Saving function is the relationship between income level and savings.

Disposable income, wealth, expectations and demographic factors are the principal factors that affect consumption expenditures.

The government collects the required and detailed information about this matter within a specific scheme and announces the results to the public by combining and summarizing these important data. These announced results include highly detailed information and show the conclusion of economic activities occurred in that country and in that period. For instance, the public institution authorized for this task in Turkey is Turkish Statistical Institute (TUIK). TUIK was announcing these data annually at the end of the year until 1987. Since 1987, it has been announcing four times a year by measuring in a three months (quarterly) basis.

Saving Paradox is the reduction in the consumption expenditures and, therefore, income because of rising savings. This is a paradox indicating that increasing saving reduces consumption and, therefore, income; however, at this new income level savings are at the same level. When you consider the fact that savings are used to finance investments in the country, this result contradicts the widespread belief that savings are beneficial for the economy.

In an economy, there is no rule that investments are equal to savings, government expenditures are equal to taxes, and exports are equal to imports. In order for the equilibrium to be realized, the sum of the injections must be equal to the sum of the leakages. Accordingly, the equilibrium condition for an economy can be expressed as the sum of savings (S), taxes (T), and import (IM) should be equal to the sum of investments (I), government expenditures (G), and exports (EX)

S + T + IM = I + G + EX.

According to Keynes, equilibrium income can be achieved at the level of underemployment or overemployment. What is important here is the level of aggregate demand. Since it is difficult to change the production capacity that determines aggregate supply in the short term, the level of income depends on aggregate demand or aggregate expenditures. In other words, firms give their production decisions according to the expected aggregate expenditure or aggregate demand level.

Keynes refused the idea that the employment was determined by prices and wages as put forward by classical models and developed the opinion that the aggregate demand for goods and services produced in the economy was the main factor determining the employment.

Since MPC + MPS = 1, MPC will be 0.70 if MPS = 0.30.

Disposable income is the usable income obtained by subtracting direct taxes from personal income.

Fiscal policy is the decisions related to taxes that government collects and expenditures that government makes.

Transfer payments are the payments that government and firms make to households without having in return for good, service or labor.

An increase in the expenditures in an economy causes the income level to rise. This will take place in real terms up to full employment level and in nominal terms after full employment level. Once the economy reaches potential or full employment income level (Yp), it is not possible to increase production in the economy. If expenditures still go on to increase, only the nominal income may increase. Since the nominal income is the multiplication of price level and production amount, price level will increase as far as production amount stays constant. This situation is called as inflationary gap.

Contraction is the period in which total production decreases.

Real GDP = (Nominal GDP/Price İndex) x100 = 200/1.25=160.

Transfer expenditures are the unreturned (outright) expenditures and have no direct effect on the national income. They only cause purchasing power to shift among private individual or social stratums. These shifts are performed unreturned, and there are no changes on the flow of goods and services within national economy. In other words, the transfer expenditures made by public sector do not refer to consumption of real sources. These expenditures transfer purchasing power from public sector to other sectors. Increases in the total expenditure volume in economy are not caused by transfer expenditures made by the state, but the expenditures made by social stratums benefiting from these state expenditures. It simply means that if public expenditures do not create the flow of goods and services in economy, they are called as transfer expenditures.

There are some limits in usage of GDP and the concepts based on it is crucial for national income analysis. There are at least 6 points unfavorable with these figures should always be kept in mind. First, GDP and other income concepts based on it do not make sense if the population of the country in question is unknown. Second, GDP and other income concepts exclude the most valuable activity for an individual: leisure. Third, GDP and other income concepts do not take the quality changes of produced goods into account. GDP doesn’t provide detailed information about the combination and distribution of income created in the country. Fifth, GDP and other income concepts do not reflect some social costs originated from production of goods and services. Sixth, there are many activities need to be added to GDP in principle but not included actually. For example, illegal activities are not included into GDP calculations unless they are ‘acquitted’ by being introduced into legal system.

The sale of goods and services produced in a country to other countries is called export.

The primary automatic stabilizer is the income tax.

The amount of goods and services purchased from other countries is called imports.