Output, Inflation and Growth: An Introduction to by D. C. Rowan (auth.)

By D. C. Rowan (auth.)

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Extra resources for Output, Inflation and Growth: An Introduction to Macro-Economics

Example text

The result is a fiow of goods and services on to the market. The expenditure on goods and services is shown as a flow from households in the form of consumption plus a flow from enterprises in the form of investment. If we measure the flow of goods and services from enterprises to the market, we obtain the value of national output. If we measure the flow of expenditure, t we obtain the value of national expenditure. These two totals are equal by definition. Or, as this proposition is usually stated and as we have stated it above, national output == national expenditure == consumption +investment.

Ii. How are we to develop a theory to explain the fluctuations in production revealed by this graph? From our discussion of the workings of a market economy we can argue that beer producers will try and adjust the quantity of beer produced in any month to the quantity consumed. For if they t Sometimes called 'theorems'. 9·0 "U cu u "0 8·0 "U Q. c " 0 E ~ July July July July ~'---""'-''--v-----' ~ 1958 1959 1960 1961 FIG. ii The quantity of beert produced (in million bulk barrels) over aperiod of 4 years produce more than tbis, either stocks of unsold beer will accumulate (and deteriorate) or beer prices will fall.

The effect of indirect taxes (and subsidies) is therefore to complicate matters slightly by giving us two sets of prices at which output, expenditure and income may be valued, namely, market prices and factor costs. The two are related by the definition: market price == factor cost-t-(indirect taxes-subsidies) == factor cost + net indirect taxes. The adjustment defined by this identity may be applied to a single commodity (as we have applied it) or to any one of our aggregates. ~~e } net indirect taxes equals { net indirect taxes equals gross national product (at factor cost) gross national expenditure (at factor cost) We have not shown the corresponding adjustment on the income side since, by convention, national income, which is simply the sum of net factor income, is always valued atfactor cost.

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