Explain the determination of equilibrium level of national income using 'saving and investment approach. Use diagram. Also explain the effects if saving is greater than investment.
According to this approach of
equilibrium, the equilibrium is reached only when Investment(I) equals
Savings(S) because at this level there is no tendency for income and output to
change.
In the diagram the
equilibrium is at E where savings intersects investment curve At this
point, I=S.
When S is more than I , then
the planned inventory would fall below the desired level. To bring back the
Inventory at the desired level, the producers expand the output More
output means more income. Rise in output means rise in I and rise in
income means rise in S. Both continue to rise till they reach E, S=I.
When S is less than I, then
the planned inventory rises above the desired level. To clear the unwanted
increase in inventory, firms plan to reduce the output till S becomes equal to
I.
So, equilibrium takes place
only at point E, when S=I.
According to this approach of
equilibrium, the equilibrium is reached only when Investment(I) equals
Savings(S) because at this level there is no tendency for income and output to
change.
In the diagram the
equilibrium is at E where savings intersects investment curve At this
point, I=S.
When S is more than I , then
the planned inventory would fall below the desired level. To bring back the
Inventory at the desired level, the producers expand the output More
output means more income. Rise in output means rise in I and rise in
income means rise in S. Both continue to rise till they reach E, S=I.
When S is less than I, then
the planned inventory rises above the desired level. To clear the unwanted
increase in inventory, firms plan to reduce the output till S becomes equal to
I.
So, equilibrium takes place
only at point E, when S=I.
