Gross Domestic Product

• Let’s summarize what the circular flow diagram tells us.

• Households:
– sell factor services to firms
and receive incomes = Y
– spend C on goods and services
– save S
– pay governments taxes, T
– Y=C+S+T
• Firms:
– buy the services of factors of production from households and pay incomes Y
– produce goods and services which they sell to households, C, governments, G, other
firms (and themselves), I, and the rest of the world, NX.
– Y = C + I + G + NX
• Governments:
– collect taxes, T
– spend G on goods and services
– borrow (or lend) an amount equal to their deficit (surplus)
– Government borrowing = G - T
– Government saving = T - G
• The Rest of the World:
– spend NX on goods and services
– borrow (or lend) an amount equal to their deficit (surplus)
– Foreign borrowing = NX
• How investment is financed
– Y=C+S+T
– Y = C + I + G + NX
– So, S + T = I + G + NX
– And, I = S + T - G - NX
– S is household (private) saving
– T - G is government saving (or dissaving)
– -NX is foreign saving
.