How do you find planned investment from the GDP, and determining the equilibrium GDP of an economy?
Planned investment = planned savings
Thanks so how do you find the equilibrium GDP of the economy.
I was given what the GDP is, then found consumption, savings, MPC, MPS and the planned investment but not sure how to go find the equilibrium GDP!
I believe you want to find GNP such that MPS*GNP = planned investment
To find the planned investment from the GDP and determine the equilibrium GDP of an economy, you can use the expenditure approach within the framework of Keynesian economics. Here's how:
1. Understand the components of GDP:
- Consumption (C): The total spending by households on goods and services.
- Investment (I): The spending on capital goods, such as machinery, buildings, and equipment.
- Government spending (G): The expenditures by the government on public goods and services.
- Net exports (X - M): The difference between exports (X) and imports (M).
2. Calculate the planned investment (I) from the GDP:
- Planned investment refers to the amount of investment spending that businesses intend to undertake.
- It is usually given as a fixed value or a percentage of the GDP.
- If you have the planned investment value, you can directly use that. Otherwise, you may need to refer to economic data or estimates provided by economists or government agencies.
3. Determine the equilibrium GDP using the expenditure approach:
- Equilibrium GDP occurs when the total spending (aggregate expenditure) in the economy matches the total output (GDP).
- At equilibrium, Aggregate Expenditure (AE) is equal to GDP (Y).
- The equation for aggregate expenditure is: AE = C + I + G + (X - M).
- To find the equilibrium GDP, you need to set AE equal to Y: Y = C + I + G + (X - M).
- Substitute the planned investment value (I) you obtained earlier and rearrange the equation to solve for Y.
4. Solve for the equilibrium GDP:
- Substitute the known values for consumption (C), government spending (G), and net exports (X - M) into the equation.
- Rearrange the equation to isolate Y:
- Y - C - G - (X - M) = I
- Y = C + I + G + (X - M)
By following these steps, you can determine the planned investment from the GDP and compute the equilibrium GDP within the Keynesian framework.