The two projects have the same economic impact, in terms of generating income for factors of production and inducing additional expenditures, but the hospital has a higher net present value than the hole in the ground. | © Harry Campbell & Richard Brown School of Economics The University of Queensland BENEFIT-COST ANALYSIS Financial and Economic Appraisal using Spreadsheets Ch 13: Economic Impact Analysis What is the difference between Net Present Value and Economic Impact? Keynes gives the example of land, labour and capital used in two alternative ways: 1. To dig a hole in the ground; 2. To build a hospital. The two projects have the same economic impact, in terms of generating income for factors of production and inducing additional expenditures, but the hospital has a higher net present value than the hole in the ground. The Circular Flow of National Income The National Income Multiplier Consider three models which can be used to derive the national income multiplier: 1. A closed economy, no taxes; 2. A closed economy, with exogenous taxes; 3. An open economy, with endogenous taxes. Symbols: Y = national income; C = consumption expenditure; S = Savings; I = investment expenditure; T = tax . | © Harry Campbell & Richard Brown School of Economics The University of Queensland BENEFIT-COST ANALYSIS Financial and Economic Appraisal using Spreadsheets Ch 13: Economic Impact Analysis What is the difference between Net Present Value and Economic Impact? Keynes gives the example of land, labour and capital used in two alternative ways: 1. To dig a hole in the ground; 2. To build a hospital. The two projects have the same economic impact, in terms of generating income for factors of production and inducing additional expenditures, but the hospital has a higher net present value than the hole in the ground. The Circular Flow of National Income The National Income Multiplier Consider three models which can be used to derive the national income multiplier: 1. A closed economy, no taxes; 2. A closed economy, with exogenous taxes; 3. An open economy, with endogenous taxes. Symbols: Y = national income; C = consumption expenditure; S = Savings; I = investment expenditure; T = tax revenues; G = government expenditure; X = value of exports; M = value of imports Model 1: Closed economy, no taxes Y = C + I + G C = A* + bY, where A* is autonomous consumption expenditure, and investment and government expenditure are exogenous. Substitute to get: Y = A* + bY + I* + G* where “ * ” indicates a variable which is exogenous to the model (. is assumed to be constant). Solve to get: Y = (1/(1-b))(A* + I* +G*), where (1/(1-b) is the national income multiplier. Now dY = (1/(1-b) dG* Model 2: Closed economy, with exogenous taxes Y = C + I + G C = A + b(Y - T) Substitute: Y = A* + b(Y - T*) + I* + G* Solve: Y = (1/(1-b)(A* + I* + G* - bT*) Now: dY = (1/(1-b)(dG* - bdT*) Note that if extra government expenditure is financed by increasing tax revenues, dG* = dT*, dY = dG* . the balanced budget multiplier is 1. Model 3: Open economy, with endogenous taxes Y = C + I + G + X - M Note that X is added because income is generated in production of exports, but the component of .
