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Explain National Income Determination Through the Two Alternative Approaches. Use Diagram. - Economics

Explain national income determination through the two alternative approaches. Use Diagram.

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Solution

Aggregate demand and aggregate supply approach

The equilibrium level of income is attained only when the aggregate demand is equal to the aggregate supply. It is the level of output where producers plan to produce an amount of good which is equal to consumers’ plans to purchase the amount of good. Thus, equilibrium is struck where the planned output (AS) is equal to the planned expenditure (AD) during a period of time 

Saving and Investment Approach

The equilibrium is determined at a point where the saving and investment are equal to each other, i.e. leakages = injections

In the diagram, SS shows the saving curve and II shows the investment curve, and the investment curve shows autonomous investment. Savings is equal to investment at Point E, where the saving curve SS and the investment curve intersect each other.

Concept: Concept of National Income
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