Question

Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.

Answer 1

In a simplified economy, income is either spent on the purchase of final goods and services or saved. Expenditure of income on the final goods either causes final consumption expenditure or investment expenditure. To the extent income is saved, final goods remain unsold. But it treated as inventory investment. So it is said that aggregate final expenditure of an economy is equal to aggregate factor payments. i.e. Y = C + S