Question

I8. Why does Total Output Total Expenditure Total Income? Identify the 3 aggregations of GDP and explain what EACH variable is. (17 pts) the Income aggregation (E + B+R+C+I+(G S) E: Employment Income B: Business Owner Income R: Rental Income C: Corporate Income I: Interest Income G: Government Income S: Government Subsidies the Output aggregation (Y ad - C+I+ G+NX) C: Consume expenditure I: Investment

Answer 1

land, Labour Capital, Entrepreneur Production Households Firms Government ( spending Rent Income) Wages & salaries interest Profil foreign Sector Equolity of Production Income & Spending

Considering the definition and domain of economics, economics is essentially concerned with what to produce, how to produce it and how to distribute the products between the various participants. It is important to mention that the prime focus is on production i.e. the total production of goods and services is of major concern to economists. Consequently, the logical sequence is therefore as follows: production creates income (earned by the various factors of production in the entire production process), this income is then spent to purchase the products.
In practice, all three phenomena are happening at the same time: production occurs, income is earned, and all or part of the income is spent on buying the goods and services that are available. So, there is a continuous circular flow of production, income and spending in the economy as shown in the above diagram.

Production
In the production process, each factor of production earns income…
•   landowner earns rent
•   labor earns wages and salaries
•   capital earns interest
•   entrepreneurship earns profit

Income
The four main categories of income are rent, wages and salaries, interest and profit.

Spending
The above-mentioned income is then spent on buying the goods and services that have been produced.
In the mixed economy, the spending is done by the four main sectors that participate in the economy: households, firms, the government and the foreign sector.

In conclusion, Production is undertaken by four factors of production: Land, Labour, Capital and Entrepreneur. Thereafter, these factors earn income in the form of rent, wages & salaries, Interest and profit. And Finally, the phenomena of expenditure takes place by households, firms, government and foreign sector.