I
Income is output sold to others for a certain sum A, which consists of an amount A1 (purchase of finished output from others) and G (working capital).
Keynes states it is not suffice to say income equals A+G-A1. Part of A + G - A1 is due to the capital equipment from the previous period. To determine income from the current period there are two possible methods identified, one in relation to production, the other in connection with consumption
1. If the capital equipment had never been used an amount would be spent on maintaining it (B1). G will now be worth G1. Therefore G1-B1 is the value saved had the equipment not been used to produce A. The excess of this value over G-A1 is what has been sacrificed to produce A. This is the user cost of A. This plus the amount paid out by the entrepreneur to other factors of production is the factor cost of A. The sum of both the factor cost and the user cost is the prime cost of A. Therefore income is the excess of the value of finished output over prime cost, which is equal to the quantity the entrepreneur attempts to maximise. Since the income of the rest of the community equals the entrepreneurs factor cost, aggregate income equals (A-U).
Keynes adds for the community as a whole, the aggregate consumption (C) of the period is equal to sum of (A – A1) and aggregate investment (I) is equal to sum of (A1 – U).
2. Secondly the involuntary loss or gain in the value of his capital equipment is examined. These losses often are unavoidable but possibly not unexpected. Keynes defines Supplementary Cost (V) is the excess of the expected depreciation over user cost (U). This cost is deducted from income and gross profit to calculate net income and net profit. However there is also the change in the value of the equipment due to unforeseen changes in market values or extraordinary events. It is called a ‘Windfall Loss’ which is ignored in calculating net income.
The amount of supplementary costs and the amount of windfall loss/gain made on the capital account affects net income. Estimating supplementary costs depends on the choice of accounting method. It can be fixed from the outset or it can be recalculated annually.
Keynes states net-income is not clear. He discards his definition of income in the Treatise on Money. The new definition of net income comes very close to Marshall’s definition of Income and it also corresponds to the money value of Pigou’s definition of the National Dividend.
II
Saving is the excess of income over consumption expenditure. (A1 – U) and net saving for the excess of net income over consumption is equal to A1 – U – V.
Keynes uses his definition of income to lead on to his definition of current investment. The part of income, which has not passed into consumption, is investment. During the same period finished output having a value of A – A1 will have passed into consumption and A1 – U is the addition to capital equipment as a result of the productive activities of the period and is therefore the investment of the period. Similarly A1 – U – V is the net investment of the period.
To summarise;
Income = Value of output = Consumption + Investment
Saving = Income – Consumption
Therefore Saving = Investment
Equilibrium in the market is decided by the free choice of individuals, as it is the amount saving individual decides to save which is equal to the aggregate amount which investing individuals decide to invest.
Income is output sold to others for a certain sum A, which consists of an amount A1 (purchase of finished output from others) and G (working capital).
Keynes states it is not suffice to say income equals A+G-A1. Part of A + G - A1 is due to the capital equipment from the previous period. To determine income from the current period there are two possible methods identified, one in relation to production, the other in connection with consumption
1. If the capital equipment had never been used an amount would be spent on maintaining it (B1). G will now be worth G1. Therefore G1-B1 is the value saved had the equipment not been used to produce A. The excess of this value over G-A1 is what has been sacrificed to produce A. This is the user cost of A. This plus the amount paid out by the entrepreneur to other factors of production is the factor cost of A. The sum of both the factor cost and the user cost is the prime cost of A. Therefore income is the excess of the value of finished output over prime cost, which is equal to the quantity the entrepreneur attempts to maximise. Since the income of the rest of the community equals the entrepreneurs factor cost, aggregate income equals (A-U).
Keynes adds for the community as a whole, the aggregate consumption (C) of the period is equal to sum of (A – A1) and aggregate investment (I) is equal to sum of (A1 – U).
2. Secondly the involuntary loss or gain in the value of his capital equipment is examined. These losses often are unavoidable but possibly not unexpected. Keynes defines Supplementary Cost (V) is the excess of the expected depreciation over user cost (U). This cost is deducted from income and gross profit to calculate net income and net profit. However there is also the change in the value of the equipment due to unforeseen changes in market values or extraordinary events. It is called a ‘Windfall Loss’ which is ignored in calculating net income.
The amount of supplementary costs and the amount of windfall loss/gain made on the capital account affects net income. Estimating supplementary costs depends on the choice of accounting method. It can be fixed from the outset or it can be recalculated annually.
Keynes states net-income is not clear. He discards his definition of income in the Treatise on Money. The new definition of net income comes very close to Marshall’s definition of Income and it also corresponds to the money value of Pigou’s definition of the National Dividend.
II
Saving is the excess of income over consumption expenditure. (A1 – U) and net saving for the excess of net income over consumption is equal to A1 – U – V.
Keynes uses his definition of income to lead on to his definition of current investment. The part of income, which has not passed into consumption, is investment. During the same period finished output having a value of A – A1 will have passed into consumption and A1 – U is the addition to capital equipment as a result of the productive activities of the period and is therefore the investment of the period. Similarly A1 – U – V is the net investment of the period.
To summarise;
Income = Value of output = Consumption + Investment
Saving = Income – Consumption
Therefore Saving = Investment
Equilibrium in the market is decided by the free choice of individuals, as it is the amount saving individual decides to save which is equal to the aggregate amount which investing individuals decide to invest.
1 comment:
Chapter 6
You should define your terms. Remember---you are writing this summary for a smart undergraduate. They will not have seen these symbols before in this context.
This is a much better summary, very close to GROUP 4's work in this chapter as well. My comments on their blog pertain to your summary as well. Good summary.
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