For economists trying to measure the health of an economy, there are a number of similar-sounding but slightly different concepts that can confuse those without a background in macroeconomics. Two of these such terms are aggregate output and aggregate income, two key concepts that are similar but subtly different. Let's walk through it.
How much is an economy actually producing?
To understand the difference between aggregate output and aggregate income, we need to start at the top -- economic productivity, or GDP. Most countries use the United Nations' standardized formula ...
Y = C + I + G + (X-M)
... where "Y" is GDP, "C" is consumption, "I" is investment, "G" is government spending, and ("X-M") is net exports. Of these components, consumption is the normally the largest, and the U.S. economy is no different.
GDP is a critical measure for politicians, policymakers, and economists, as increasing productivity creates jobs, increases wealth, and improves the quality of life for citizens.
Two concepts, one metric
Economists define aggregate output to be the sum of all the goods and services produced in an economy over a certain period of time. In other words, aggregate output is defined as an economy's total productivity, or GDP. By definition, then, aggregate output and GDP go hand in hand, with GDP acting as the practical application of the theory of aggregate output.
But there are other theoretical ways to define an economy's output. You guessed it -- aggregate income is one such way.
Aggregate income is defined as the total income earned by individuals and companies in the economy. Aggregate income excludes any adjustment for inflation and taxes. If aggregate output measures all of the goods and services produced in an economy, aggregate income measures how much money individuals and businesses actually make.
We can break down the definition of aggregate income to match the formula for GDP and see that these two concepts ultimately describe the same thing. First, let's assume that consumption as a percentage of income is constant. If that assumption is true, which most economists agree it is, then consumption will also be a certain percentage contributor to aggregate income.
Because aggregate income excludes any adjustment for taxes, it's also reasonable to add in government spending, as we see in the GDP formula. Governments tend to spend what they collect, after all.
Thinking through the formula further, aggregate income includes the net profits of an economy's businesses. That should roughly approximate to the business sector's investment and its net export figure.
Complex economies, complex theories, and an easy metric to make sense of it all
GDP doesn't perfectly fit either of the two concepts here, but it does do a good job approximating both. This makes sense conceptually, as aggregate output and aggregate income each describe the wealth building engine of an economy. One, aggregate output, describes the problem from a productivity standpoint, while the other, aggregate income, tackles the problem through incomes.
At the end of the day, it's two sides of the same coin.
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