Determination of National Income

According to the question, we exclude the government sector, export and import. Therefore the real GDP of this economy can be formulated as Y=C+I or Y=C+S.

The main factor determining the consumption expenditures to be made in a given period is the income level. Along with the increase in income, the desire and purchasing power of households to make consumption expenditures also increases.
This linear and positive relationship between income and consumption expenditures is called consumption function.

Saving function is the relationship between income level and saving. On the other hand, negative saving is the part of the expenditure that exceeds the income.

Autonomous consumption is the portion of consumption expenditures that is
independent of income.

The relationship between the change in income and the change in consumption is called marginal propensity to consume (MPC) and is defined as the ratio of consumption change to income change.

According to our example, consumption expenditures increase by 700 TL in return for increase of every 1,000 TL in income. This means that consumers spend 70 percent of every incremental income they earn:

MPC=700/1000=0.70

MPS=1-MPC, therefore, MPS in our example is 1-0.7=0.3.

Marginal propensity to save is the ratio of the saving change to the income change: (change in savings)/(change in income).

Average propensity to consume is the ratio of consumption expenditures to income: (consumption)/(income).

Average propensity to save is the ratio of savings to income: (savings)/(income).

APC = 4,500/6,000 = 0.75

Since “APS = 1 - APC”, it can be easily calculated as APS = 1-0.75=0.25.

Disposable Income, wealth, expectations and demographic factors.

Wealth: Wealth is the value of all assets that households have. These include houses,
automobiles, bank accounts, stocks and all kinds of assets such as income expected to be obtained in the future. When the wealth of households increases, the available resources that can be allocated for spending increase, too. As a result, the amount of consumption expenditure at each income level will increase.

Another important factor for determining consumption is the expectations about future income, prices and wealth. For example, if consumers expect a stagnation in the
economy, they expect that they will lose their jobs or their working hours will be reduced. Expectations are subjective opinions about the future. It is therefore extremely difficult to observe and measure them. This causes different problems
in terms of analyzing the effects of expectations on consumption. For this reason, expectation surveys are periodically conducted by policy-makers and expectations are monitored in this way.

When the other factors effecting consumption are assumed to be constant, an increase in population will increase consumption expenditures. Here, both the increase in the number of people in the country and the changes in the age composition of the population have an effect on the consumption expenditures. While the size of the
population affects the location of the consumption function, the age composition of the population has an effect on the slope of the consumption function. Other factors being constant, an increase in the size of population leads to an increase in autonomous
consumption, and therefore the consumption function shifts upward. Considering the age composition of the population, it is known that the young population spends more on durable consumption goods and therefore the young population has a higher marginal propensity to consume than the elderly population.

Investment expenditures cover the expenses incurred by firms in capital goods and inventories. Among the aggregate expenditures, investments are the most volatile one.

Autonomous investments refer to the level of investment expenditures which is determined independent of income. When examining the determination of national
income in an economy, we will assume that the investments are autonomous to simplify the analysis, i.e. independent of the current income level. However, this does not mean that we assume that investments are fixed at a certain level. There are a number of factors that cause investment spending to change. We assume that GDP is not one of these factors. In this case, we can draw autonomous investment expenditures parallel to the horizontal axis. This means that if the income increases or decreases, the autonomous investment expenditures will not be affected.

We have already stated that investment expenditures are made up of expenditures of firms on capital goods and stocks. Capital goods are the equipment they need to carry out production activities and the buildings that firms have. Stocks are composed of final unsold goods. Stocks may be planned or unplanned. For example, a tire firm
will start to have enough winter tires in stock from the autumn to meet the winter tire demand which is expected to intensify in the winter months. Otherwise, the firm’s inadequate stock operation can lead to a reduction in sales and loss of revenue.
For this reason, the investment made by this firm is a planned inventory investment - that is, a stock change. If the firm wants to keep as few unsold winter tires as possible in its stocks until the month of February, and there are still unsold winter tires
in February when it comes, this is an unplanned inventory investment. Unplanned stock changes can be regarded as a sign showing that sales are not as good as expected and that there is too much production in the previous period.

Interest rate is the cost of borrowing funds. Interest Rate: The investment objective of
a firm is to be able to obtain profit from this investment. For this reason, the higher the expected profitability of the investments is, the higher the investment amount will be. The main factor determining whether an investment is profitable is the interest rate. Interest rate can be defined as the cost of borrowing funds. A large part of the investment expenditures made by the enterprises is covered by borrowing. If the cost of borrowing, i.e., interest rate, increases, fewer investment projects will become profitable. Accordingly, when the interest rate increases, investment expenditures
will decrease and when the interest rate falls, investments will increase. 

Factors determining the investment are interest rate, expected profit, technological change, cost of capital goods and capacity utilization.

Import is the amount of goods and services purchased from other countries. Marginal propensity to import is the ratio of change in import to change in income.

The sale of goods and services produced in a country to other countries is called export. There are a number of factors that determine the export volume of a country. These include income levels, preferences and prices of similar goods in other countries. Limitations that governments put on international trade and the exchange rates can also affect the export volume.