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C + I + G + (X—M) = Y. Figure 29.2 shows what is known as the 45° diagram. National income is measured on the horizontal axis and total planned expenditure, at different levels of GDP is measured on the vertical axis. GDP is in equilibrium at Y level of GDP If all the output produced is sold there is no reason for producers to change their output.
Figure 29.3 can be used to derive another formula for the equilibrium condition. GDP will only be stable when the total planned injections are equal to the total planned leakages.
In a four sector economy with a government sector and a foreign trade sector it is not a necessary condition for equilibrium that S should be equal to I, or that G be equal to T, or X be equal to M...
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