Page 215 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes Tom Glynn, Director of International Care Control for the American Cancer Society has
been quoted as saying. "In Africa, these health care systems don't exist, at least not in the
form we're used to," Only Kenya, he says of Africa's low income nations, has a medical
care system that reasonably resembles that of the western world.
Most studies conclude a cigarette costs 10 minutes of life, so a pack-a-day smoker
(20 cigarettes a day) loses 13.9 per cent of a year to the habit over the long haul, the
magazine notes.

Source: www.articles.economictimes.indiatimes.com
13.2 Some Important Identities

We denote the value of output by 'Y' under the assumption that the simple economy does not
consist of either a government or foreign trade. Consumption is denoted by 'C' and investment
spending by 'I'. The key identity is between output produced and output sold.

Output sold can be written in terms of consumption and investment spending, so identity of
output produced and output sold is
Y C + I (1)

Output produced is identically equal to output sold.
Now, a part of the whole, Y, will be spent on consumption and a part will be saved. So
Y S + C (2)
This tells us that the whole of income is allocated either to consumption or to saving.

Identity (1) and (2) can be combined to read
C + I Y C + S (3)
The left hand side of identity (3) shows the components of demand and the right hand side shows
the allocation of income. The identity emphasises that output produced is equal to output sold.
The value of output produced is equal to income received and income received, in turn, is spent
on goods or saved.
Identity (3) can be rewritten as the relation between saving (S) and investment (I). Subtracting
consumption (C) from each part of identity (3), we have
I Y – C S (4)
Identity (4) is very important. It shows us that in this simple economy, saving is identically
equal to income less consumption and investment is identically equal to saving.
The identity is really only a reflection of our definitions - output less consumption is investment,
output is income and income less consumption is saving.
Reintroducing the Government and Foreign Trade

We now reintroduce government sector and the external sector, G. All taxes denote the purchase
of goods and services by government by I. Transfer to the private sector (including interest) are
denoted by TR. Net exports (X - M) are denoted by X.

We return to the easier identity between output produced and sold, taking into account additional
components of demand G and X. So
Y C + I + G + X (5)

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