Answer to Question #218122 in Macroeconomics for Devesh Nagar

Question

a). What are the three approaches to measuring economic activity? Why do they give the same answer?

b). Define private saving. How is private saving used in the economy?what is the relationship between private saving and national saving?

Answer 1

Within an economy, there is a circular flow of income and expenditure, with factor income made through the production of products and services and the income spent on the purchase of produced items. The output method, often known as the inventory method, is another name for the product method. This approach calculates the total gross value of final goods and services in various sectors of the economy, such as industry, service, agriculture, and so on, for the current year by calculating total production over a specified time period. The gross domestic product (GDP) is the result. Factor income technique or factor sharing method are other names for the income approach. National income is calculated using this method as the entire sum of factor payments received over a given time period. Land, labor, capital, and entrepreneurship are all production elements. Individuals that supply these essential services are compensated in many ways, including rent, wages/salaries, interest, and profit. For a given period of time, the entire sum of money received by these individuals constitutes the national income. The expenditure method calculates national income as the sum of individual expenditures on personal consumption, business expenditures on private investments, and government expenditures on government purchases. Because production revenue is received as a result of other entities' expenditures on the produced goods and services inside the economy, the result of the expenditure approach should be the same sum as the product method.

The aggregate of home and company savings is referred to as private savings. Savings from the private and public sectors add up to total national savings. They indicate a country's domestic supply of loanable cash. As a result, increased savings equals more money available for economic investment. In essence, private savings refers to the “leftover” income that all private citizens have after paying their taxes and purchasing all of their desired items. The total level of savings in an economy is determined by combining private and public savings.