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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..

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Q: Why does income equal to total expenditure and also equal to GDP?
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Why must an economy's income be equal to it's expenditure?

An economy's income must be equal to it's expenditure because every transaction has a buyer and a seller. It is also because every dollar of spending by some buyer is a dollar of income for some seller. Gross domestic product (GDP) measures an economy's total expenditure on newly produced goods and services and the total income earned from the production of these goods and services.


Why aggregate income is equal to aggregate expenditure?

One man's income is another man's expenditure. The expenditure of buyers on products is, by the rule of accounting, income to the sellers of those products. Every transaction that affects income must affect expenditure. If, for example, a company produces and sells one extra loaf of bread. This transaction will raise total expenditure on bread, but it also has an equal effect on income. If the company produces the extra loaf without hiring any more labour (such as making the production process more efficient), then profit increases. If the company produces the loaf by hiring more labour, then wages increase. In both cases, expenditure and income increase equally.


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Psychological law of consumption?

Generally it is observed that when income increases, consumption also increases but by a less proportion than the increase in income. Suppose the total income of the community is 10 crore and the consumption expenditure is also Rs 10 crore. In that case, there is no saving and investment. Further the income increases to Rs.15 crore. Then, consumption also increases, but not to the extent of Rs15 crore. It may increase to Rs14 crore and Rs 1 crore constitutes the savings. This savings create a gap between Income and Consumption. This gap is in conformity with Keynes Psychological law of consumption, which states that, when aggregate income increases, consumption expenditure shall also increase but by a somewhat smaller amount". This law tells us that people fail to spend on consumption the full amount of increment in income. As income increases, the wants of the people get satisfied and as such when income increases they save more than what they spend. This law may be considered as a rough indication of the actual macro - behaviour of consumers in the short run. This is the fundamental principle upon which the Keynesian consumption function is based. It is based upon his observations and conclusion derived from the study of consumption function. This law is also called the fundamental law of consumption. It consists of three inter related propositions: # When the aggregate income increases, expenditure on consumption will also increase but by a smaller amount. 2. The increased income is distributed over both spending and saving. 3. As income increases, both consumption spending and saving will go up. These three prepositions form Keynes psychological law of consumption. As consumption expenditure progressively diminishes when income increases, a gap between income and expenditure arises. This tendency is so deep rooted in people's habits, customs, and the psychological set up that it is difficult to change in the short run. Hence, it is impossible to raise the propensity to consume of the people so as to increase the national output, income and employment. Increasing the volume of investment in an economy can only fill up the gap between income and Consumption.


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