate demand =         aggregate supply

Deflationary gap

Inflationary gap

If the level of full employment is at Y2 then the government will increase its spending so that the aggregate demand increases to achieve the new level of full employment, however an increase in government spending is inflationary, but if we have inflation we expect the rate of employment to be high as depicted by the Phillips curve below [3]

Unemployment

Economics

Prices

Phillips curve

As the rate of inflation increases the level of employment rises, the government will achieve the high levels of employment by increasing spending which will result to an increase in aggregate demand. A country will always try to achieve high levels of national income and high levels of employment but it must consider the inflationary consequences of policies applied. Income growth is an indicator of economic performance of a country and therefore the real rates of income, growth of income and unemployment and important measures that aid in policy formulation.

REFERENCE:

Brian Snow (1997) Macroeconomics: Introduction to Macroeconomics, Rout ledge publishers, UK

[1] Snow (1997)

[2] Snow (1997)

[3] Snow (1997)

Economics