Equilibrium income

Under equilibrium income refers to the national income and the domestic product Y, wherein the associated demand is equal to this domestic product.

Case of Keynesian models

Assuming a Keynesian model, then a certain production Y leads to an income Y, which in turn triggers consumer demand C. This consumer demand can, however, lead overall to a demand that is greater or less than production / income Y. The equilibrium income can be determined in which production and income on the one hand are equal to the demand triggered by them on the other.

In a closed economy , i.e. without foreign trade , the following applies:

(1) ${\displaystyle Y=C_{0}+C+I+A_{St}}$

The total demand Y is made up of consumption, investment demand and government spending, the government's demand.

Taxes T are charged proportionally to income Y:

                        ${\displaystyle T=t\cdot Y}$

The following applies to Keynesian consumer demand C:

                       ${\displaystyle C=C_{0}+c\cdot (Y-T)}$

In equation (1) there is Y on the left, but Y is also a quantity on the right. How big does the equilibrium income have to be for the equal sign in (1) to apply?

The equilibrium income Y * is the product of the multiplier and the sum of the non-income-related demand variables (autonomous demand):

${\displaystyle Y^{*}={\frac {1}{1-c+ct}}(C_{0}+I+A_{St})}$

${\displaystyle C_{0}}$: Income-independent (autonomous) private consumption : Demand for goods by the state : Investments by entrepreneurs : Tax rate : marginal consumption rate
${\displaystyle A_{St}}$
${\displaystyle I}$
${\displaystyle t}$
${\displaystyle c}$

Are you demanding that government spending be financed entirely through taxes ?

${\displaystyle A_{St}=T}$,

so that government expenditures also become dependent on income Y ( ), then: ${\displaystyle A_{St}=T=t\cdot Y}$

${\displaystyle Y^{*}={\frac {1}{1-c+ct-t}}(C_{0}+I)}$

This Keynesian model can be refined (non-linear consumption function, foreign trade). In addition, instead of Keynesian assumptions, neoclassical assumptions about investment or consumption behavior can of course be made with correspondingly different equilibrium solutions for the domestic product Y.

See also: economic cycle