The Income-Expenditure Model

The Income-Expenditure Model explains how the total income of an economy (like a country) is determined by the total spending (expenditure) within it. It focuses on the idea that the level of income depends on how much people, businesses, and the government spend on goods and services. When spending increases, income rises, which then encourages more spending—a cycle that helps find an equilibrium point where income and expenditure are balanced. This model is useful for understanding how changes in spending, such as increased government investment or consumer confidence, impact overall economic activity.