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CHAPTER THREE: DETERMINATION OF NATIONAL INCOME
EQUILIBRIUM

DEFINITION/CONCEPT
AGGREGATE DEMAND: TOTAL VALUE OF SPENDING MADE BY ALL SECTORS IN
THE ECONOMY

AGGREGATE SUPPLY: TOTAL VALUE OF OUTPUT PRODUCED
INJECTIONS: INCOME THAT CAN BE RAISED WITHIN THE CIRCULAR FLOW

LEAKAGES: INCOME RECEIVED BY ALL SECTORS IN THE ECONOMY WHICH IS NOT
DISTRIBUTED WITHIN THE CIRCULAR FLOW
CONSUMPTION: SPENDING GOODS AND SERVICES THAT BEEN PRODUCED WITHIN
THE COUNTRY BY ALL HOUSEHOLDS

AUTONOMOUS CONSUMPTION: SPENDING MADE EVEN THE DISPOSABLE
INCOME ZERO
INDUCED CONSUMPTION: SPENDING INCREASE AS DISPOSABLE INCOME

INCREASE

AVERAGE PROSPENSITY TO CONSUME: PROPORTION OF INCOME USED BY
HOUSEHOLDS FOR CONSUMPTION AT VARIOUS LEVEL OF DISPOSABLE INCOME
MARGINAL PROSPENSITY TO CONSUME: RATE OF CHANGE IN CONSUMPTION

WHEN DISPOSABLE INCOME CHANGES

SAVING: INCOME THAT A HOUSEHOLD DO NOT CONSUME\

AUTONOMOUS SAVING: EXPENDITURE INCURRED BY CONSUMER IF THERE IS NO
INCOME (DISSAVING: C > Yd)

INDUCED SAVING: AMOUNT OF SAVINGS BY HOUSEHOLD DEPENDS ON THE
LEVELS OF INCOME RECEIVED

AVERAGE PROSPENSITY TO SAVE: PROPORTION OF DISPOSABLE INCOME THAT
HOUSEHOLD SAVE

MARGINAL PROSPENSITY TO SAVE: CHANGE IN TOTAL DISPOSABLE INCOME
AND A CHANGE IN TOTAL SAVINGS

AUTONOMOUS INVESTMENT: FIXED INVESTMENT AND INDEPENDENT WITH
NATIONAL INCOME

INDUCED INVESTMENT: INVESTMENT WHICH DEPENDS ON NATIONAL INCOME

INVESTMENT MULTIPLIER: RATIO AN INCREMENT IN NATIONAL INCOME TO AN
INITIAL INCREMENT IN INVESTMENT