Keynesian cross analysis on income determination in three sector model

1. INCOME DETERMINATION
IN THREE SECTOR MODEL
KEYNESION CROSS
ANALYSIS

2. THREE SECTOR MODEL
COMPONENTS
 CONSUMPTION ( C )
 INVESTMENT ( I )
GOVERNMENT ( G )
TAX [LUMSUM] ( T )
TRANFER PAYMENTS ( TR )

3. GOVERNMENT
OBJECTIVES
Create more jobs
Faster economic growth
Welfare

4. INCOME DETERMINATION – WITH
GOVERNMENT EXPENDITURE AND
WITHOUT TAX
Y = C + I + G
Where C = a + by
Thus Y = a+ by + I + G
Y - by = a + I + G
Y (1 – b) = a+ I + G
Y = 1/1- b * (a + I + G) A = a + I
+ G
So Y = 1/1-b * A

5. INCOME DETERMINATION – WITH
GOVERNMENT EXPENDITURE AND
LUMSUM TAX
Lumsum tax : The which is fixed by the
government and it doesn’t vary with the changes
in income.
The effect of tax : there is fall in the disposable
income of the consumer thus the purchasing
power decreases.

7. INCOME DETERMINATION – WITH
LUMSUM TAX AND TRASFER
PAYMENTS
Transfer payments : These are payments made by the government to
certain sections of society at the cost of the taxpayers. These are one
side since those who receive such payments do not provide
anything to the government.

9. INCOME DETERMINATION IN AN
OPEN ECONOMY

10. Y = C + I+ G+ NX (assuming NX>0)
S = I +G +NX (the only leakage = the sum three injections, assuming away
taxes
No undesired changes ( accumulation or exhaustion ) in stocks

11. TIME FOR QUESTIONS AND DISCUSSIONS

12. THANK YOU