National Accounting - Consumption and Investment

Over the course of a year, a quarter, or a month, we can look at the debits and credits that build up the entirety of an economy. National accounts looks at these debits and credits and record the transactions 

While it can be the case we make more than we spend as individuals, this cannot be the case for entire economies. This is the old adage that every sale is something bought. In the context of macroeconomics we say that income over a period of time should be equal to expenditures over that period of time:

Expenditures = Income

For the case of this post, we will assume a hypothetical economy which only consists of domestic investment and consumption as transactions. We can define the two as follows:

1. Consumption: Transactions that are associated with the destruction of asset values.

1. Investment: Transactions that are associated with increasing assets values.

To understand these definitions, we will look at two sets of debit and credit charts to show how these transactions are recorded on the economy wide ledger. 

The first example we will look at is consumption.

In the point of time t=0, McDonalds has a produced burger and the customer has a dollar to spend. At t=1 the transaction has occurred and the man sits down with his burger. At t=2 the burger is eaten. What is interesting here is the economy wide ledger. If the two entities in the economy consist of the Customer and McDonalds, then we can see that the consumption of the burger has caused the aggregate wealth to decline. One person swapping a 1 dollar burger for a dollar and the other drawing down their stock of wealth (their newly purchased burger). 

We will now look at investment.

In terms of balance sheets, the house at t=0 is not built yet by the builder. In t=1, the house is built and on the market. In t=2 the transaction is completed and we can clearly see that since the house was not consumed that this spending was associated with an increase in wealth for the total economy assuming the economy only consisted of the home buyer and the builder.

If we assume classes of transactions are either Investment or Consumption and we pretend government or the foreign sector doesn't exist, we can show that total expenditures over a time period in an economy are: 

Expenditures ≡ Consumption + Investment 

or: 

E ≡ C + I 

Where the three lines show 'equivalence' since this is always true and exists as an accounting relation, not a behavioral one. An accounting definition simply divides types of flows or stocks into different categories, a behavioral one will assume some sort of relationship between variables (such as investment trading off with consumption, aka consumption being a negative function of investment).