Discuss The Economic Relationship Between Consumption, National Income And Investment

707 words - 3 pages

Discuss the economic relationships between consumption, national income and investment.

Aggregate demand is heavily determined by the state of consumption, the spending on consumer goods and service over a period of time; Furthermore income and investment have a very volatile connection with consumption. National income is the total level of output of a country and is calculated by C+I+G+(X-M)= AD however there is three ways in which we can be interpreted. Firstly The expenditure method is the worth of household spending of goods and services, secondly national output is the amount flowing between goods and services from firms to households; finally there is the national income which is ...view middle of the document...

The government spending more on public sector salaries e.g. teachers and nurses would increase national income as consumption would see an increase. Finally The housing market is a very conclusive factor to determine the state of national income. If houses increase in value there is a larger amount of equity available this can lead to people using equity withdrawal to consume more and the wealth effect takes place here also.

Consumption and investment have very similar factors that effect nation income however take effect in a very different way. Investment is effected by the confidence of the economy, where there is a large increase in spending leads to a larger than proportionate change in the national income, this is known as the multiplier effect. However it is important to know that it will take time for the multiplier effect to take effect and work fully thought the economy. Investment can cause an injection for the economy with businesses investing in capital goods which creates income for workers and they spend this money on goods and services, effecting national income positively. Confidence reiterates this,...

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