Relationship Between Gdp , Consumption

RELATIONSHIP BETWEEN GDP, CONSUMPTION, SAVINGS AND INVESTMENT

GROSS DOMESTIC PRODUCT (GDP) – is the total value of final goods and services produced within a country over a period of time. CONSUMPTION (C) – includes expenditure of households on food, rent, medical expenses… SAVINGS (S) – is an income received by a consumer that that is not spent on the output of firms through consumption expenditure. It is saved for the future. INVESTMENT (I) – is a purchase or investments in capital goods (non-financial product purchases - they are not consumed but used in future production) e.g. machines, buildings, new technology…

1. Relationship between consumption and savings

Income = Consumption + Savings The largest part of total spending is consumption. C = f (Y) If income increases, consumption also increases BUT not as quickly as income. S = f (Y) If income increases, savings also increase BUT at the higher rate than income. Propensity to Consumption (how much income is consumed) PC = Consumption / Income Marginal Propensity to Consumption (how consumption changes with changing income) MPC = Change in Consumption / Change in Income For example, if a household earns one extra dollar of disposable income, and the marginal propensity to consume is 0.65, then of that dollar, the family will spend 65 cents and save 35 cents. Propensity to Savings (how much income is saved) PC = Savings / Income Marginal Propensity to Savings (how savings change with changing income) MPS = Change in Savings / Change in Income For example, if a family earns one extra dollar, and the marginal propensity to save is 0.35, then of that dollar, the family will spend 65 cents and save 35 cents. How is National Income divided in the economy – Keynesians Theory Y=C+S

1

(C / Y) + (S / Y) = 1 ( C / Y) + ( S / Y) = 1 John Maynard Keynes developed a theory of consumption that focused primarily on the importance of people’s disposable income in determining their spending. A rise in real income...