Economics: A Complete Introduction: Teach Yourself by Thomas Coskeran

Author:Thomas Coskeran [Coskeran, Thomas]
Language: eng
Format: epub
Tags: Economics
ISBN: 9781444144444
Google: MmDZUcFyzGoC
Amazon: B00A3BO9IU
Publisher: Hachette UK
Published: 2012-11-23T00:00:00+00:00

Figure 9.4 Equilibrium in an open economy with a government

National income

We can use the circular flow of income model in Figure 9.4 to show how we measure an economy’s size or the national income. As income comprises payments to factor services, national income (Y) is the sum of the wages, firms’ profits, interest received on capital and the rent of landowners.

We have seen, though, that in the circular flow of income, one sector’s income is another sector’s spending. National income is, therefore, also the sum of spending. This comprises spending by:

• Households on goods and services produced by firms (C)

• Firms’ spending on investment goods (I)

• Government spending on goods and services (G)

• Overseas residents’ spending on exports less domestic residents’ spending on imports (X – M)

Using our notation: Y = C + I + G + X – M

As each of the different types of spending represents demand, the sum of the spending is aggregate demand. The equation is the national income equation and is important for thinking about national income in an economy. For income to rise, either C, I, G or X must rise or M fall. When discussing a national economy, economists will consider how well each of the different sectors’ spending is performing. It provides ideas about how to improve national income if we know which sectors are spending less.

As national income is equivalent to national spending (or, in symbols, Y ≡ E), it gives us two ways of measuring national income. And a third comes from considering the goods and services the economy produces. We know from microeconomics that their price reflects the total cost of producing them. That cost is, in turn, the sum of payments made to the factors of production used to produce them, namely the wages, interest, capital and rent paid out by firms. The result is that if we add up the value of the goods and services produced the figure matches the sum of the incomes earned. National income, in other words, equals the value of national output. This is the third way of measuring the economy’s size.

Some symbols

Economists use a standard set of letters to identify the different concepts in the circular flow of income model. Those given below, which will be used in this book, are widely, although not universally, used.

Savings (S)

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