State the Private sector in the circular flow
- Private sector total income is known as the national income. As private sector receives entire return from the factors of production, national income is equal to GDP and we can use symbol Y for national income as well. Note that in a more explained analysis of components of GDP, including for example depreciation and factor income from abroad, it's no longer case that national income is exactly same as GDP though they will often be close to each other.
- Private sector pays taxes to government. Here we should include all income taxes, taxes, value added taxes, payroll taxes and selective purchase taxes (which are ultimately paid by the private sector as it owns firms).
- Part of these taxes would be returned to private sector in the form of pensions, child allowances, unemployment benefits and sickness benefit and so on. All these are instances of transfers from government.
- Net taxis then stated as taxes minus transfers and is denoted by NT.
- National income minus net tax is known as disposable income or personal disposable income and is referred by YDisp where YDisp= Y- NT.
- Total consumption by private sector is referred by C. C need not be equal to disposable income as private sector can borrow and save. We define private sectors savings as SH= YDisp- C (H for household). If C> YDisp then SH< 0, that implies that private sector (in the aggregate) is borrowing money.