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Explain the national income determination in an economy using saving and investment approach. Use diagram. |
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Answer» Solution :National income is determined in an economy at a point where plant saving equals planned investment. In the above diagram.E is the equilibrium point where SAVINGS equals investment at national income Y. At any output level less than equilibrium output, S `lt` I. It MEANS, there is unplanned decrease in INVENTORIES. To increase inventories to the planned level, producers increase output leading to increase in income. With suchrise in income, saving rises again till S=I at equilibrium E. (Note: Explanation with S `GT` I, Is also acceptable) 
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