Answer to Question #251973 in Macroeconomics for liam

Question

State the three possible relationships between production, income and

spending in macroeconomic theory.

Answer 1

1. Spending equals production. The whole value of all household spending enters the business sector as an inflow, and hence ends up on the revenue side of a company's balance sheet. The overall value of production in an economy is measured by the revenues earned by businesses.
2. Spending equals income. By looking at the household sector, we may complete the circle. The revenue of the household sector is determined by the dollars that flow into it. They must match the amount of money that leaves the household sector—its expenditure.
3. Payments to inputs = production. The inflows and outflows from the firm sector must be balanced. Firms receive revenue, which is then distributed to households.