KEY EQUATIONS

total production

total _ total income expenditure

(2.1)

The fundamental identity of national income accounting states that the same value of total economic activity is obtained whether activity is measured by the production of final goods and services, the amount of income generated by the economic activity, or the expenditure on final goods and services.

Y = C + I + G + NX (2.3)

According to the income-expenditure identity, total income or product or output, Y, equals the sum of the four types of expenditure: consumption, C, investment, I, govern­ment purchases, G, and net exports, NX.

S_pvt =( Y + NFP + TR + INT - T) - C (2.6)

Private saving equals private disposable income less con­sumption, C. Private disposable income equals gross domestic product, Y, plus net factor payments from abroad, NFP, plus transfers, TR, and interest, INT, received from the government, less taxes paid, T.

Sgovt = (T - TR - INT) - G (2.7)

Government saving equals government receipts from taxes, T, less outlays for transfers, TR, interest on government debt, INT, and government purchases, G. Government saving is the same as the government budget surplus and is the negative of the government budget deficit.

S = Spvt + Sgovt = Y + NFP - C - G (2.8) National saving, S, is the sum of private saving and gov­ernment saving. Equivalently, national saving equals gross domestic product, Y, plus net factor payments from abroad, NFP, less consumption, C, and government pur­chases, G.

S = I + CA (2.10)

National saving, S, has two uses: to finance investment, I, and to lend to foreigners (or to acquire foreign assets) an amount that equals the current account balance, CA. The current account balance equals the increase in net foreign assets.

Spvt = I + (-Sgovt) + CA (2.11)

According to the uses-of-saving identity, private saving is used to finance investment spending, I, to provide the government with the funds it needs to cover its budget deficit, -S_govt, and to lend to foreigners (or to acquire for­eign assets) an amount that equals the current account balance, CA.

r = i — π^e (2.14)

The expected real interest rate, r, equals the nominal interest rate, i, minus expected inflation π^e.

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