Direct benefits lead to PQ=C+G'+I < C+G+I=C+T+S

As a conclusion of this article, under the fluid picture of money circulation, direct benefits (monetary assistance, or cash handout) lead to "PQ ≠ C+G+I''. Here an instance of direct benefits is monetary assistance during this covid-19 disaster. For measuring GDP, we should apply Y=C+G'+I=PQ, where G' is obtained by subtracting the budget for direct benefits from G.

A fluid picture of money circulation. The goods and services market is located in `A', and the household budget is located in `B'. `C' and `D' are government and financial markets.

1. A Fluid Picture of Money Circulation and Direct Benefits

Under the money circulation, GDP is measured as Y=C+G+I=C+T+S. And on goods and services markets, we obtain PQ=C+G+I. This is clarified by confirming cross sections for measuring the money flow in the circular flow diagram, as is shown in "A three-piece set for understanding the money circulation". Furthermore, as is shown in "A fluid view of money circulation", our fluid picture, like as a running pool, helps readers to quantitatively understand the money circulation.

From this fluid picture, we understand that direct benefits break the relationship,  PQ=C+G+I. This is because direct benefits are paid directly to households without passing through goods and services markets (product markets).

For example, let us imagine a running pool like the above figure, and change a path of some of water. Some of water that flows into a running pool through goods and services markets is hosed directly to households. At this time, the amount of water flowing out of households remains the same as before, but the amount of water flowing into goods and services markets decreases. Therefore, the equality between the production side and the expenditure side breaks down. (PQ < C+T+S)

And note that the amount of water flowing into this running pool also remains the same as before. Then we obtain the following relations.

PQ < C+G+I=C+T+S

2. Assumed government spending

Originally, G in Y=C+G+I is assumed to be “government spending flowing into goods and services markets”. This includes personnel costs for civil servants and public works expenses. Therefore, budgets for direct benefits should not be included in the calculation of GDP on the production side. Once included, C+G+I=C+T+S holds true in the book, as described in the above section. However, C+G+I is not equal to PQ. If we set G' as the value obtained by subtracting the budgets for direct benefits from G (G' = G - direct benefits), then we obtain C+G'+I=PQ.

As Gross Domestic Product, we should apply Y=C+G'+I=PQ. And we obtain PQ=C+G'+I < C+G+I=C+T+S. Other budgets from government to households have the same effect.

Link page: Contents for money circulation