Okay, unit six, lesson three, we're going to discuss the national income identity.  So let's kind of define this, right? The national income identity states that  production equals consumption plus investment plus government purchases  plus net exports. So whatever we consume, invest in, what our government  spends on, and what we export to other nations will equal the national income  identity. 

That is the production. All of the units of production, right, is consumption,  investment, government purchases plus net exports, right? That gives us our  national income identity. So consumption refers to total consumption spending  by households on final goods, right, that are in the market, and services. 

Consumption is divided into three categories, services. These are such items  like haircuts, restaurant meals, hotel nights, legal service, et cetera. There's  often no tangible product. 

The consumer purchases the time and skills of an individual over an actual  product. So production and consumption of services usually occur together. So  non-durable goods, right, so this is the other phase of consumption, non-durable goods. 

The examples of non-durable goods include groceries, clothing, DVDs, tangible  products that usually have a fairly limited lifespan, typically less than three  years. And the last one, durable goods, these are items such as automobiles,  washing machines, refrigerators, appliances, and computers. They are tangible  products that usually have a lifespan of several years. 

So the distinction among these categories are not always as clear cut as the  definition suggests. A good pair of blue jeans might outlast a shoddy dishwasher even though the jeans are classified as a non-durable good and the  dishwashers are durable good. The jeans may last longer, longer than three  years, whereas the dishwasher could break down in a year. 

So, you know, those are just not always clear cut, right? Investment is the  purchase of new goods that increase the capital stock, allowing us to produce  more output in the future. Investment is also divided into three categories. First  is business fixed investment. 

This is the purchase of physical capital, plants, machines, property equipment  for the production of goods and services. Also, new residential construction, the  building of new homes is another type of investment. And inventory investment,  change in inventory of the final goods.

So as we produce more final products through the process of production, inputs  to outputs, you know, that can grow our investment into our inventory. The  economist's definition of investment is precise and differs from the way we often  use the word in everyday speech. Specifically, economists do not use the term  to mean the purchase of financial assets, such as stocks and bonds. 

Most of the time when we talk about investment, we are referring to business  investment in the production of new physical capital goods. As a rough rule of  thumb, consumption spending is carried out by households and investment  spending is carried out by firms. But there is one important exception. 

New residential construction is included in investment. A new house purchased  by a household is treated as an investment, not consumption. Government  purchases include all purchases of goods and services by the government. We include our definition of government as local, national, or regional. In the  United States, this means we have collapsed together or consolidated together  federal, state, and local governments for the purpose of our analysis. The  component of spending refers only to purchases of goods and services, not to  transfers. 

So if the federal government buys aircraft from Boeing or the local police  department buys a fleet of Volvos, these are included in government purchases.  However, a transfer you receive from the government, say you because you are  unemployed and are being paid unemployment insurance, is not counted in the  GDP. Of course, if you then use the income to purchase goods and services, the consumption is then considered part of the GDP. 

So net exports simply equal exports minus imports. So the export is what we sell overseas to other nations versus the imports is what we buy from other nations.  They are included because we must correct for the expenditure flows associated with the rest of the world. 

Some spending in the economy goes to imported goods, which is not associated with domestic production. We must subtract these imports from total  expenditures. Again, that some demand for domestically produced goods come  from other countries. We add these exports to total expenditures. 



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