[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

THE NATIONAL INCOME–OUTPUT IDENTITY
National income is equal to national output (as explained in Chapter 22). Their equality
reflects the fact that when a good or service is purchased, the money that is paid must
eventually wind up as someone’s income—as wages, in the pockets of the workers in
the firm that produced the good (or of the workers who produced the intermediate
goods that were used in the production of the final good); as interest payments, in the
pockets of those who lent the firm money; or as profits, in the pockets of the owners
of the firm. 2 If Y is used to represent national income, this identity can be written as
GDP = national income = Y.
The equation allows us to interpret the horizontal axis in Figure 30.1 in two different
ways. We can say that the aggregate expenditures schedule gives the level of
expenditures at each level of national income. We also can say that it gives the level
of expenditures at each level of national output.
EQUILIBRIUM OUTPUT
Normally, firms will produce only what they believe they can sell. As a result, the
total output produced by all firms will equal the total demand for output. In equilibrium,
aggregate expenditures, which we will denote by AE, must equal aggregate
output (GDP). Since aggregate output also equals national income (Y ), we have the
simple equation
AE = GDP = Y.
In Figure 30.1, the 45-degree line through the origin is labeled “Aggregate expenditures
= output.” All points on the 45-degree line have the property that aggregate
expenditures, measured on the vertical axis, equal aggregate output, measured
on the horizontal axis. Only points on this 45-degree line satisfy the equilibrium
requirement that aggregate expenditures equal output.
Equilibrium lies at the point on the aggregate expenditures schedule that also satisfies
the “Aggregate expenditures = output” condition. That point is at E 0 in the figure,
where the aggregate expenditures schedule intersects the 45-degree line. The corresponding
equilibrium value of aggregate output, for given inflation and interest
rates, is denoted Y 0 .
The analysis that determines equilibrium output by relating income (output) to
aggregate expenditures is called income–expenditure analysis. We can take two
approaches to demonstrating that Y 0 is the equilibrium. The first way is to note that
it is the only point that satisfies the two conditions for equilibrium. In equilibrium,
everything produced must be purchased. Thus, aggregate expenditures must be
equal to output, as represented by the 45-degree line. In equilibrium, the level of
2 For the sake of simplicity, we will assume that the residents of the country neither receive money (net) from
abroad nor make payments (net) abroad.
INCOME–EXPENDITURE ANALYSIS ∂ 663