Question

Suppose that an economy consists of only two individuals. Jeremy has $1890 available to spend on goods. He decides to purchase $390 worth of produce from Krista in the current quarter. No other economic activity takes place during the current quarter. Using this information, answer the questions.

For the current quarter, what is the economy's income? $_____________
For the current quarter, what is the economy's expenditure? $_____________

In an economy, how are income and expenditure related?
a. Income is less than expenditure.
b. They are equal.
c. They are unrelated.
d. Income is greater than expenditure.

Answer 1

Answer:

Economy's income: $390

Economy's expenditure: $390

b. They are equal.

Explanation:

In an economy Income (Y) is the sum of Consumption or private expenditure (C), Investment (I), Government spending (G), and Net Exports (NX).

Y = C + I + G + NX

But as the economy consists only of 2 individuals, Investment (I), Government spending (G), and Net Exports (NX) are Zero. Therefore,

Y = C i.e. Income = Expenditure

In the above scenario, Jeremy spends $390 on produce from Krista. Jeremy's expenditure is equal to Krista's income which is $390. Under the assumptions in this scenario, the sum of all spending that occurs in the economy is exactly equal to the sum of all income that people receive.

In the question, Krista receives $390 in income from selling her produce to Jeremy. The $390 that Jeremy paid for the produce is the amount of expenditure for the economy. The $1890 Jeremy could have used is irrelevant since it is not used in the current quarter. The expenditure a buyer pays for a good or service is equal to the income the seller receives.