Answer to Question #232709 in Macroeconomics for tman

Question

The equality between total production, income and expenditure does not hold if different set of prices are used?

Answer 1

The demand theory states that price has an important role to play in the determination of quantity of commodity demanded in the economy. This price factor is always available for affecting the demand pattern in an economy. Not only the demand theory but supply side variables also have level of prices on top of the chart. Here, price again plays a significant role in the determination of supply.

Hence, variations in the set of prices will definitely affect the income, expenditure and production in an economy. The equality amongst all these three variables won't hold true if different sets of prices will be used. This is so because at a different level of price there will definitely be a different approach for making expenditure on the purchase of commodities based on the persisting income level.