Transcript Document

Keynesian Circular-Flow Analysis
(As Applied to a Wholly Private Economy)
Saving and Investment—and their Equilibration
according to John Maynard Keynes
and according to Dennis Robertson.
Roger W. Garrison
2009
EXPENDITURES
E=Y
45o
INCOME
The INCOME and the EXPENDITURES that make up the circular flow
contain a large common element, namely CONSUMPTION.
Income is used mainly for consumption, but some of it is saved.
Expenditures are mostly for consumption, but some is for investment.
In an income-expenditure equilibrium, C + S must equal C + I.
EXPENDITURES
C+I
C = a + bY
b
1
a
The
Even
In
this
“Keynesian
inwholly
a mixed
private
Cross”
economy,
economy,
marks
spending
the
spending
spot
on
consumption
on
where
investment
incomegoods
goods
equals
typically
accounts
expenditures.
counts
for the
for
about 70%expenditures.
remaining
of GDP. In this wholly private
We
assume
herecount
that, for
initially,
full
economy,
it would
even more.
employment conditions prevail—though
only by accident.
45o
Yeq=Yfe
INCOME
EXPENDITURES
C+I
C = a + bY
a
SAVING,
INVESTMENT
45o
-a
Yeq=Yfe
INCOME
Clearly,issaving
Saving
Investment
represented
spending
equalsisby
investment
determined
the vertical
at
distance
exclusively
the
samebetween
level
by business
of income
the consumption
psychology.
at which
O line.
equation
At
income
each equals
and
andevery
the
expenditures.
45
level
of Saving
income,isit is
negative for low
represented
by the
levels
vertical
of income
separation
and
So now, let’s net out consumption
increasingly
between
C and
positive
C+I. at higher levels.
spending
to
show
that S = I is an
(The 45O line allows income to be
alternative equilibrium condition.
measured vertically as well as
horizontally.)
Y=0
and C=Y give us two points
on the saving equation.
S = -a + (1-b)Y
1-b
Finally,
The
Investment
Just
slope
by the
themselves,
ofshading
isthis
represented
lineon
these
is the
1-b,by
two
S=I
which
a
I graph
together
horizontal
curves
matches
(Swith
and
line.the
I)perfectly
identify
intercept
the
with
(-a),
the
1
allows uson
income-expenditure
shading
tothe
write
Y=E
thegraph.
equilibrium.
saving
INCOME
equation.
SAVING,
INVESTMENT
S = -a + (1-b)Y
I
INCOME
SAVING,
INVESTMENT
S
I
INCOME
With this saving-investment
W
equilibrium, it just so happens
that
S
the demand for labor is just strong
enough to clear the labor Dmarket
at the going wage.
N
RATE OF INTEREST
SAVING,
INVESTMENT
S
S
D
I
INCOME
With this saving-investment
W
equilibrium, it just so happens
that
S
the demand for labor is just strong
enough to clear the labor Dmarket
at the going wage.
N
SAVIING (S)
INVESTMENT (D)
Thethe
As
pre-Keynesian
appropriate
movement in the
understanding
of interest
the
rate clears the
relationship
between
marketsaving
for
loanable
and
investment
the the
W funds, took
S and in
appropriate
form
of the supply
movement
the wagefor
demand
rate
loanable
clears
the
funds.
D
market for labor.
N
I
INCOME
However,
With
Investment
Keynes
lower
didn’t
ifincomes
spending
people
believe
do
and
does
that
become
hence
people
not
In summary
terms:
the
interest
decreased
increase.
would
more
simply
demands
the
“decide
with
increased
for
to save
output,
saving
the
W
rate isthrifty,
noAnd
part
ofconsequences
the
coordinating
demand
(i.e.,
more.”
are
not
decreased
He
good.
forargued
labor
falls.
thatS current
However,
excess
mechanism
thatspending),
brings
saving
wage
inventories
spending
rates
(and
develop
arehence
“sticky
saving)
downward”
the and
and investment
intoand
balance,
D
and
economy
depends
The
increased
not
exclusively
spirals
adjust
thriftiness
to the
upon
new
iscurrent
market
the do
wage
rate
is downward.
too
downwardly
conditions.
Incomes
income,
depicted
are
by
So,
an
S
reduced
=for
upward
unemployment
-alabor-market
+ N(1-b)Y.
until
shiftsaving
in
is,
sticky toi.e.,
allow
persists
once
the
saving
again,
until
equation.
equal
suitable
to investment.
fiscal and
adjustments.
monetary policies are implemented.
RATE OF INTEREST
SAVING,
INVESTMENT
S
S
D
SAVIING (S)
INVESTMENT (D)
In summary
Suppose,
With
market
now,
terms:
conditions
thatboth
people
decide
now
interest
changed,
to
rates
saveand
the
more.
wage
wage
In the
pre-Keynesian
rate
rates
adjusts
respond
soinworld,
that, once
this
increased
again,
conventional
the Wthriftiness
supply
waysand
towould
be depicted
demand
changes
for
in market
labor
as a rightward
areS
shift in the
brought
conditions,
intosupply
allowing
balance.
of D
loanable funds.
investment
to correspond
N
to saving preferences and
allowing the labor market
to find its equilibrium.
Keynesian Circular-Flow Analysis
(Labor-Based Macroeconomics)
Saving and Investment—and their Equilibration
according to John Maynard Keynes
and according to Dennis Robertson.
Roger W. Garrison
2009