T. Schelling

Aug 1, 1948

Citations

0

Influential Citations

3

Citations

Journal

The Review of Economics and Statistics

Abstract

THE graphic method of determining the level of income which is consistent with a consumption function and given investment is familiar to most students.1 The method is that of plotting the aggregate demand function (consumption demand function with investment superimposed vertically) against national income; the intersection of this line with a forty-five degree line through the origin indicates the level of income at which income equals assumed investment plus derived consumption. But this forty-five degree line method suffers from the disadvantage that consumption must explicitly be related to the national income or gross national product. It is common nowadays to assume that consumption is related to disposable income, and to assume as well that taxes, government transfer payments, and corporate savings are themselves related to gross national product, so that the consumption-gross national product relationship is a derived one. In the graphic solution as ordinarily presented, a change in the tax structure cannot be assumed without having the shape of the derived consumption-GNP relationship affected. So, where graphic methods are desired, an elaboration that allows separate manipulation of the tax function and the consumption function is of some advantage. This paper will present a graphic method which goes one step further than the forty-five degree line method, that is, one which portrays the solution when consumption is explicitly related to disposable income, the latter being explicitly related to the gross national product.2 The method is simple. We have two relationships, here assumed linear for convenience. One is the consumption-disposable income relationship, in the form C a + bDI, in which the parameter b measures the marginal propensity to consume. The other is the disposable income-gross national product relationship, in the form DI = c + dGNP, where the parameter d measures the marginal ratio of DI to GNP.3 Both these relationships are plotted on Chart i. Measuring GNP along the horizontal

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