Problem 4

Question 1

1.1

The vertical columns must inevitably sum to zero because in the case of households, the amount of money held must always be equal to the difference between the households’ receipts and payments. In other words the wages earned by the household (+W.Ns) minus the consumption (-Cd), the taxes paid (-Ts), and the end period holdings of cash (-Hh) must equal zero. This is also the case with production as it is assumed that producers hold no cash, therefore producers receipts (+Cs and +Gs) must equal their outlay on wages (-W.Nd). Similarily the amount of money created (+Hs) must be equal to the differences in government receipts in the form of taxes (+Td) and their outlays in the form of government expenditure (-Gd).

1.2

The rows reperesent the circular flow of income which move in a zero sum space. Basically every component in the matrix has an eqivalent component whose sumation will always come to zero. In the case of consumption it is a receipt for businesses but is a payment for households.


Question 2:

Row 1 Consumption:
The Household sector purchase services from the production sector. Denoted by -Cd as it is a liability to the household. Conversely the production sector supplies services denoted by +Cs as they receive income in return for providing the service. The services demanded by the household are immediately supplied by the production sector, hence –Cd and +Cs cancel out.

Row 2 Government Expenditure:
Like households the government also demand services which are again provided by the production sector. This represents an asset for the production firm (+Gs) and a liability for the government (-Gd).

Row 3 Output:
This represents total production and is not a transaction between two sectors. It is the sum of all expenditures on goods and services. Y= C + G

Row 4 Factor Income:
This is the income received by the household for supplying labour, this is an asset for the household and is denoted by +W.Ns. For the production firm it is a liability as they must pay money out. The amount paid out by the production firm equals the amount received by the household thus they sum to zero.

Row 5 Taxes:
Households must pay taxes therefore it is a liability for them and denoted by –Ts. The amount paid by the households is received by the government, thus it is an asset for them denoted by +Td.

Row 6 Changes in Money stock:
Another way that households use their income is to purchase financial assets, it is denoted by –ΔHh as it is an outflow. Consequently, the government supply these financial assets, it is revenue for them denoted by + ΔHs.