01: Income & Expenditure

Econ married Wonder and set of on sail for Honeymoon in the sea in their small boat. They wre unfortunate and faced a storm. The boat capsized and after hours of swimming they found themselves in an uninhabitated island. Since there was no way of going back home, they decided to settle down in the island that Econ named Wonderland after his beloved wife. There was nothing to eat on this island except fruits. They lived on fruits. Both of them plucked fruits. In the first year they plucked in all 4000 fruits. Econ told his wife that the Wonderland's economy had a National Income of F4000 where F stood for Wonderland Unit of measurement of Income. They of course needed no currency nor money because there was no exchange to be made among the citizens of Wonderland yet. But Econ calculated that he himself gathered 2000 fruits, Wonder 1500 and the remain 500 fruits came through joint efforts. So, Wonder said that his income was F2250 and Wonder's F1750. During the year, they consumed all the fruits they had gathered. So, their National expenditure worked out to F4000.
In the second year, Econ fell sick in the initial three months and Wonder became pregnant and unable to work much in the last quarter of the year. Their fruit collection (effective production) during the year was: Econ 1300 and Wonder 1300 and jountly 400.Thus Gross Domestic Product or GDP was F3000 (Fruits that were not collected, eaten or stored but remained on the trees were not really effective production and therefore not counted}.The output produced had to be distributed in some manner as income: distribution was Econ F1500 and Wonder F1500. Thus, they reckoned the National Income as Y=F3000. More fair distribution of income came about this year due to sickness and pregnancy. This year however, they consumed only 2500 fruits because of sickness or loss of appetitie due to sickness, pregnancy and their decision to save for the rainny day. So, Natiional Saving was S=F500 and National Consumption Expenditure was C=F2,500. Since Wonder ate 1200 fruits, her consumption expenditure was F1200 and Econ's F1300. Naturally Econ saved less: his saving was F200 and Wonder's saving F300. Wonder became wealthier than Econ. But the entire National Income had to be spent. Consumption expenditure was C=2500. The rest was saved meaning not consumed. They called this as Investment (I) expenditure which resulted in an inventory or stock or capital for use later. Earlier there was no capital stock. But because of Saving and Investment expenditure, there is an increase in Capital from K=0 to K=F500. Thus Investment was nothing but increase in Capital ssstock. They wrote in symbol: dK=I, where d denoted change and hence dK was change in capital stock.

What happened in the next year? They used this capital stock to productive use by building up an asset. We also note thatonly hard labor effort by the husband and wife resulted in GDP or National Income as also consumption, Saving and Capital formation or Investment. Everything happened because of labor effort of the two citizens of the country. Income was distributed as per the contribution or productivity of the two citizens of Wonderland. Capitalism, Socialism or Communism have not come to confuse the citizens. Nor has Government come to tax away the income of the citizens. This would continue for some time. Things would get progressively complicated and cause philosophers to get confused and pick up the business of confusing other people.

We come to the third year later. Just now we note that GDP = National Income=Y=C+S=C+I=National Expenditure.