Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Determining a country’s income – and not consuming it all at once!
GDP tells you the aggregate amount of income of an economy. In other words, if you add up everyone’s individual income, that should be equal to GDP.

So, to continue the example from the preceding section, the car manufacturer has managed to turn £8,000 worth of parts into a £20,000 car, leaving it with a surplus of £12,000. Some of this surplus goes to pay the workers in the factory (say £5,000), leaving a profit of £7,000. Ultimately, people own all firms, so this profit also provides an income. Thus the manufacturer’s value added is entirely distributed as income either to its workers or its owners.

The same is true for the component manufacturer and the owners of the raw materials: the value added must have been paid to someone as income; because the total value added equals GDP, so too must total income equal GDP.

Of course, when you have your share of the ‘GDP cake’ (and everyone gets a certain share), you have to decide what to do with it. You have a number of options:


You can consume it all: This would mean spending all your income. Another way of thinking about this option is that your income gives you a claim to a certain share of national output (your slice of the cake). By spending it all now, you’re choosing to use your entire claim on consumption today (you eat the entire slice).

You can consume some of it and save the rest: This would mean you spend only part of your income. By saving some of your share, you give

up some of your claim to consumption today. You do so because in return you get a claim to future consumption. Economists think of saving as a way of converting consumption today into consumption in the future.


You can consume more than your share. How? By borrowing from someone who wants to save part of his share. The catch is that you’ll have to pay that person back at some point by giving up some of your own future consumption. Thus economists think of borrowing as a way of converting consumption in the future into consumption today.