National income equilibrium

National income equilibrium refers to a situation when the level of national output (commonly measured as Gross Domestic Product (GDP) is stable over time.

A stable GDP will occur when the aggregate supply in an economy is exactly matched by aggregate demand.

Therefore, equilibrium will occur at the price level that equates aggregate demand and short run aggregate supply.

Example

We can see that aggregate demand is inversely related to the price level, and aggregate supply is positively related.

national income equilibrium

Equilibrium is a Y=100, which is where AD equals AS.

national income equilibrium

Changes in national income

Equilibrium national income (or ‘Y’) can change following a change in AD or AS. Assuming a constant price level, AD can shift to the right, which is an increase, if a component of AD increases. This could include increases in household consumption, investment, government spending or exports.

Video on national income equilibrium

Each of these is determined by many factors:

For example, household spending is affected by real wages, unemployment levels, consumer confidence and interest rates.

Lower interest rates, and income tax, and higher wages could all increase AD. AD can shift to the left - a decrease, if a component of AD decreases. Higher interest and tax rates, and lower wages are likely to reduce AD.

national income equilibrium

On the supply side, AS can increase if there is an increase in productivity, a fall in costs, or a rise in the exchange rate.

Conversely, AS can decrease following a fall in productivity, a rise in costs or a fall in the exchange rate. In all cases, shifts in AD or AS will have an impact on equilibrium Y and the price level.

national income equilibrium
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