Chapter 6 Summary

Chapter 6

Income

Keynes defines income and the factors which determine income. These determinants include sale of output, purchase of output, capital equipment (inventory, working capital, goods in production).

This lead Keynes to the equation of

A+G-A1

Where A is equal to sale of finished output to consumers etc.

G is equal to the working capital,

And A1 equals the cost of the inputs.

Keynes states that in order to define income a deduction must occur. This deduction is for the cost of having and maintaining capital equipment. This deduction is for the income that is not attributable to the present period, but from having a value inherited from previous periods. Keynes has come up with 2 methods for calculating the deduction; these 2 methods are based on production and the other on consumption. This figure can be either connected to voluntary activities or involuntary conditions.

In the deduction method dealing with production, Keynes refers to this as a voluntary activity. He argues that the value of G at the end of the period is determined by the maintenance and possible improvement that was done during the year; however there may be a decrease due to over use. He therefore comes up with the equation

(G’ – B’) – (G – A1)

Where B’ is the value of the maintenance, improvements during the year. G’ the value at the end of the period. (G – A1) is the value of the sacrifice to produce A. this is called the User Cost and is referred to U. The amount paid out for services of production is called the Factor cost. The User Cost + Factor Cost = Prime Cost of Output production.

In defining the deduction for consumption or as Keynes refers to as the involuntary conditions. These include changes in market values, obsolescence, time decay, and catastrophe. These may be unavoidable but they are not necessarily unexpected. These costs he describes as supplementary costs. These costs affect everyone. Keynes defines income like Marshall, as the excess value of finished output sold in the period over the prime cost.

Saving & Investment

Keynes states that savings is an agreed definition. This is the excess of income over expenditure on consumption. Any doubts must be on expenditure or consumption. This must mean the value of goods to consumers during that period, this leads to the problem of defining a consumer, such as consumer – purchaser or investor - purchaser. Keynes comes up with the equation A1 – U, for savings. For net saving for excess net income equals A1 – U – V.

This leads on to the definition of current investment. Keynes states that this is equal to the definition of savings. This is due to the current addition to the value of the capital equipment.

This can be seen through this

Income = value of Output = consumption + investment

Saving = Income – Consumption

Therefore Saving = Investment.