A key assumption made about spending in economic policy discussions is that expenditures must equal income. This is the assumption made upon when spending policies are needed and how they need to be implemented to work.
The idea is that without spending, income would not be coming in enough to support spending and consequently, negative consequences would occur.
This idea is a very basic one that cannot be nuanced or changed. If spending does not equal income, then people cannot justify any expenditures as being necessary or wise.
Economists call this the money/spending strategy of government policy makers.
True balance equations
There are three key questions that every individual and organization must answer in order to determine whether or not balance equations for an economy are true or false. These questions can be answered by dividing the components of an economy into two groups: expenditures and income.
When do individuals and organizations get their income?
When does money come from? When they spend?
In the case of where spending exceeds income, this is generally considered to be in a financial situation called debt. In the case of where income exceeds expenditures, this is often called overspending and can be a sign of debt collecting or extortionate spending.
The answers to the first two questions are usually no and yes, respectively. Consumer confidence is high when individuals feel that they receive all they deserve in money spent by them.
Overspending can lead to debt which can continue to collect as long as people keep paying it.
Expenditures must equal income
This may seem like a minor point, but it can have a big impact on your personal finances. As an example, healthcare spending can be high due to increased overall health conditions and repairs needed.
As an example of how much healthcare spending can cost, find out how much you would pay if you were diagnosed with heart failure or cancer, and then add 5-10% to those numbers to determine the rest of your expenses.
You will probably find that a large proportion of your expenses are spent on housing, food, transportation, and other things that don’t necessarily have to do with health.
Health expenditures are one area where income must equal expenditures because you cannot buy health insurance unless you are paying enough to cover your medical needs.
Examples of economic equilibrium
In an economic equilibrium, the different factors of production (i.e. land, capital, humans) are brought together to produce as much income as possible. This can happen naturally, with people joining forces to grow more food or start a business to sell their products.
In some cases, such as the Roman Empire, it was forced by circumstances. For example, while there was enough money to support large empires, it wasn’t widely used due to administration and taxation issues.
At the time of economic collapse, many people were left without an adequate income and could not buy necessary items or invest in new businesses. This caused a widespread famine that killed many people.
Disequilibrium and the market process
In order for the economy as a whole to function, expenditures must equal income. This is due to the fact that without funding expenses, nothing else gets funded!
As you know, people work to receive money in exchange for their services. If people weren’t earning money, then funding expenses wouldn’t be paid.
However, while this makes sense on a macro level, it can create issues on a personal level. For example, if you’re paying for gasoline to go somewhere, but don’t have a car so you have to take the bus or walk where you live, then your monthly gas budget goes down.
On a more severe level, there are times when health and safety issues arise because of insufficient funding. These can go unnoticed for years because of only the central government being able to fund projects.
What causes disequilibrium?
Inequilibrium occurs when people do not have enough money to buy what they want and want but do not have enough income to purchase what they want.
They are forced to spend less than they earn because of debt, lack of investments, or simply because they do not have enough money to buy what they want.
This occurs for several reasons. One of the main ones is that people prefer clothing and entertainment products with highly-plated sales than reasonable-quality ones.
Another reason that people don’t have enough money is that there are no good investments that require little or no money. For example, you can’t shop at a mall where everything is $300 USD$ due to financial constraints.
Neither can you find true hidden treasures that require very little time or effort due to the amount of salespeople who push them.
Supply and demand
This might seem like a strange statement to make, but it’s true: Expenditures must equal income. This is because money is the basis for everything!
Economists refer to this as the law of spending. It doesn’t mean that people spend money because they don’t have any money, it just means that people spend money because they have income to spend.
It doesn’t matter how much you earn, as long as you have income, someone else will pay you something to show their appreciation for your work.
If spending did not equal income, then people would stop spending because there would be no products or services to purchase. It would become cheaper and easier to waste money due to availability.
Many products and services on the internet are sold without a physical address or phone number.
Income and expenditure do not have to be equal in the short run, but they must be equal in the long run
In the long run, we as a society must maintain the equality of income between rich and poor. In the short run, we as a society must balance our expenditures with income to maintain living standards.
In the military, they teach you that in the short run, spending more money will get you more. In the long run, it will ensure victory.
In order for us as a nation to win in a global economy, we must match spending with income. If we do not have enough money to maintain our standard of living in the short term, then we must spend less to regain our position in the market.
This is true for both civilian and military leaders.
Examples of markets in equilibrium
Market equilibrium occurs when two or more parties in a society or group who are seeking something of value, find a way to obtain it through negotiation and cooperation.
In the market, sellers and buyers meet with others in the community or group and negotiate what they want, how much they want it, and whether or not to sell it to them.
The market is an example of a non-social system that achieves equilibrium because there is no single person who controls the supply and demand for goods and services.
Political systems can also achieve stability when there is no single person who holds power for long periods of time. People learn from their experiences that things change leaders every few years so nothing sticks as policy.
It is important to note that political instability does not mean anything else in the society gets worse, it just causes people to look elsewhere for supplies and/or products to wear and spread their influence.