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Government Expenditure

 Government Expenditure

       To begin with we are considering government outlay and to describe it, the above postulations of two sector model excluding government sector in the two sector economy.

       The income determination is as follows:

                                    Y         =          C + I + G

       Similarly, by including government outlay (G), to the saving and investment equation, we obtain,

                                    Y         =          C + I + G

                                    Y         =          C + S,                          (Hence S = Y – C)

Therefore, I + G = S.

Effect on Saving and Investment

       The effect of a tax on saving and investment is also ascertains the symmetry of national earnings as follows:

                                  Y         =          C + I + G

And                            Y         =          C + S+ T

Therefore,                 Y         =          C+ I + G         =          C + S+ T

Otherwise,                 Y         =          I + G               =          S + T

       It is unambiguous from the above equations that when planned investment (I) plus government outlay on goods and services (G) parities planned saving (S) plus tax (T), the symmetry of national earnings is established. I + G are inflows or injections in the national earnings and S + T are outflows or leakages. If they are equal to each other, the national earnings is symmetry.

Four Sector Model: Income Ascertainment In Open Economy

       We shall now present how national earnings is ascertained in an open financial system. For this, we relax the postulations that there are no overseas transactions and government outlay. This means that we shall have to add overseas’ trading, government outlay and taxation in our study. It may be noted that government outlay are like investment for the reason that they hike the demand for goods.

       They are injections in the national earnings. Alternatively, taxes are leakages in the national earnings like savings for the reason that they are likely to lessen the demand for consumer goods. The force of overseas’ trading is alike to that of the government outlay. Exports are introduction for the reason that they enhance the demand for goods in the same financial system. Imports conversely are outflows in the national earnings for the reason they symbolize the supply of goods to the given financial system.

Postulations

       The study of the ascertainment of earnings in an open financial system is based on the following postulations:

  1. The domestic market’s overseas trade is diminutive when compared to total globe’s trade.
  1. There is less than full employment in the fiscal.
  1. The general price level is invariable upto the full employment level.
  1. Exchange rates are stable.
  1. There are no tariffs, trade and exchange limitations.
  1. Gross Exports are ascertained by external dynamics.
  1. Exports (X), Investment (I) and government outlay (G) are self-governing.
  1. Consumption (C), imports (M), Saving (S) and taxes (I) are every a fixed ration of national income (Y) and their relationships with national earnings are linear.

Ascertainment of Equilibrium Level of Income

       Given these postulations, an open financial system is in equilibrium when it’s national earnings (Y). This can be shown in the following equation for the equilibrium level of earnings:

                                    Y         =          E          =          C + I + G + (X – M)

However,
                                    Y         =          C + S+ T

Therefore,
                        C+ S+ T          =          C+ I + G + (X-M)

       In the above study, C+ S+ T is gross national earnings (GNI) and C+ I + G + (X – M) is gross national outlay (GNE). Thus the symmetry level of earnings in a financial system is ascertained when aggregate supply, GNI = GNE, aggregate demand or C+ S+ T = C+ I + G + (X- M).

            This study depicts that in the non presence of overseas trade, the symmetry level of earnings would have been at a higher level, as ascertained by the equality of C + I + G = C + S + T at a point whereas with overseas trade it is at a lower point. There is also a substitute technique for ascertaining the equilibrium level of earnings in an open economy in terms of saving and investment parity.
Correspondingly, C + S + T = C + I + G + (X – M) is written as S + T = I + G + (X – M) or either written as S + T + M = I + G + X.

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