Sunday, July 25, 2021

National Income Identity in a Closed Economy

In a closed economy, we have three equivalent measurements for macroeconomic activity, i.e., GNE=GDP=GNI
1. Gross national expenditure (GNE) = personal consumption (C) + investment (I) + Government spending (G). GNE is an expenditure measure. 
2. Gross domestic product (GDP) = value of all intermediate and final goods and services produced within a country’s territorial borders, minus the values of all goods and services purchased as inputs. GDP is an output measure. 
3. Gross national income (GNI) = total income resources of the economy. GNI is an income measure.
In a closed economy GNE = GDP because the nation’s expenditure must be spent on the final goods and services it produces; GDP = GNI because GDP measures the value of firm outputs minus the cost of firm inputs, and the remaining flow is paid by firms as income to factors, such as the owners of labour, capital and land employed by firms.

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