Explain the Components of Aggregate Supply or National Income.

The money value of all the final goods and services that all the producers are willing to supply in a given time period in an economy is known as Aggregate Supply. Also, when we express aggregate supply in physical terms, then it is an economy’s total output of goods and services. The value of total output is distributed among the factors of production in the form of rent, wages, profit, and interest, and the sum of these factor incomes at domestic and national level is known as National Income. Hence, it can be said that Aggregate Supply is equal to the National Income (AS = Y).

Components of Aggregate Supply or National Income

Most of the amount of National Income is spent on the consumption of goods and services, and the remaining amount is saved, which means that the income is either consumed or saved. Therefore, it can be concluded that:

National Income (Y) = Consumption (C) + Saving (S)

OR

Aggregate Supply (AS) = Consumption (C) + Saving (S)

Diagrammatic Representation of Aggregate Supply

As aggregate supply is equal to national income, their curves coincide with each other. Let’s take an example to understand the nature of National Income Curve or Aggregate Supply Curve.

In the above graph, X-axis represents the Income, Y-axis represents Consumption and Saving, and a 45° line represents the aggregate supply, which is drawn from the origin. As the 45° line is drawn after taking the same scale on both X-axis and Y-axis, Y = C + S at every point of this line.

Significance of 45° line 

Aggregate Supply is determined by adding consumption and saving schedules as seen in the above table. Now, the straight line drawn from the sum of consumption and saving schedules from the origin will form a 45° angle which establishes the relation of Y = C + S. Therefore, at all points of this line, the consumption will be equal to income, and this concept will be helpful in Keynesian Economic Analysis. Besides, as Consumption or Aggregate Expenditure and Income are measured in the same units, the slope of 45° line is one, and it bisects the graph making a 45° angle.