Economics notes

Gross Domestic Product • •

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Let’s summarize what the circular flow diagram tells us. Households: – sell factor services to firms and receive incomes = Y – spend C on goods and services – save S – pay governments taxes, T – Y=C+S+T Firms: – buy the services of factors of production from households and pay incomes Y – produce goods and services which they sell to households, C, governments, G, other firms (and themselves), I, and the rest of the world, NX. – Y = C + I + G + NX Governments: – collect taxes, T – spend G on goods and services – borrow (or lend) an amount equal to their deficit (surplus) – Government borrowing = G - T – Government saving = T - G The Rest of the World: – spend NX on goods and services – borrow (or lend) an amount equal to their deficit (surplus) – Foreign borrowing = NX How investment is financed – Y=C+S+T – Y = C + I + G + NX – So, S + T = I + G + NX – And, I = S + T - G - NX – S is household (private) saving – T - G is government saving (or dissaving) – -NX is foreign saving

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