Question

Imagine you are a time traveller and you enter a small medieval village and find your way to the only inn. The innkeeper rents rooms for $10 a week, which you pay, as that is the exact amount of money you brought. The innkeeper promptly goes across the street and buys a new pair of shoes (which were just being finished) from the cobbler for $10. Later the same day, the cobbler purchases a new bridle and a set of horseshoes (just produced) from the stable master for, again, $10. Right at the end of the day the stable master buys a year’s supply of candles (freshly produced) from the candle maker for, of course, $10. These are the only economic transactions in the whole village on that particular day.

What were the total expenditures? What was the total income earned? And finally, what stock of money was used to generate this income flow?

What is the relationship between production, expenditures, and income?

What comes first: production or expenditure? And is it conceivable, for instance, to have income and production, but no expenditures?

Answer 1

The total expenditures were: 10$ by you(the time traveller), 10$ by the innkeeper, 10$ by the cobbler and 10$ by the stable master = 40$

The total income earned was: 10$ for the innkeeper, 10$ for the cobbler, 10$ for the stable master, and 10$ for the candlemaker = 40$

The total stock of money used to generate this income flow was 10$. The same 10$ you brought was passed on and generated the income flow that lead to all of these transactions.

The relation between production, income and expenditure is Total value of all production=Total expenditures=Total income earned (These are 3 approaches to calculate the GDP or Gross Domestic product and should sum up to the same value)

Production comes first, as you can only spend on goods or services that were produced. A farmer growing apple trees(Or any other raw material) from seeds and soil both naturally occuring will have done production first before someone spends money to buy it from him. Although it is often possible for it to be a cycle (Suppose the farmer had to spend on pesticides for farming whose production needed expenditure somewhere else etc.). It is also possible for production to happen without expenditure in case someone produces a good and doesn't ask anything in return

No it is not possible to have both income and production but no expenditure. Since there is income and production, someone will have had to spend money on it and therefore the expenditure cannot be zero.

Hope it helps. Do ask for any clarifications if required.