National Income: Where It Comes From and Where It Goes

1. National Income: Where It Comes From and Where It Goes The basic Classical Model of the economy discusses how much the economy produces, who gets the income from production, and how the economy’s resources are allocated among alternative uses.

2. Who Uses the Economy’s Output in an Open Economy? • Households purchase some the economy’s output for consumption, C; • Business firms and households use some of the economy’s output for investment, I; • Governments buy some of the economy’s output for public purposes, G; and • Foreigners purchase some of the economy’s output for consumption, X.

3. Planned Aggregate Expenditures in an Open Economy • Consumption Expenditures • C = Cd + Cf • Investment Expenditures • I = Id + If • Government Expenditures • G = Gd + Gf • Foreign Sector’s Expenditures • X

4. Gross Domestic Product (Y) Y = C + I + G + (X - M) Why ( X - M )? Y = Cd + Id + Gd + X where, Cd = C - Cf, Id = I - If, and Gd = G - Gf M = Cf + If + Gf

5. Saving in a Closed Economy • National Saving (S): the output that remains after the demands of households and the government have been satisfied Y - C - G National Saving is the sum of: • Private Saving: disposable income minus consumption: Y - T - C • Public Saving: T - G

6. Saving in an Open Economy • National Saving (S): the output that remains after the demands of households and the government have been satisfied Y - C - G = I + (X - M) or S = I + (X - M) S - I = (X - M) Net Foreign Investment = Trade Balance