Why Keynesian Stimulus - Not Supply Side Economics - Is Exactly What We Need

May 14, 2012 3:20 PM ET57 Comments
Hale Stewart profile picture
Hale Stewart

(Click charts to expand)

The above chart shows two important concepts: where we could be and where we are. The difference is called an output gap. The question is how do we fill it?

To answer that questions, let's look at a few important definitions.

Gross national income:

The GNI consists of: the personal consumption expenditures, the gross private investment, the government consumption expenditures, the net income from assets abroad (net income receipts), and the gross exports of goods and services, after deducting two components: the gross imports of goods and services, and the indirect business taxes. The GNI is similar to the gross national product (GNP), except that in measuring the GNP one does not deduct the indirect business taxes.

Or, expressed mathematically:

Gross Domestic Product (GDP) = C + I + G + NX

2. GNP = GDP + Earning of U.S. Citizens and Corporations Abroad - Earnings of Foreign Citizens Working in the United States - Earnings of Foreign Corporations from Operations in the United States

3. Net National Product ((NNP() = GNP - Depreciation

4. Net Investment = Gross Investment (I) - Depreciation

5. National Income (NI) a. NI = NNP - Indirect Business Taxes and Other Adjustments b. NI = Sum of Factor Payments

Eisen, Peter (2000-09-01). Economics (Barron's Business Review Series) (Kindle Locations 1376-1383). Barron's Educational Series. Kindle Edition.

Put another way, gross national income is another measurement of GDP, but from the perspective of consumer's income. It also means that the real GDP chart above comes close to expressing national income. Most importantly, the chart tells us that we should have more income than we currently have. This drop in national income, in turn, lowers demand:

The average income of consumers is a key determinant of demand. As people’s incomes rise, individuals tend to

This article was written by

Hale Stewart profile picture
Hale Stewart spent 5 years as a bond broker in the late 1990s before returning to law school in the early 2000s. He is currently a tax lawyer in Houston, Texas. He has an LLM in domestic and international taxation (MagnaCumLaude). He is the author of the book The Lifetime Income Security Solution. Follow me on Twitter at @originalbonddadYou can read his legal analysis on his law office's blog.

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