Keynesian formula

From Wikipedia, the free encyclopedia

The Keynesian formula, developed by the British economist John Maynard Keynes. Keynes was an influential economist who was greatly influenced by the events of the Great Depression in the 1930s. He was a great influence upon government economic policy after the Second World War and was involved in the establishment of The World Bank and the International Monetary Fund at the Bretton Woods Conference in 1944. Keynes explained 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. Monetarists have always been critical of Keynes' work.

Contents

[edit] Composition of the Keynesian Formula

The Keynesian Formula consists of the following make-up:

Consumption + Investment + Government Spending + Exports - Imports = Gross Domestic Product

ie C+I+G+X-M= GDP or Y

[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 (the creation of money for government funding, at a heavy price of high inflation and other possibly devastating consequences), 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 affect 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

[edit] External links