Handout 12: Macro-economics - Circular Flow

The three most fundamental macro-economic variables are: Total Production, Total Income and Total Spending.

The total production of a country and total income are always the same. The value of total production is equal to the income received by the four factors of production - land, labour, capital and entrepreneurship.The payment made to the firms are the incomes earned in the economy and that is equal to the value of goods and services produced.

This income is then spent on the goods and services produced. In National Accounting this figure is also equal. If not all the income is spent there will be a savings component added back as an expenditure - and that saving will be equal to the unsold inventory which is subtracted from the production.

In the National Accounts we always find the following identity (PIE)

Product EQUALS income EQUALS expenditure.