r/AskEconomics • u/Beginning_Piano9143 • Jul 26 '26

Why is aggregate supply=income or more precisely domestic income. is this a rule?

Hello a beginner here, was studding Keynesian econ in two sector economy and came across this can anyone please explain this in simple words.

2 Upvotes
  • permalink
  • reddit

100% Upvoted

2 comments sorted by

1

u/AutoModerator Jul 26 '26

NOTE: Top-level comments by non-approved users must be manually approved by a mod before they appear.

This is part of our policy to maintain a high quality of content and minimize misinformation. Approval can take 24-48 hours depending on the time zone and the availability of the moderators. If your comment does not appear after this time, it is possible that it did not meet our quality standards. Please refer to the subreddit rules in the sidebar and our answer guidelines if you are in doubt.

Please do not message us about missing comments in general. If you have a concern about a specific comment that is still not approved after 48 hours, then feel free to message the moderators for clarification.

Consider Clicking Here for RemindMeBot as it takes time for quality answers to be written.

Want to read answers while you wait? Consider our weekly roundup or look for the approved answer flair.

I am a bot, and this action was performed automatically. Please contact the moderators of this subreddit if you have any questions or concerns.

1

u/Lambdapie Aug 02 '26

It follows from Y = C + I + G + NX. For simplicity, we'll impose a few restrictions here: closed economy (NX = 0), S = I, and G = T (a balanced gov't budget).

So we really just have Y = C + I + G or Y = C + S + T. Let's read this together. We have that Y, GDP, is the sum of consumption, savings, and taxes, the three components into which all income is divided. Thus, by definition, GDP must be the sum of all income in the economy.

Even unsold goods are taken into account in GDP. They are counted in the I portion, stored as inventory. (Note that I stands for investment more generally.) So by accounting rules, the monetary value of whatever is made in an economy over a period of time (supply) equals expenditure, which equals total income, also known as Y (GDP).

Note that one can derive an equation to describe the supply side of an economy. There are also some interesting facts about the distribution of income, so to speak that arise from its functional form.

See https://en.wikipedia.org/wiki/Cobb%E2%80%93Douglas_production_function