ABSTRACT
This chapter investigates the relationship between national income and the balance of payments. From the description of how the economic system operates, it is possible to identify three critical connections to maintain the stability of the circular flow: the relationships between domestic private savings and investment, imports and exports, and taxes and government expenditures. A statistic frequently used to measure national income is gross national product (GNP), which is the accumulation of consumption, investment, government expenditures, and external sector expenditures. In equilibrium, GNP is equal to potential income, which is partially reduced by its recipients to meet tax responsibilities. Autonomous expenditures are those with disregard for the expected level of national income. An example of these expenditures is the expense made to provide food and shelter for those unable to perform a professional job, such as children and the disabled elderly. All the autonomous expenditures, except spending on autonomous imports, are considered an income injection.
