How to Calculate the Equilibrium Level of Income

How to Calculate the Equilibrium Level of Income
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The equilibrium income of an economy is the point where consumers' expected spending matches their actual spending. In other words, companies sell as much of their inventories as they plan to. When consumer's aggregate expenditures start to exceed the gross domestic product, also known as GDP, the GDP rises, and when it exceeds aggregate expenditures, the GDP will drop. In either case, the nation's aggregate income will settle at an equilibrium. Calculate this equilibrium using the function that derives consumption from aggregate income.

Getting Started With Your Calculation

To calculate the equilibrium level of income, you'll need as much information as possible about a country's consumption and aggregate income. This means that you will need to do some research into the country's overall economy. Your equation may become more complicated if you decide to factor in things like inflation.

Calculating the Equilibrium Level of Income

Add the economy's consumption, C, stated in terms of the aggregate income, Y, to the economy's investment, I, which exists independent of Y. For example, if the function determining consumption is C = $200b + 0.8Y, and investment is a constant $400b: $200b + 0.8Y + $400b = $600b + 0.8Y.

Substitute this expression for C + I in the formula Y = C + I, which describes aggregate income in terms of consumption and investment. Continuing from the previous step, this produces the equation Y = $600b + 0.8Y.

Subtract the statement of income. Continuing with the example from the previous steps, subtract 0.8Y, from both sides of the equation. In this case, this produces "Y - 0.8Y = $600b + 0.8Y - 0.8Y," or "0.2Y = $600b."

Divide both sides of the equation by the coefficient of Y, which is in this case 0.2. This produces "0.2Y ÷ 0.2 = $600b ÷ 0.2," or "Y = $3,000b." The economy's equilibrium income is $3,000 billion or $3 trillion.

Using the Information

Once you have this information, you can circle back occasionally and use the formula to determine how a change in any of the factors affects a nation's overall income levels. Over time, this information can be essential in knowing advance how factors like changes in government spending will impact the overall economy and eventually trickle down to affect the members of its population. It's rare that things are ever fully equal, but at least in being aware of the differences between anticipated spending and actual spending, you can learn to spot trends.