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NATIONAL

INCOME
ACCOUNTING

Berdos, Camilon, Cayetano, Dimaculangan, Egar, Galvez, Lozano, Rodriguez, Rosano


GROSS NATIONAL PRODUCT(GNP)

▹ a broad measure of a nation's total economic


activity
2
▹ is an estimate of total value of all the final
products and services produced in a given period
by the means of production owned by a country's
residents
HOW IT WORKS
▹ includes income earned by citizens and companies
abroad, but does not include income earned by
foreigners within the country

▹ The figures used to assess GNP include the 3


manufacturing of tangible goods (cars, furniture and
agricultural products) and the provision of services
(education, healthcare, and business services)

▹ GNP does not include the services used to produce


manufactured goods because their value is included in
the price of the finished product.
WHY IS GNP REQUIRED?

▹ It is helpful in measuring the contribution of a


country’s residents to the flow of goods and
services inside and outside the national territory
4
Five major limitations of Gross
National Product in Economics:

1. Economic versus Social values


National income and product figures measure
the economic rather than the social value of
5
production in terms of market prices of the different
types of goods and services.
A society, for example, may spend identical
amounts on health and tobacco, yet one would
hesitate to say that the social, as distinguished from
the economic, value of these two types of
expenditures is the same.
2. Distribution of National Output
National income accounts as prepared
currently do not tell us how the total output is
distributed amongst the different sections and
members of society.
6

It shows the distribution of income in various


forms like wages, interest, rents, profits etc. but it
does not show the distribution of income to persons.
3. The Value of Leisure
During the last half century the length of
standard work week has fallen from 70 hours a week
to less than 48 hours a week—a development that
shows a considerable improvement in welfare. But
the fact is that the productivity of work—what an
average worker can produce per unit of time—has 7
gone up, so it is possible to work less and yet enjoy
the same or even larger bundle of goods and services.
It is in this sense that GNP figures do not—they
cannot—measure directly the value of leisure to
society.
4. Qualitative Changes in the National Output
Qualitative changes in the national output
produced by changes in prices of goods and services
must be taken care of, if comparisons were to be
made of the national output at different points in
time.
8
It is possible, for instance, that the economy
might be spending the same amount today, as it did 10
years ago say for T.V. sets, but today’s T.V. sets is in a
qualitative sense a vastly different product from the
one produced 10 years ago.
5. The Composition of Output
The various aggregates of the national income
accounting do not tell us much about the composition
of national output except in broad terms of
consumption, investment, government expenditure
etc.
9
The welfare considerations cannot be correctly
known without some knowledge of the composition of
output, for example, the real GNP during war time may
show an increase, this increase does not represent
necessarily an increase in the well-being of the
people.
GROSS NATIONAL PRODUCT (GNP)

GNP includes the following:


1. Consumer goods and services
2. Gross private domestic investment in capital
10
goods
3. Government expenditure
4. Net exports (Exports-Imports)
5. Net factor income from abroad
GROSS NATIONAL PRODUCT (GNP)

𝐺𝑁𝑃 = 𝐶 + 𝐼 + 𝐺 + 𝑋 − 𝑀 + 𝑁𝐹𝐼𝐴
11

where,
𝐶 = Consumption
𝐼 = Investment
𝐺 = Government expenditure
(𝑋 − 𝑀) = Export minus import
𝑁𝐹𝐼𝐴 = Net factor income from Abroad
GROSS NATIONAL
$ Million
PRODUCT (GNP)
Private Consumption 200
Gross Investment 250
𝐺𝑁𝑃 = 𝐶 + 𝐼 + 𝐺 + 𝑋 − 𝑀 + 𝑁𝐹𝐼𝐴 Gov't expenditure 100

Exports 80 12
𝐺𝑁𝑃
= $200 + $250 + $100 + $80 − $30 Imports 30
+ $15
Indirect Business Taxes 10

Subsidies 5
𝑮𝑵𝑷 = $𝟔𝟏𝟓 𝒎𝒊𝒍𝒍𝒊𝒐𝒏 Net Income from abroad 15
CURRENT VS REAL GNP

CURRENT GNP REAL GNP


▹ A value using ▹ A value using a base or
current prices constant price. 13
▹ The growth rate in Real
GNP is theoretically the
growth rate in volume,
thus reflecting the
movement of economic
activities through time
CURRENT VS REAL GNP

CURRENT GNP
▹ = PcQc
14

Where:
Pc = Current Price
Pb = Base Price
CURRENT VS REAL GNP

▹ Economists typically use nominal GDP (the


value of GDP at current price levels) to
compare multiple economies at current
15
levels.

▹ Real GDP (the value of GDP at a base year


price level) is most often used to compare a
single economy’s output at various pints in
time.
CURRENT VS REAL GNP

▹ Real GNP is computer from Current


GNP using a price coefficient.
16

▹ The coefficient is in the form of a


weighted price index for all the
products as based on their relative
importance in the expenditure
basket.
𝑃𝑐
Price Index =
𝑃𝑏
𝑃𝑐
Pb =
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥

17
Then:
Real GNP = PbQc
𝑃𝑐𝑄𝐶
=
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐺𝑁𝑃
=
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥
OTHER CONCEPTS OF
NATIONAL INCOME
ACCOUNTING
OTHER CONCEPTS OF
NATIONAL INCOME ACCOUNTING

▹ Gross Domestic Product


▹ Gross National Product 19

▹ Net National Product


▹ National Income
▹ Personal Income
▹ Disposable Income and
Consumption
GROSS DOMESTIC PRODUCT (GDP)

▹ Most important concept of national


income 2
0

▹ The money value of all final goods


and services produced within the
domestic territory of a country
during a year
IMPORTANCE OF GDP

▹ Used as an indicator of the economic health of a


country

21
▹ Can be used to compare the productivity of various
countries with a high degree of accuracy

▹ Helps a business and government make decisions


GROSS DOMESTIC PRODUCT (GDP)

𝐺𝐷𝑃 = (𝑃 ∗ 𝑄)
2
2

where,
𝑃 = Price of goods and service
𝑄 = Quantity of goods and service
denotes the summation of all
values
GROSS DOMESTIC
PRODUCT (GDP) Production and Price Statistics for 2017

𝐺𝐷𝑃 = (𝑃 ∗ 𝑄)
Product Quantity Price Value
𝐺𝐷𝑃 = ($25 ∗ 200) + ($5 ∗ 160)+ Haircuts 200 $ 25 $ 5,000 2
($50 ∗ 40) 3

Hotdogs 160 $ 5 $ 800


𝑮𝑫𝑷 = $𝟕, 𝟖𝟎𝟎
Bikes 40 $ 50 $ 2,000
Bike Tires 80 $ 3 $ 240
GROSS DOMESTIC PRODUCT (GDP)

Expenditure Approach
- most commonly used GDP formula which is based
on the money spent by various groups that 2
participate in the economy 4

𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + (𝑋 − 𝑀)
where,
𝐶 = Consumption
𝐼 = Investment
𝐺 = Government expenditure
(𝑋 − 𝑀) = Export minus import
GROSS DOMESTIC PRODUCT (GDP)

Income Approach
- takes the total income generated by the goods and
2
services produced
5

𝐺𝐷𝑃
= 𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 + (𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑇𝑎𝑥𝑒𝑠 − 𝑆𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠)
+ 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

𝑇𝐼𝑛𝑐𝑜𝑚𝑒
= 𝐶𝑜𝑚𝑝𝑒𝑛𝑠𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠 + 𝑁𝑒𝑡 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝑅𝑒𝑛𝑡𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒
+ 𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑝𝑟𝑜𝑓𝑖𝑡𝑠 + 𝑃𝑟𝑜𝑝𝑟𝑖𝑒𝑡𝑜𝑟𝑠 ′ 𝐼𝑛𝑐𝑜𝑚𝑒
Using Expenditure Approach
Transfer Payments $ 54
Interest Income $ 150
Depreciation $ 36
Wages $ 67 𝐺𝐷𝑃 = 𝐶 + 𝐼 + 𝐺 + (𝑋 − 𝑀)
Gross Private Investment $ 124
2
Business Profits $ 200
𝐺𝐷𝑃 = $304 + $124 + $156 + $18 6

Indirect Business Taxes $ 74


Rental Income $ 75 𝑮𝑫𝑷 = $𝟔𝟎𝟐
Net Exports $ 18
Net Foreign Factor Income $ 12
Government Purchases $ 156
Household Consumption $ 304
Gross Private Investment $ 124
Using Income Approach Business Profits $ 200

Transfer Payments $ 54 Indirect Business Taxes $ 74

Interest Income $ 150 Rental Income $ 75

Depreciation $ 36 Net Exports $ 18

Wages $ 67 Net Foreign Factor Income $ 12

Gross Private Investment $ 124 Government Purchases $ 156

Business Profits $ 200 Household Consumption $ 304


2
Indirect Business Taxes $ 74
𝑇𝐼 = 𝑊𝑎𝑔𝑒𝑠 + 𝑅𝑒𝑛𝑡𝑎𝑙 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 7
Rental Income $ 75
Net Exports 𝑇𝐼 = $67
$ + 18$75 + $150 + $200
Net Foreign Factor Income $ 12
𝑁𝐼 = $492
Government Purchases $ 156
𝐺𝐷𝑃Household
= 𝑇𝑜𝑡𝑎𝑙Consumption
𝐼𝑛𝑐𝑜𝑚𝑒 + (𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡
$ 304 𝑇𝑎𝑥𝑒𝑠 − 𝑆𝑢𝑏𝑠𝑖𝑑𝑖𝑒𝑠) + 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

𝐺𝐷𝑃 = $492 + $74 + $36

𝑮𝑫𝑷 = $𝟔𝟎𝟐
TYPES OF GDP

▹ Real GDP
- sum of all goods and services produced at constant
prices
- based on a certain base year or the previous year
2
8

▹ Nominal GDP
- Total value of all goods and services produced at
current market prices
- all the changes in market prices during current year
due to inflation or deflation
Calculating Real GDP

First step:

Calculate the nominal GDP, which is the value of


goods and services produced during a given year valued 2
at the prices that prevailed in that same year 9
Calculating Real GDP

In 2002, nominal GDP is:


Item Quantity Price ▹

2002 Expenditure on balls $100


Expenditure on bats $100

Balls 100 $ 1.00 Nominal GDP $200


3
0

Bats 20 $ 5.00 ▹ In 2003, nominal GDP is:


2003
Expenditure on balls $80
Balls 160 $ 0.50 Expenditure on bats $495

Nominal GDP $575


Bats 22 $ 22.50
Methods in Calculating
Real GDP

▹ Base Year Prices Method


- to value each year’s output at the prices of a
base year 31

Suppose 2002 is the base year and 2003 is the


current year.
Calculating Real GDP

Item Quantity Price Expenditure on balls in 2003


valued at 2002 prices is $160.
2002
Expenditure on bats in 2003
Balls 100 $ 1.00 valued at 2002 prices is $110 3
2

Bats 20 $ 5.00
2003
Real GDP in 2003 (base-year
Balls 160 $ 0.50 prices method) is $270.

Bats 22 $ 22.50
Methods in Calculating
Real GDP

▹ Chain-Weighted Output Index Method


- uses the prices of two adjacent years to 3
calculate the real GDP growth rate 3
Methods in Calculating
Real GDP
Step 1: Value last year’s production and current year’s production at
last year’s prices and then calculate the growth rate of
current number from last year to current year.

Step 2: Value last year’s production and current year’s production at 3


current year’s prices and then calculate the growth rate of 4
current number from last year to current year.

Step 3: Calculate the average of the two growth rates. This average
growth rate is the growth rate of real GDP from last year to
current year.

Step 4: Repeat steps 1, 2, and 3 for each pair of adjacent years to link
real GDP back to the base year’s prices.
Calculating Real GDP

Item Quantity Price ▹ Step 1

2002 2002 production at 2002 prices


(GDP in 2002) is $200.
Balls 100 $ 1.00 3
5

Bats 20 $ 5.00 2003 production at 2002 prices


is $270.
2003
Balls 160 $ 0.50 The 2003 growth rate in 2002
prices is 35 percent.
Bats 22 $ 22.50
Calculating Real GDP

Item Quantity Price ▹ Step 2

2002 2002 production at 2003 prices


is $500.
Balls 100 $ 1.00 3
6

Bats 20 $ 5.00 2003 production at 2003 prices


(GDP in 2003) is $575.
2003
Balls 160 $ 0.50 The 2003 growth rate in 2003
prices is 15 percent.
Bats 22 $ 22.50
Calculating Real GDP

Item Quantity Price ▹ Step 3

2002 The 2003 growth rate in 2002 prices


is 35 percent.
Balls 100 $ 1.00 37
The 2003 growth rate in 2003 prices
Bats 20 $ 5.00 is 15 percent.

2003 The average of these two growth


rates is 25 percent.
Balls 160 $ 0.50
Real GDP in 2003 with 2002 as the
Bats 22 $ 22.50 base year is $250.
Calculating Real GDP

Item Quantity Price ▹ Step 4

2002
Real GDP in 2002 is $200.
Balls 100 $ 1.00 3
8

Bats 20 $ 5.00 Real GDP in 2003 is $250.

2003
Balls 160 $ 0.50
Bats 22 $ 22.50
NET NATIONAL PRODUCT

▹ Net national product (NNP) is the monetary value of


finished goods and services produced by a
country's citizens, overseas and domestically, in a
given period (i.e., the gross national product (GNP) 3
9
minus the amount of GNP required to purchase new
goods to maintain existing stock (i.e., depreciation).

▹ Net national product (NNP) is the market value of a


nation's goods and services minus depreciation
(often referred to as capital consumption).
NET NATIONAL PRODUCT
Relation between domestic product
▹ Domestic product concept is based on the production units
located within domestic (economic) territory, operated by
both residents and non-residents.

4
▹ National product concept based on resident and includes 0

their contribution to production both within and outside the


economic territory.

▹ National product = domestic product + residents contribution


outside the economic territory (factor income from abroad) –
non-resident contribution to production inside the economic
territory (factor income to abroad).
NET NATIONAL PRODUCT
formula
The formula for NNP is:

NNP = Market Value of Finished Goods + Market


Value of Finished Services - Depreciation 41

Alternatively, NNP can be calculated as:

NNP = Gross National Product - Depreciation


NET NATIONAL PRODUCT
example

Let's assume Country XYZ's companies, citizens and


entities produce $1 trillion worth of goods and $3 trillion
worth of services this year. The assets used to produce
those goods and services depreciated by $500 billion. 4
2
Using the formula above, Country XYZ's NNP is:

NNP = $1 trillion + $3 trillion - $0.5 trillion = $3.5 trillion


WHY IT MATTERS?

▹ NNP is a measure of how much a country can


consume in a given period. Note that NNP
measures output regardless of where that 4
production takes place (in other words, it 3

includes the value of goods and services that


American companies produce, supply or
create abroad).
THE USE OF NNP

▹ Although the net national product is a key identity in national


accounting, its use in economics research is generally
superseded by the use of the gross domestic or national
product as a measure of national income, a preference which
4
has been historically a contentious topic. Nonetheless, the net 4
national product has been the subject of research on its role
as a dynamic welfare indicator as well as a means of
reconciling forward and backward views on capital wherein
NNP(t) corresponds to the interest on accumulated capital.
Furthermore, the net national product has featured
prominently as a measure in environmental economics such as
within models accounting for the depletion of natural and
environmental resources or as an indicator of sustainability.
NATIONAL INCOME
▹ is the total income accruing to the permanent residents of a
country as a result of engaging in economic activity.

▹ It is the total amount of money in circulation in a country at any 4


one time. 5

▹ National Income is the total wealth gained as a result of


supplying the factors of production.

▹ Simon Kuznets is generally regarded as the father of national


income and fueled the Keynesian revolution of expansionary
fiscal policy.
USES OF NATIONAL INCOME DATA
▹ Use # 1. Population:
■ A higher national income clearly does not mean a higher standard
of living if the extra income is shared among more people. The
standard of living depends on the average real income per head or
per capital — that is, real national income divided by the population.
4
▹ Use # 2. Composition of Output: 6
■ In ancient Egypt productive resources were wasted on building
pyramids. Similarly, a modern society may use a large part of its
resources for military purposes that contribute little to the welfare
of the people. Moreover, societies differ in their needs.
■ For example, a cold country has to use a portion of its productive
capacity just to keep warm. At a particular time much of a
countries output may be used to repair damages due to floods or
earthquakes. Thus, the output that is available for satisfying other
needs will fall.
USES OF NATIONAL INCOME DATA
▹ Use # 3. Distribution of Income:
■ The wealth of a country may belong to only a small number of very rich
people and so a high national income can conceal widespread poverty.
Living standards within a society depend partly on how wealth and
income are shared among the people.
▹ Use # 4. Different National Currencies:
■ In order to compare the national income of different countries, it is
necessary to covert the figures into the same currency. For instance, 4
the United States' figures are in dollars whereas Britain’s figures are in 7
pounds sterling. To compare them, we must either change the former
into pounds of the latter into dollars. This is done by using the
exchange rate at which pounds can be changed into dollars.
■ For example, at a rate of £1 to $2, a UK national income of, say, £100
billion would be expressed as $200 billion. If the USA national income is
then $400 billion, it would be taken as double that of the UK. But this
assumes that £1 can actually buy the same amount of goods in Britain
as it could if changed into $2 and spent in the United States. However,
in reality currency exchange rates are rarely such an accurate
reflection of prices. International comparisons of this kind can
therefore be misleading.
USES OF NATIONAL INCOME DATA

▹ Use # 5. Statistical limitations:


■ Methods of calculation and reliability of national statistics
inevitably vary, particularly between countries at different
stages of economic development. Thus, the welfare of 4
people in a less developed farming community may be 8
underrated by national income figures because production
is based largely on family self-sufficiency and not
measurable in money terms. Even in advanced economies
the measurements can be misleading because they take no
account of non-monetary exercises such as the do-it-
yourself activities of Indian households.
NATIONAL INCOME

There are 3 ways of measuring 4

National Income 9
Income Method
+ Add all incomes in whatever form they are earned , wages ,salaries
,rent ,profit ,interest etc.
- Stock appreciation ( Increased valuation due to inflation )
- Financial services profit ( bank lending - deposit rates )
= Net Domestic Product at factor cost
- Net Factor income ( Factor incomes earned abroad less 5
0
factor income earned in a country and sent abroad )
= Net National Product at factor cost ( National Income ) Exclude
Transfer Payments * Include Payments / Benefit in kind

*Transfer Payments are payments for which no factor of production


is supplied e.g. welfare payments , gifts and inheritances , pocket
money from parents etc.
Benefit in kind is non – monetary payment for supplying a factor e.g.
company car , expense a/c
Output Method
▹ Add all production of goods and services for the year.
▹ Adjustments are the same as for the income method. Remember
only count the added value at each stage of production …….
Avoid double counting
▹ e.g farmer grows wheat € 100 from € 5 seed Added value € 95
▹ miller sells to baker for € 500 € 400 51

▹ who sells to confectioner for € 800 € 300


▹ who sells to customer for € 1000 € 200
Total value of final goods and services.

Intermediate
Final goods
good
Sushi: $1000
Fish: $400

Pay: $1000

Earn: $400 Earn: $1000 - $400 = $600

Value of final goods = $1,000


If value of intermediate and final goods are counted ($400+$1000), it will
be double counting ($400)
Expenditure Method
Simply total up all the different types of expenditure for the year
Y Income = Total National Income
+C Consumption = personal /public spending
+I Investment = spending by business
+G Government = spending by the different government 5
departments 3

+X Exports = spending by foreigners on Irish goods and services


I + G + X are called Injections
-M Imports = spending on foreign goods and services
-T Taxes = money spent on indirect taxation e.g. VAT
-S Subsidies = payment made by a government to a producer
M + T + S are called Withdrawals / Leakages
Consumption Income , lifestyle , domestic circumstances
Investment Rate of interest , economic climate
Government Expenditure Tax collected , infrastructure requirements
Exports Inflation rate, quality of products , value of €
Imports Disposable income , prices , availability of
goods 5
4
Subsidies Income , rate of interest , Dirt tax
Taxation Budgetary requirements, state of
economy
Y = C + I + G + (X – M) - T – S 5
5
Practice

If G = 700 , C = 2,000 , I = 1,000 , X = 1,200 , M = 1,000,


Tax = 250 , Subsidies = 200
(in PHP and 000,000’s are excluded) 5
6
Calculate

National Income
Y= 2,000 + 1,000 + 700 + (1,200 – 1000) – 250 – 200
Y=3,450
PERSONAL INCOME

▹ All of the income collectively received by all of the


individuals or households in a country.

57
▹ Includes compensation from a number of sources
including salaries, wages and bonuses received
from employment or self-employment; dividends
and distributions received from investments; rental
receipts from real estate investments and profit-
sharing from businesses.
SIGNIFICANCE OF PERSONAL
INCOME

▹ It has a large effect on consumer


consumption, and since consumer 5
8
spending drives much of the economy,
national statistical organizations,
economists and analysts track personal
income on a quarterly or annual basis.
PERSONAL INCOME

▹ Personal Income = Private Income – Corporate tax –


Undistributed profit

▹ = National income – Income of govt. (public) sector – 5


Corporate tax – Undistributed profit + All types of 9

transfer incomes

▹ = Domestic income – Income from domestic product


accruing to govt. sector – Corporate tax –
Undistributed profit + NFIA + All types of transfer
incomes
PERSONAL INCOME

▹ All of the income collectively received by all of the


individuals or households in a country.
6
0
▹ Includes compensation from a number of sources
including salaries, wages and bonuses received
from employment or self-employment; dividends
and distributions received from investments; rental
receipts from real estate investments and profit-
sharing from businesses.
DISPOSABLE INCOME

▹ Also known as disposable personal income


▹ Amt. of money that households have available for spending
and saving after income taxes have been accounted for.
61

▹ Formula:
DPI = Personal Income – Personal Income Taxes
Payments
DISCRETIONARY INCOME

▹ Disposable income minus all payments for necessities (e.g.


mortgage, health insurance, food, etc.)
6
2
▹ Portion of disposable income that can be saved or spent on
what the income earner chooses
Marginal Propensity to Consume

▹ Proportion of an aggregate raise in pay that a consumer spends


on the consumption of goods and services
6
3
▹ Formula:
∆𝐶
𝑀𝑃𝐶 =
∆𝐷𝑃𝐼

where: MPC = marginal propensity to consume


C = consumption
DPI = disposable personal income
Marginal Propensity to Save

▹ Proportion of an aggregate raise in pay that a consumer saves


and does not spend on the consumption of goods and services
6
4

▹ Formula:
∆𝑆
𝑀𝑃𝑆 =
∆𝐷𝑃𝐼

where: MPS = marginal propensity to save


S = personal saving
DPI = disposable personal income
CONSUMPTION

▹ Process in which the substance of a thing is completely


destroyed, used up, or incorporated or transformed into
something else
6
5

▹ Consumption of goods and services is the amount of them used


in a particular time period
CONSUMPTION FUNCTION

▹ Also known as Keynesian consumption function


▹ Introduced by British economist John Maynard Keynes
▹ An economic formula representing the functional relationship
between total consumption and gross national income 6
6

▹ Formula:
C = A + MD

where: C = consumption; A = autonomous consumption;


M = marginal propensity to consume;
D = disposable personal income