Using the Income-expenditure Model in UK Economy Essay

Using the Income-expenditure Model in UK Economy - Essay Example As the discussion declares consumption refers to the use of goods and services by consumer purchasing or in the production of other goods. Investment is referred to as an addition to the real capital stock of the economy and it comprises the purchase of new capital equipment, the construction of buildings and the addition to the stock of raw materials, semi-finished goods and finished goods. Economists refer to investment as spending by firms. This paper stresses that government expenditure is the existing spending by central government and local authorities on the provisions of social goods and services such as, health, education, roads etc, marketed goods and services such as coal, postal services, etc and transfer payments e.g., child benefit, job seekers allowance, state pension etc. Government expenditure is primarily financed by taxation and borrowing. Exports are goods and services produced in the UK and are purchased by foreigners, the purchase of exports adds to the income of UK households and firms. Exports therefore provide an injection into the economy. Imports can be classed as a leakage from the economy as it represents the amount of money spent on goods and services that are purchased outside the home economy. It leaks out of the circular flow and forms part of the demand for output from foreign countries. A change in any of these constituent variables of the aggregate demand will result a change in the over all aggregate demand.