National Income

Figure 1 depicts Model I. Here, we imagine an economy that produces only consumption goods. To keep Model I as simple as possible we further suppose that the only consumption good is cars. These cars are produced by firms which are staffed by the households and owned by the households.

We all have an understanding of the concept of income on an individual level and what our own income is. But how should we measure the income of a whole economy? What is the relation between our income and the value of what we produce? To find the nation’s income do we just add up the incomes of the household, business, and government sectors? And how does the rest-of-the-world enter the picture? What does the nation spend its income on, and what does it save? How does savings relate to investment?