private sector in the circular flowthe private

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Private sector in the circular flow

• The private sector total income is known as the national income. Because private sector receives the entire return from the factors of production, national income is equal to the GDP and we can use the symbol Y for national income as well. Note that in a more detailed analysis of components of GDP, including for instance depreciation and factor income from abroad, it is no longer the case that national income is exactly the same as GDP though they will often be close to each other.
• The private sector pays taxes to government. Here we should include all taxes, income taxes, selective purchase taxes, value added taxes and payroll taxes (that are eventually paid by the private sector because it owns the firms).
• Part of these taxes will be returned to the private sector in the form of pensions, sickness benefit, child allowances and unemployment benefits and so on. All these are illustrations of transfers from the government.
• Net tax is then described as taxes minus transfers and is denoted by NT.
• National income minus net tax is termed as disposable income or personal disposable income and is signified by Y_Disp where Y_Disp = Y - NT.
• Total consumption by the private sector is signified by C. C need not be equal to disposable income as private sector can save and borrow. We define private sectors savings as SH = Y_Disp - C (H for household). If C > Y_Disp then SH < 0 that implies that private sector (in the aggregate) is borrowing money.