Given: National Income as Y = C + I + G + (X - M). (i) If National Income, without imports and exports, is €1,500m calculate national income if exports are €70m and imports are €100m. Show your workings. (ii) The economist John Maynard Keynes developed the concept of the Multiplier to help understand how an economy works. Explain, using an example, the underlined term.

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Given: National Income as Y = C + I + G + (X - M) - Leaving Cert Economics - Question (b) - 2010

Question (b)

Given: National Income as Y = C + I + G + (X - M). (i) If National Income, without imports and exports, is €1,500m calculate national income if exports are €70m and... show full transcript

Worked Solution & Example Answer:Given: National Income as Y = C + I + G + (X - M) - Leaving Cert Economics - Question (b) - 2010

Step 1

Calculate the level of National Income.

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Answer

To calculate the National Income (Y), we can use the formula:

$Y = C + I + G + (X - M)$

Where:

National Income (without imports and exports) = €1,500m
Exports (X) = €70m
Imports (M) = €100m

First, compute the net exports:

$X - M = €70m - €100m = -€30m$

Now substitute the values into the National Income formula:

$Y = €1,500m + (-€30m)$

This simplifies to:

$Y = €1,500m - €30m = €1,470m$

Thus, the level of National Income is €1,470m.

Step 2

Explain the concept of the Multiplier.

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Answer

The Multiplier effect refers to the concept that an initial change in spending (usually an injection of investment) will lead to a greater increase in overall economic output (National Income).

For example, if the government injects €10m into the economy and the multiplier is 2, then the National Income will increase by:

$ext{Increase in National Income} = ext{Multiplier} imes ext{Injection} = 2 imes €10m = €20m$

This means the total increase in National Income will be €20m, thereby showcasing how an economy can respond to initial fiscal stimuli.

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