Question

Explain relationship between production, income, and expenditure in a mechanism of business cycle.

Answer 1

The basic idea during the mechanism of business cycle in relation to production , income and expenditure is that On incurring expenditure on raw materials Production is done that and from income is generated.

FIRSTLY , Expenditure on the purchase raw material is to be done so that the production can be done easily

Secondly,  After incurring expenditure on collection of raw material for production. Goods are produced for income generation

Thirdly, When the production is completed these goods are sell in the market among the buyers and from which income is generated.

Let us create a relationship between Production or Output, Income and expenditure

INCOME will be denoted by ( Y ) - The total money incomeis the value of goods and services Produced in any period of time and expressed in terms of money.

EXPENDITURE  will be denoted by (E) -  It is determined by incurring expenditure on raw material from the production and after paying the remuneration or wages in terms of money to the factors of production. Thus it means total expenditure incurred on goods and services.

PRODUCTION will be denoted by (P) - It is the Physical volume of goods and services Produced after incurring expenditure on factors of production

Thus the money value of real income is the money income which is determined by the prices of goods and services or output. Symbolically,

Y = P.E

Here is diagram which shows relationship between Production , income and expenditure in the mechanism of business cycle.

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