Economics Asked on September 2, 2021
$$text{C+S+T = Y = C+I+G+(X-M)}$$
where:
$text{Y}$ is GDP
$text{C}$ is Private consumption
$text{S}$ is Private savings
$text{T}$ is net taxes
$text{I}$ is investment
$text{G}$ is Government’s expenditure on final goods.
How does $text{C+S+T= C+I+G+(X-M)}$?
What do they form? Which one’s aggregate demand and which one’s distribution of income and why are the called so?
A concrete example makes it easier to think about:
Let's say during the week you receive $1000 income. Only 3 things can happen to your $1000:
In this example we've used your $1000 income. The distribution of income (Y = C + S + T) is exactly the same but not just one week of your income, but 52 weeks of everyone's income. So it's a measure of how much income was received across everyone in the economy for the whole year.
Now, all this income had to originate from somewhere, and there are only four possibilities:
Adding these components together gives aggregate demand: C + I + G + (X - M); it's the $ amount of all the goods and services purchased in an economy over one year.
GDP is not a perfect way to measure the size of an economy, but it's probably the most common way. So when we talk about GDP = Y = C + S + T = C + I + G + (X - M), what we know is that GDP can be measured in a few different ways, and that more spending will mean more income (and vice-versa).
Correct answer by stevec on September 2, 2021
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