We saw that, in Argentina, real GDP decreased between 1998 and 2002. The circular flow of income tells us that when real GDP decreases, it must also be the case that real production decreases and real spending decreases. The IMF team in 2002 wanted to understand why real GDP decreased. We are not going to answer that question in this chapter—after all, we are still at the very beginning of your study of macroeconomics. Still, the circular flow still teaches us something very important. If real GDP decreased, then there are really only two possibilities:
- For some reason, firms decided to produce less output. As a consequence, households reduced their spending.
- For some reason, households decided to spend less money. As a consequence, firms reduced their production.
Of course, it could be the case that both of these are true. This insight from the circular flow is a starting point for explaining what happened in Argentina and what happens in other countries when output decreases.
KEY TAKEAWAY
- The circular flow of income illustrates the links between income and spending in an economy. In its simplest form, revenue earned by firms by selling their output ultimately flows to households, which spend this income on the output produced by firms.
- The national income identity says that total spending must equal total output and also must equal total income.
Checking Your Understanding
- What changes in Figure 3.14 The Complete Circular Flow if the government takes in more revenue than it spends?
- We said that borrowing from abroad equals imports minus exports. Is there an analogous relationship that holds for an individual?
- 瀏覽次數：3946
