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Investment Saving Approach

Determination of equilibrium level of national income can also be explained with the help of investment and saving approach.

Explanation of the Approach

We known that the various factors of production get money  income as a reward for factor services. The money income received from economic activity is partly spent on consumption and the rest is saved. Therefore,

Income = Consumption + Saving

           Y = C + S

Alternatively, the national income of a country is expressed in terms of goods and services produced in a year’s time. The goods produced may comprise consumption and capital goods (investment goods). Therefore,

Income = Consumption + Investment
           Y = C + I

Comparing equation (1) and (2), we get:

                   C + S = C +1

Therefore,        S = I

The equilibrium level of national income is reached when saving equals investment.

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