- Households (C ): They buy goods and services for their daily needs (food, clothes, appliances, etc.).
- Businesses (I): They invest in new machinery, factories or technology to produce more.
- Government (G): Spends money to build roads, schools, hospitals and pay the salaries of public employees.
- Rest of the world (X – M ): Represents exports (X) minus imports (M). Basically, how much our store sells abroad minus how much it buys from abroad.
The Keynesian equation tells us that the store’s total sales (Y), that is, the country’s income, is equal to the sum of how much all these customers spend:
Y = C + I + G + (X - M)
Example:
If households spend 100, businesses invest 50, the government spends 30 and exports exceed imports by 20, the country’s total income will be:
Y = 100 + 50 + 30 + 20 = 200
Why is this important?
This equation helps us understand how the spending decisions of households, businesses, government and the rest of the world affect the country’s total income. If, for example, households decide to save more and spend less, total income will decrease.
More information:
To learn more about this topic, you can consult:
- The Bank of Italy website: https://www.bancaditalia.it/
- Macroeconomics textbooks: such as “Macroeconomics” by Gregory Mankiw or “Macroeconomics” by Olivier Blanchard.
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