Why does income equal to total expenditure and also equal to GDP?

Answer 1

Because GDP, which stands for Gross Domestic Product, is the dollar value of total US production (of goods and services) within a given quarter. To measure how much we've produced, we keep track of how much has been bought in the economy. Another way to say this is that we keep track of how much each sector spends.

Remember that GDP = C + I + G + NX, where C is consumption by households, I in investment (business spending), G is government is spending, and NX is net exports (exports minus imports). So this is how GDP is equal to total expenditure, expenditure being another word for spending.

GDP is also equal to total income because every dollar that is spent is spent to pay someone. For example, if you buy an apple at a grocery store for a dollar, some of that dollar will go to the government, some to the employees of the store, some to the business owner as profit.

Every time money changes hands (in a transaction) it is the income of someone (the one who received it) and the expenditure of someone else (the one who gave it). Some possible transactions are:

You get paid: you receive income equal to the expenditure of your employer;

You buy something: your expenditure is equal to the income of the shop selling you the item;

GDP just totals up the amount of all these transactions and so is equal to the total income or total expenditure (as both are equal) in an economy..