The relationship between national income and price determination is one of the fundamental issues of economic theory. National income is the total value of goods and services produced by a country in a given period. Price determination is the price level formed by the forces of supply and demand in the market. There is a mutual interaction between these two concepts. As the national income increases, the purchasing power of consumers increases and demand increases. This pushes prices up. As prices rise, producers increase supply to make more profit. This increases the national income. However, this process does not go on forever. When prices get too high, inflation occurs and consumers' purchasing power decreases. This reduces demand and drives prices down. When prices fall too low, deflation occurs and producers' profit margins shrink. This, in turn, reduces supply and lowers national income. In this way, a balance occurs between national income and price determination.
In this blog post, we will examine how the relationship between national income and price determination is analyzed, which factors affect this relationship, and how this relationship is reflected in economic policy decisions. First, we will introduce the aggregate demand-aggregate supply model, which is a model that shows the relationship between national income and price determination. Next, we will explain how the aggregate demand and aggregate supply curves in this model are formed and which variables shift these curves. Next, we will discuss the short-run and long-run equilibrium points that emerge in this model and their economic implications. Finally, we will show with examples how this model is used in economic policy decisions and which policy tools have an impact on national income and price determination.