Keynesian formula
 |
It has been suggested that this article or section be merged with Aggregate Demand. (Discuss) Proposed since January 2010. |
The Keynesian formula is an economic theory developed by the British economist John Maynard Keynes. Keynes argued that the level of output and employment in the economy was determined by aggregate demand or effective demand. In a reversal of Say's Law, Keynes in essence argued that "man creates his own supply," up to the limit set by full employment. Adherents of the Austrian and Monetarist and schools of economic thought are critical of this theory.
Contents |
[edit] Composition of the Keynesian Formula
In scientific notation, the Keynesian Formula consists of the following make-up:
C + I + G + X − M = Y(GDP)
which means:
Consumption + Investment + Government Spending + Exports − Imports = Gross Domestic Product
[edit] Consumption
In Keynesian economics aggregate consumption is total personal consumption expenditure, i.e., the purchase of currently produced goods and services out of income, out of savings (net worth), or from borrowed funds. It refers to that part of disposable income (income after taxes paid and payments received) that does not go to saving.
[edit] Investment
Investment is a term with several closely related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. Literally, the word means the "action of putting something in to somewhere else" (perhaps originally related to a person's garment or 'vestment').
[edit] Government Spending
Government spending or government expenditure consists of government purchases, which can be financed by seigniorage, taxes, or government borrowing. It is considered to be one of the major components of gross domestic product.
John Maynard Keynes was one of the first economists to advocate government deficit spending as part of a fiscal policy to cure an economic contraction. In Keynesian economics, increased government spending is thought to raise aggregate demand and increase consumption.
[edit] Exports
In economics, an export is any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. Export is an important part of international trade. Its counterpart is import.
Export goods or services are provided to foreign consumers by domestic producers. Export of commercial quantities of goods normally requires involvement of the Customs authorities in both the country of export and the country of import.
[edit] Imports
In economics, an import is any good or commodity, brought into one country from another country in a legitimate fashion, typically for use in trade. Import goods or services are provided to domestic consumers by foreign producers. Import of commercial quantities of goods normally requires involvement of the Customs authorities in both the country of import and the country of export.
[edit] GDP
A common measurement of national income.
[edit] Economic Consequences
If the rate of consumption, investment, government spending and/or exports increases, there will be an overall increase in gross domestic product. This will have a resulting effect on aggregate demand, causing it to rise and, thus resulting in the aggregate demand curve shifting outwards. Alternatively, if there was a decrease in the mentioned factors, the result will be a fall in aggregate demand, thus causing and inward shift in the aggregate demand curve.
The Keynesian Formula can be used to track changes in aggregate demand, gross domestic product and what consequence that will have on the price level (inflation). This formula is a tool for analysing macroeconomic performance.
[edit] See also
[edit] References
- Works by John Maynard Keynes at Project Gutenberg
- The Keynesian Revolution
- CBO's Current Budget Projections, Congressional Budget Office, March 2, 2007.
