Three Sectors Of The Economy

Description Of The Three Sectors Of The Economy

Three sectors of the economy is an economy that consists of: the household sector,corporate sector, and government sectors. economy is referred to as "closed economy". Because in it there is not economic relations with foreign parties

Three sectors in the economy, aggregate expenditures consist of: 1. Household consumption expenditure (C) 2. Investment spending (I) 3. Government consumption expenditure (G)

Referred government consumption expenditure (Government expenditures) here,covering all government spending, which the government directly receiving remuneration, such as paying salaries, purchases of goods and services by the government. to finance spending, the government levies taxes (T) to the public.

In discussing the "national income equilibrium" three-sector economy, fiscal policy is used with a simple tax system, the "system of taxation which taxes not determined by the size of a known level of income tax"

Equilibrium Conditions

Aggregate demand = C + I + G

Y = AD = C + I + G

Assuming there is no "government transfers (Tr)", the amount of disposable income:

Yd = Y - T

Y = Yd + T

Disposable income is used for consumption and the rest is saved, then:

Yd = C + S

then: C + I + G + T = YD

  C + I + G = C + S + T

I + G = S + T <---- terms of the balance

Saving Functions In Three Sectors Of The Economy:

As it is known that the disposable income (Yd) is used to finance consumption expenditures (C) and the rest for savings (S), so that Yd = C + S

In the analysis of the balance of the country's economy, in the threesectors of the economy here, the national income is not an important factor in determining the amount of government spending.

So the amount of government spending is fixed at different levels of national income.

Thus, the aggregate expenditure function in the three sectors of the economy is always parallel to the function of consumption plus investment : à AD = C + I + G

Captions On The Balance

At the time of the country's economy consists of two sectors, the aggregate expenditure function is a C + I. economic equilibrium is reached in the E₀ and national revenue balance is Y₀.

After the government intervened in the activities of the two sectors of the economy through fiscal wisdom (tax = T) and government spending, then the balance of the economy are as follows:

When government imposes income tax which amount is not affected by the level of national income (lump-sum tax), the household consumption expenditure will fall by ∆C at different levels of national income.

So in the presence of a fixed amount of tax collection, then the consumption function will change from C + I to C’ + I , and the balance of the economy occurred in the E' and national revenue balance is equal to Y '

Conjunction with the tax collection, government spending (consumption expenditure) of G, and the aggregate expenditure in the economy to be AD = C + I + G

Function C '+ I + G is parallel to the function C' + I, and this means that the government consumption expenditure is the same magnitude at different levels of national income.

Government interference with the balance achieved in the economy and national income equilibrium E₁ is equal to Y₁.

Besides, Y = C + I + G, the other equilibrium conditions are: savings= investment + tax + expenses.

In the analysis of the balance of the three sectors of the economy, it is assumed that the magnitude tax collected does not depend on the size of national income (lump-sump Tax)

Example :

National Income, Consumption, and Savings Balance

Note :  C = 20 + 0.75Yd

              I = 40

              T = 20

             G = 60

Were :

Based on these data, calculate magnitude national income equilibrium, equilibrium consumption, and saving the equilibrium.

Solution :

1.      National Income Equilibrium

2.      Equilibrium Consumption

3.      Saving The Equilibrium

Proportional Income Tax

Previously been discussed about the government's revenues in the form of "lump-sum tax", which is magnitude tax that does not dependon national income.

Presuppose that the magnitude income tax is not influenced by thelevel of national income is not consistent with the fact that happenedin the economy

In general was largely a higher national income, the greater theamount of taxes collected by the government. magnitude tax collected is comparable to the national income.

The size of the income tax depends on the size of revenue acquired by a taxpayer to have a flexible character, which is flexible to follow the changes in income. If the amount of income, the amount of tax collected is also great, and vice versa

Amount of tax is a function of:

T = ty

T = the amount of tax

t = marginal rate of taxation, which is the ratio between the change inthe amount of income tax amount.

Y = indicates magnitude national income.

Because the rise and fall of national incomes followed a wave of conjuncture, the tax revenue is also up and down following the wave of conjuncture.

When there are waves rising conjuncture (economic growth rose), demand for goods and services rise and the economy headed in the direction of inflation, the tax revenue is increasing.

·         Because of the tax leakage current is the velocity of the national income, the increase in government revenue from taxes means theenlargement of the leak, so the brakes are joined otomaticonjuncture up the wave motion

·         Wave at the conjuncture down (a decline in economic activity) in aggregate demand will fall and be followed by a decline in national income.

·         Decline in national income is a tax system that will not be as powerful as a decrease in national income, if the tax system used is a "lump-sum taxation"

·         The process continues until reaching the new equilibrium national income.

Equilibrium level of national income is achieved in these "higher"when compared to the equilibrium level of national income which was reached on the tax system "lump-sum taxation".

Taxes that can serve as a brake that automatically react to the changes of national income is called "built-instabilizer or" automaticstabilizers ". Because such taxes can contribute to stabilize the wavemotion conjuncture (the ups and downs of economic activity) automatically.