We understand that, as a rule, total spending must equal total income (this was explained in part 4 of the series). But this raises a question. Is it spending that determines income or, instead, income that determines spending?
A prominent flow measure for the economy as a whole is Gross Domestic Product (GDP). This is a measure of the total output produced within the domestic economy over a year.
The economist Michal Kalecki once joked that economics is the science of confusing stocks and flows. These two concepts are important, but easy to mix up.
The rule that total spending equals total income is very important, but only true for the economy as a whole. It is not true for individual households, businesses or sectors of the economy. Here, we consider a household.
We saw in parts 2 and 3 that funds initially enter the economy through either government spending or bank lending. In the future, we will take a closer look at these activities. For now, it is enough to understand that these funds, once created, can be used for various purposes, including spending.
It was seen in parts 1 and 2 that government, as our collective agent, is able to use its currency to attract some workers and resources to the public sector. This enables it to carry out important functions. One of these functions is to shape and regulate the monetary and banking system.
For government to carry out its functions, it needs to employ some people and obtain various resources.
Most national governments coordinate the division of resources between public and private use through the operation of a currency that they themselves issue.
A national currency can be established through a few steps.
Many activities require cooperation at the society-wide level.
As a community, we need to agree upon a set of rules and regulations, and arrange for their supervision and enforcement.
Questions that arise include: