Fiscal Policy and Business Cycles

By Alvin H. Hansen | Go to book overview

Chapter II
INVESTMENT AND CONSUMPTION, 1920-1939

IT may be well to remind the reader again that we have chosen to follow the common-sense classification adopted by Kuznets in his study of National Income and Capital Formation, 1919-1935, and have included in real consumption not only the flow of personal services, nondurable consumption goods (e.g., foodstuffs), and semidurable commodities (e.g., clothing) reaching consumers' markets, but also such durable consumers' goods as automobiles and household equipment. By real investment we mean the flow of production of (a) fixed capital goods, including plant and equipment, residential housing, public construction, and (b) net increases in inventories of commodity stocks held by business firms, whether finished, semifinished, or raw. Real consumption means the annual flow of consumers' goods and services; real net investment means the annual flow of additions to stocks of plant, equipment, and inventories. Together, the annual output of consumption and investment goods constitutes the real income.

The money expenditures made on consumption and investment goods in any given period are the source of the stream of money income received by the society as a whole for the stream of goods and services produced. The money income equals consumption plus investment expenditures. We shall designate the money income (or net income) by the letter Y, consumption expenditures by C, and investment expenditures by I. Thus Y = C + I. When the terms "income." "in

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