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4.2.3 equilibrium and disequilibrium (marginal and average propensities not required)

Equilibrium National Income

Definition

Equilibrium national income: the level of national income at which total injections equal total leakages, so income has no tendency to change.

Disequilibrium: any level of income at which injections and leakages differ, so income is rising or falling.

The Equilibrium Condition

Equilibrium condition:

I+G+X=S+T+M I + G + X = S + T + M I+G+X=S+T+M
  1. At that point the spending added each period exactly replaces the income withdrawn from the flow.
  2. So the size of the flow, and hence national income, stays constant from one period to the next.
Key Idea
  • Equilibrium is a balance between injections and leakages, not a sign that the economy is at full employment.
  • Income stops changing only when the two sides are equal.

Disequilibrium and Adjustment

  1. If injections > leakages, more is added to the flow than is taken out, so national income rises.
  2. As income rises, leakages rise too, because households save more, pay more tax and buy more imports, until leakages climb to match injections.
  3. If leakages > injections, more is taken out of the flow than is added, so national income falls.
  4. As income falls, leakages shrink until they drop back to match injections.
  5. So the economy adjusts back towards the equilibrium where injections = leakages.
Example
  • In a given year injections total £300bn (I + G + X) while leakages total £250bn (S + T + M).
Injections−Leakages=300−250=50 \text{Injections} - \text{Leakages} = 300 - 250 = 50 Injections−Leakages=300−250=50
  • Injections exceed leakages by £50bn, so more is added than withdrawn and national income rises.
  • As income rises, leakages increase until they too reach £300bn, at which point injections = leakages and income settles at its new, higher equilibrium.
Exam technique
  • State the condition as injections = leakages, then explain the direction of change when they differ.
  • Compare the totals of injections and leakages, not any single flow on its own.
Common Mistake
  • Equilibrium means income is stable, not that the economy is performing well.
  • An economy can sit in equilibrium with high unemployment, so do not equate equilibrium with full employment.
Self review
  • Define equilibrium national income.
  • State the equilibrium condition using injections and leakages.
  • What happens to income when injections exceed leakages, and why?
  • Does equilibrium guarantee full employment?
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Equilibrium national income is the level of income at which total injections equal total leakages. At this point, spending added to the circular flow exactly replaces income withdrawn from it.

The equilibrium condition is:

I+G+X=S+T+M I + G + X = S + T + M I+G+X=S+T+M

Because the two totals are equal, national income has no tendency to rise or fall.

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Equilibrium national income occurs when [     ].

4.2.3 equilibrium and disequilibrium (marginal and average propensities not required) Revision Guide

  1. Intl A Level
  2. /Economics
  3. /4.2.3 equilibrium and disequilibrium (marginal and average propensities not required)

Revision notes for CIE Intl A Level Economics 4.2.3 equilibrium and disequilibrium (marginal and average propensities not required): explanations and worked examples.

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