Why should the aggregate final expenditure of an economy be equal to the aggregate factor payments? Explain.
The aggregate final expenditure of an economy should be equal to the aggregate factor payments because the revenues earned by all firms put together must be distributed among the factors of production as salaries, wages, profits, interest earnings and rents.
When households spend their income on goods and services produced by firms, it takes the form of aggregate expenditure received by the firms. This revenue is then paid out to the factors of production, taking the form of aggregate income. There is no leakage from the system – there is no difference between the amount that firms distribute as factor payments and the aggregate expenditure they receive as sales revenue.
Thus, the sum of final expenditures in the economy must be equal to the incomes received by all the factors of production taken together.
Explanation
The textbook establishes this equality through the circular flow of income. Firms receive revenue from final expenditures on goods and services, and this same revenue must be paid out to factors of production (land, labour, capital, entrepreneurship) as factor payments. Since there are no leakages in the basic model, aggregate expenditure equals aggregate factor income.