Question

State briefly the two approaches to the determination of income and output.

State two approaches to the determination of equilibrium level of income in an economy.

Answer 1

There are two approaches to the determination of the equilibrium level of income. These are

1. Aggregate demand-aggregate supply approach: According to the aggregate demand-aggregate supply method, the equilibrium level of income and output in the economy is one at which the desired aggregate demand for goods and services equals the aggregate supply. The aggregate demand represents the community's entire desired expenditure (spending). Total wanted expenditure includes planned (desired) consumer goods expenditure by families as well as planned capital goods expenditure by businesses. Aggregate supply is the monetary worth of an economy's overall output of goods and services in a given year. In other terms, aggregate supply equals the value of national product, often known as national income. It is represented as a 45° line that starts at the origin. Thus, the straight line from the origin that forms a 45° angle with the X-axis represents both aggregate supply and national income in monetary terms.
2. Saving-investment approach: An alternative approach to the determination of the equilibrium level of income is the saving-investment approach. According to this approach, the equilibrium level of income is determined at that level where planned investment equals desired/planned saving.