GDP and the circular flow of income and expenditures - Research Paper Example

roductivity, expenditure, or income (gross domestic product of a nation) (Ouanes, Abdessatar, Subhash, Thakur, Lienert, Marciniak and Swiderski, 1997, p.87). Consumption is a primary concept in economics, and many other social sciences also study it. Economists are very much interested in the relationship that exists between income and consumption. According to some economists, consumption entails the final purchase of goods and services by individuals. Other economists define consumption in a much broader manner.

They define it as the aggregate of all economic activities that does not include the design, marketing of goods and services and production. An example is the adoption, selection, use, disposal and the recycling of the services and products (Ouanes, Abdessatar, Subhash,Thakur, Lienert, Marciniak and Swiderski, 1997, p.87) According to economists, Investment is the accumulation of physical entities that are newly produced, such as goods inventories, houses, machinery, and factories. Also in macroeconomics, it is the amount purchased per unit time of goods that are not utilized but are employed in at a future date production.

It is as a function of interest rates and income. An increase in the amount of revenue will contribute to higher investment and, on the other hand, higher rates of interest may lead to the discouragement of investment since it will be more costly to borrow money. More so if a company decides to use its funds in an investment. The interest rate will represent an opportunity cost of investing the funds rather lending out the money for interest (Ouanes, Abdessatar, Subhash ,Thakur, Lienert, Marciniak and Swiderski, 1997, p.87) According to economists, government spending entails all consumptions of the government, investments, and transfer payments.

Government spending can be by taxes, seigniorage, and government borrowing. Changes in the government expenditure are a primary component of fiscal policy which is used to stabilize the