What Would Happen To Equilibrium National Income If There Was A Sustained Rise In Private Investment Spending?

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5 Answers

amber Jhon Profile
amber Jhon answered
Basically, National income can be calculated as follows:

National Income = GDP - Private consumption of fixed capital - Government consumption of fixed capital

Now as,

GDP = C + I + G + (X - M)

Where, I = Gross private domestic investment

Now with the increase in the Private investment spending, there will be an increase in National Income. Moreover, Investment has a positive relation with national income and negative relation with interest, therefore, when investment will increase, income will go up.
amber Jhon Profile
amber Jhon answered
Private investment spending has a direct relation with National income and an indirect relation with interest. Therefore, with the increase in private investment, National income is also increased. In response to this rise, equilibrium of national income is distorted because IS, "Investment and Saving curve also shifts forward and new equilibrium of national income is approached.

Another factor which shows the direct correlation between National income and investment spending is the formula.

National Income = GDP - Private consumption of fixed capital - Government consumption of fixed capital

and GDP = C + I + G + (X - M)

Where, I = Gross private domestic investment

So if the value of GDP is put into the equation of national income then rise in Investment leads to rise in Income.
amber Jhon Profile
amber Jhon answered
There is a direct relationship between the national income and the private spending. Therefore, when there will be an increase in the investments, eventually there will be an increase in the national income. The IS curve which is also known as Investment saving curve, will move forward and new equilibrium of national income will come against interest rate.

The given formula also explains the same concept.

National Income = GDP - Private consumption of fixed capital - Government consumption of fixed capital

and GDP = C + I + G + (X - M)

Where, I = Gross private domestic investment

Now, this formula shows that if there is an increase in I, then there will be an increase in GDP, which will eventually increase the National income.
Anonymous Profile
Anonymous answered
Since national income is the aggregate of goods and services produced by the citizen in a country for a particular period of time, apparently any increase in private expenditure  or investment would automatically have effect on the equilibrium state. A rise private investment spending will also bring about multiplier effect in the economy. This spending will bring about total shift in the equilibrium stage.

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Anonymous