The flows in and out of the firm sector of an economy must balance. The total flow of dollars from the firm sector measures the total value of production in the economy. The total flow of dollars into the firm sector equals total expenditures on GDP, which we divide up into four categories.
Toolkit: Section 16.16 "The Circular Flow of Income" The national income identity is the condition that
production = consumption + investment + government purchases + net exports.
It is the most fundamental relationship in the national accounts.
Consumption refers to total expenditures by households on final goods and services.Investment refers to the purchase of goods and services that, in one way or another, help to produce more output in the future. Government purchases are all the purchases of goods and services by the government. Net exports are the difference between exports and imports: they measures the total expenditure flows associated with the rest of the world. 1
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