National income determination is the process of finding the point where an economy reaches balance, also known as equilibrium. This occurs when Aggregate Demand (AD), representing total planned spending, equals Aggregate Supply (AS), representing the total value of all goods and services produced.

Key points to understand:

• In the Keynesian model, equilibrium happens when total spending (AD) matches total production (AS).
• AD consists of Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (X – M).
• When demand is greater than supply (AD > AS), companies produce more, causing national income to increase.
• When demand is less than supply (AD < AS), companies produce less, causing national income to decrease.
• An economy can reach equilibrium even when unemployment is high, meaning it may not reach full employment.
• Shifts in spending or changes in the multiplier can move the economy to a new level of income.
• This theory explains why governments sometimes use fiscal stimulus programs to boost the economy instead of just letting it run on its own (laissez-faire).