lnc5tripleprime - Y = C I G 8 Including foreign trade we...

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Notes 5’’’. National Income Identity We start with Total Income = Total Spending (1) I’ve reversed the order but it’s still the same as before Letting Y be total income and C be consumption spending, and assuming our simple circular flow model, Y = C (2) Now—let households save: Y = C + S (3) In equilibrium—all saving is invested, i.e., S = I (4) and so Y = C + I (5) Now, let government exist and collect taxes, which displace spending or saving: Y = C + I + T (6) Assuming a balanced government budget, i.e.,
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Unformatted text preview: Y = C + I + G ( 8 ) Including foreign trade, we have imports (M), which are “leakages” from the circular flow, and exports (X), which are “injections,” giving Y = C + I + G + X – M (9) Simplifying, letting net exports be NX = X – M, we have Y = C + I + G + NX (10) And substituting GDP for Y, we have, finally, GDP = C + I + G + NX (11) This is the national income identity, in expenditure form....
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