MacroEconomic Equilibrium

Equilibrium in the Goods Market:
Income Equals Aggregate Expenditure (Y=AE) and
Expenditure Injections Equal Expenditure Leakages (I+G=S+T)

Equilibrium in the goods market may be graphically depicted using a simple macro-model of the relationship between income(Y) and aggregate expenditure(AE), where AE appears on the vertical axis and Y is on the horizontal axis. Equilibrium is depicted as the point where aggregate expenditues (AE) equal income (Y) or, where the AE function crosses the 45-degree line.
A subsidiary equilibrium condition is examined that explains how expenditure injections are equal to expenditure leakages . A 'big-picture' view of this equivalence may be seen with the circular flow diagram . The algebraic derivation may be seen by starting with the orginal equilibrium condition above:

Y = AE [1]

Where: Y = income (GDP)
AE = aggregate expenditure

Aggregate expenditure (AE) is defined as:

AE = C + I + G + X - M [2]

Where: C = consumption expenditures
I = investment expenditures
G = government expenditures
X-M = net exports
= exports (X) less imports (M)

Assume there is a balance of trade (X-M=0) for simplicity.

Income (Y) may be consumed, saved or taxed and is defined as:

Y = C + S + T [3]

Where: C = consumption expenditures
S = savings
T = taxes

Assume that taxes are capitation taxes and are invariant with respect to income.

To obtain the subsidiary equilibrium condition, use equation [1] and substitute equation [2] for AE and equation [3] for Y:

C + S + T = {Y = AE} = C + I + G + X - M [4]

This expression may be restated as

C + S + T = C + I + G + X - M [4a]

Subtracting C from both sides of [4a] and, recognizing that X-M=0 renders the subsidiary equilibrium condition:

S + T = I + G [5]

Where: S + T = expenditure leakages
I + G = expenditure injections

Expenditure injections include investment (I) plus taxes (T). Both sources of expenditure injections are autonomous (exogenous), meaning they are invariant with respect to the level of income. Either source of expenditure injections may increase or decrease, resulting in a change in equilibrium income via the income expansion equation
Expenditure leakages include savings (S) plus taxes (T). Both sources of leakages reduce income available for expenditures. Savings and consumption are interdependent and taxes also affect the relationship between consumption and savings.

Please select a baseline and alternative scenario below:

Select the baseline scenario below:

Autonomous
Consumption (Ca) MPC Government
Expenditure (G) Capitation
Taxes (T) Investment (I)

Alternative Scenario:

Autonomous
Consumption (Ca) MPC Change in
Government
Expenditure ( G) Capitation
Taxes (T1) Investment (I)

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For a discussion of the consumption tax see:
Consumption Taxes

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Equilibrium in the goods market may be graphically depicted using a simple macro-model of the relationship between income(Y) and aggregate expenditure(AE), where AE appears on the vertical axis and Y is on the horizontal axis. Equilibrium is depicted as the point where aggregate expenditues (AE) equal income (Y) or, where the AE function crosses the 45-degree line. A subsidiary equilibrium condition is examined that explains how expenditure injections are equal to expenditure leakages . A 'big-picture' view of this equivalence may be seen with the circular flow diagram . The algebraic derivation may be seen by starting with the orginal equilibrium condition above:
Y = AE	[1]
Where: Y = income (GDP) AE = aggregate expenditure
Aggregate expenditure (AE) is defined as:
AE = C + I + G + X - M	[2]
Where: C = consumption expenditures I = investment expenditures G = government expenditures X-M = net exports = exports (X) less imports (M)
Assume there is a balance of trade (X-M=0) for simplicity.
Income (Y) may be consumed, saved or taxed and is defined as:
Y = C + S + T	[3]
Where: C = consumption expenditures S = savings T = taxes
Assume that taxes are capitation taxes and are invariant with respect to income.
To obtain the subsidiary equilibrium condition, use equation [1] and substitute equation [2] for AE and equation [3] for Y:
C + S + T = {Y = AE} = C + I + G + X - M	[4]
This expression may be restated as
C + S + T = C + I + G + X - M	[4a]
Subtracting C from both sides of [4a] and, recognizing that X-M=0 renders the subsidiary equilibrium condition:
S + T = I + G	[5]
Where: S + T = expenditure leakages I + G = expenditure injections
Expenditure injections include investment (I) plus taxes (T). Both sources of expenditure injections are autonomous (exogenous), meaning they are invariant with respect to the level of income. Either source of expenditure injections may increase or decrease, resulting in a change in equilibrium income via the income expansion equation Expenditure leakages include savings (S) plus taxes (T). Both sources of leakages reduce income available for expenditures. Savings and consumption are interdependent and taxes also affect the relationship between consumption and savings.

Equilibrium in the Goods Market: Income Equals Aggregate Expenditure (Y=AE) and Expenditure Injections Equal Expenditure Leakages (I+G=S+T)

Select the baseline scenario below:

Equilibrium in the Goods Market:
Income Equals Aggregate Expenditure (Y=AE) and
Expenditure Injections Equal Expenditure Leakages (I+G=S+T)