UNIT 11 NATIONAL INCOME DETERMINATION

Key Terms
1. Potential output [Sản lượng tiềm tàng]

• It is the level of output the economy would produce if all factors of

production were fully employed.

2. Consumption [Tiêu dùng]

• Because consumption represents two-thirds of total aggregate spending in

the United Sates, understanding the determinants of consumer spending
is central to any analysis of the U.S. economy’s level of output.

• Consumer spending is largely determined by personal income, income

taxes, consumer expectations, consumer indebtedness, wealth, and the
price level. Since consumption is impossible for most individuals without
income earned from employment or through transfers from business or
government, personal income is by far the most important of these
variables.

• Personal income taxes are also central in that one’s ability to spend
depends not upon the income received but on the income available for
spending.

• Consumption, however, does not have a perfect linear relationship to

disposable income, indicating that other variables influence the decision to
consume. Although less important, consumer confidence, consumer
indebtedness, wealth, and the price level also affect consumer spending in
the short run.

3. Personal disposable income [Thu nhập được quyền dùng cá nhân]

• It is the income households receive from firms, plus transfer payments

received from the government, minus direct taxes paid to the government.

• It is the income that households have, available for spending or saving.

4. Consumption function [Hàm tiêu dùng]

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 • The relationship between consumption and disposable income.

• It shows the level of aggregate consumption desired at each level of

personal disposable income.

5. Marginal Propensity to Consume (MPC) [Thiên hướng tiêu dùng biên]

• The ratio of the change in consumption to the change in disposable

income.

• It is the fraction of each extra pound of disposable income that households

wish to use to increase consumption.

• It is the change in consumption as a result of an additional unit of income.

• It can be written as: MPC = C/Y

- Where C: Consumption

Y: Income

: small change in

• It can be stated as a propensity to consume out of either National

Income or Disposable Income.

6. Marginal Propensity to Save (MPS) [Thiên hướng tiết kiệm biên]

• The ratio of the change in saving to the change in disposable income.

• It is the change in savings as a result of an additional unit of income.

• It may be written as: MPS = S/Y

-Where S: Savings

Y: Income

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 : small change in

• It can be stated as a propensity to save out of either National

Income or Disposable Income.

7. Average Propensity to Consume (APC) [Thiên hướng tiêu dùng trung bình]

• The ratio consumption to disposable income at a given level of income.

• It is the proportion of total income that is consumed and is calculated by

diving total consumption by total income: APC = C/Y

8. Average Propensity to Save (APS) [Thiên hướng tiết kiệm trung bình]

• The ratio of savings to disposable income at a given level of income.

• It is the proportion of total income which is saved and it is calculated by

dividing total saving by total income: APS = S/Y

9. Autonomous Investment [Đầu tư dự định]

• It is capital investment which is unrelated to changes in income levels.

10. Multiplier [Thừa số]

• It is the ratio of the change in output to ther change in autonomous

demand which caused output to change.

• It is written as: k = 1/(1-MPC) = 1/MPS

• The multiplier exceeds 1 because MPC and MPS are positive fractions.

11. Paradox of thrift [Nghịch lý tiết kiệm]

• The paradox of thrift demonstrate that increases and decreases in

consumer’s desire to save, ceteris paribus, affect the economy’s output
level but not its saving level.

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 • It is and economy which is not fully employed, the more thrifty and frugal
households are, the lower will be the level of output and employment.

• This apparent paradox which appears to suggest that SAVING is a “bad”

thing that results from the fact that increased savings on the part of
households will mean a reduction in CONSUMPTION and hence a
decrease in the level of AGGREGATE DEMAND. Since the level of
aggregate demand determines the level of output and associated level of
employment in the simple Income-Expenditure model, this will result a fall
in output..

12. Animal spirits [Tính năng nổ]

• Investment demand depends chiefly on current guesses by firms about

the future demand for their outputs. Since there is no way of knowing for
sure what future demand will be, Keynes argued that investment demand
was likely to fluctuate significantly, being strongly influenced be current
pessimism or optimism about the future --- what he called the ANIMAL
SPIRITS of investors.

13. Gross Domestic Product [Tổng sản phẩm nội

địa]

• Gross Domestic Product (GDP) measures total output in the domestic

economy. Nominal GDP, real GDP, and potential GDP are three different
measures of aggregate output.

• Nominal GDP [GDP danh nghĩa] is the market value of all final goods and
services produced in the domestic economy in a one-year period at
current prices. By this definition:

 Only output exchanged in a market is included (do-it-yourself

services such as cleaning your own room are not included.

 Output is valued in its final form (output is in its final form when no
further alteration is made to the good which would change its
market value)

 Output is measured using current-year prices.

 Real GDP [GDP thực]: Because nominal GDP values are

inflated by prices that change over time, aggregate output is also
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 measured holding the prices of all goods and services constant
over time. This valuation of GDP at constant prices is called real
GDP.

 Potential GDP (trend GDP) [GDP tiềm ẩn]: the maximum

production that can take place in the domestic economy without
putting upward pressure on the general level of prices.
Conceptually, potential GDP represents a point on a given
production-possibility frontier.

14. GDP gap: it is the difference between potential GDP and real GDP. It is
positive when potential GDP exceeds real GDP; and negative when real GDP
exceeds potential GDP.

• A positive gap indicates that there are unemployed resources and the
economy is operating inefficiently within its production-possibility frontier. It
therefore follows that an economy’s rate of unemployment rises as its
GDP gap increases, and falls when the gap declines.

• An economy is operating above its normal productive capacity when there

is a negative gap. The economy’s price level rises when a negative gap
develops.

15. Aggregate Demand [Tổng cầu]

• It is the amount that firms and households plan to spend on goods and
services at each level of income. And Aggregate demand curve
represents the collective spending of consumers, businesses, and
government, as well as net foreign purchases of goods and services, at
different price levels.

• An aggregate demand curve is negatively related to price, holding

constant other factors that influence aggregate spending decision.

• Price, presented as the price level in macroeconomics, affects aggregate

spending because of an interest rate effect, a wealth effect, and an
international purchasing power effect.

 The interest rate effects traces the effect that interest rate levels have upon
aggregate spending. The nominal rate of interest is directly related to the price
level, ceteris paribus. Increases in the price level push up the nominal rate of
interest. Rising interest rates usually will depress interest-sensitive spending.
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 The wealth rate effect relates changes in wealth to changes in aggregate
spending. The market value of many financial assets falls as the price level and
interest rates increase. A higher price level will decrease the household sector’s
net wealth, lower consumer spending, and cause a lower level of aggregate
spending.

 A country’s imports and exports are also affected by a changing price level, i.e.,
by an international purchasing power effect. When the price level increases in the
home country and is unchanged in foreign countries, foreign-made commodities
become relatively less expensive, the home country’s exports fall, its imports
increase, and there is less aggregate spending on the home country’s output.

 An aggregate demand curve shifts when there is a change in variable (other than
price) that affects aggregate spending decisions. Outward shift (shifts outward to
the right) occur when consumers become more willing to spend or there are
increases in investment spending, government expenditures, and net exports.

16. Aggregate Supply: An aggregate supply schedule depicts the

relationship of aggregate output and the price level, holding constant other
variables that could affect supply.

• There is no agreement among economists in the shape of the

aggregate supply curve. It is customary to present three distinct aggregate
supply curves to characterize this disagreement.

• The Keynesian aggregate supply curve is horizontal until it reaches

the economy’s full-employment level of output at which point it becomes
positively sloped.

• The positively sloped aggregate supply curve.

• The classical aggregate supply curve is vertical, indicating that

there is no relationship between aggregate output and the price level.

17. Business Cycles:

• It is a cumulative fluctuation in aggregate output that lasts for several

years. Although recurrent, the duration and intensity of each fluctuation
varies, and the impact of each cycle is widely diffused among a wide array
of businesses.

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 • Points at which aggregate output changes direction are marked by peaks
and troughs. A peak is a point which marks the end of economic
expansion (rising aggregate output) and the beginning of a recession
(decline in economic activity). A trough marks the end of a recession and
the beginning of economic recovery. The time span between troughs and
peaks is classified as an expansionary period (trough to peak) or a
contractionary period (peak to trough).

18. Appreciation of the U.S. dollar

• An increase in the value of the dollar relative to the unit currency of

another nation. One U.S dollar then buys more units of a foreign currency.

19. Autonomous consumption [Tiêu dùng tự định]

• Consumer spending which is unrelated to the receipt of income.

20. Gross exports: The value of domestic production that is sold to other
countries.

21. Gross imports: The value of foreign production that is purchased by the
domestic economy.

22. Gross investment: The sum of residential construction, nonresidential

construction, the purchase of producers’ durable equipment by businesses, and
the net change in business inventories.

23. Induced consumption [Tiêu dùng phát sinh]: An increase in consumer

spending that results from an increase in income.

24. Investment demand curve: A curve that show the relationship between
gross investment and the rate of interest, holding constant other variables that
affect investment spending.

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25. Net exports: Gross exports minus gross imports.

26. Saving function [Hàm tiết kiệm]: The relationship between saving and
disposable income.

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