How does the income level of a country have an impact on influencing Aggregate Supply? Could...

How does the income level of a country have an impact on influencing Aggregate Supply?

Could you porvide examples with your answers? Many Thanks

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Expert Solution

Aggregate supply is affected by the production capacity (availability of capital, materials, labor, etc.) as well as the aggregate demand. Capital accumulation depends on the availability of credit, which depends on the savings rate in the economy. The savings rate in the economy depends on income level. Therefore, higher the income level, higher the savings rate, higher the availability of credit and higher the production capacity.

Also, higher income results in higher aggregate demand. Higher aggregate demand influences firms to supply more, expand capacity and increase aggregate supply. Therefore, higher income level increases aggregate supply by increases aggregate demand.

One example is China and Bangladesh. China's income level is much higher that of Bangladesh. This has resulted in a higher capital accumulation, production capacity and aggregate supply in China as compared to Bangladesh.

Rahul Sunny answered 1 year ago

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