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National Income
Lecture Plan
Objectives
Circular Flow of Economic Activities and Income
Two Sector Model
Four Sector Model
Macroeconomic variables
Concepts of National Income
Measuring National Income
Uses of National Income Data
Difficulties in Measurement of National Income
Objectives
To explain the circular flow of economic activity and
income.
To introduce the concepts of aggregates, stock and
flow and final goods.
To explain various concepts of national income, like
GDP, GNP and NNP.
To discuss and analyze the different methods to
measure national income.
To understand the advantages of national income
calculation in global perspective.
Factor Payments
(Y)
Factor Inputs
Households
Savings
(S)
Financial
Market
Investment
(I)
Goods and
Services (O)
Consumption
expenditure
(C)
Firms
Government Spending
Government Revenue
Households and firms pay various taxes and other payments and
provide factor inputs to the government.
Government borrows from the financial market to fill revenue gap.
Imports (M): Outflow of income occurs when the domestic firms buy
goods and services from foreign ones.
Exports (X): Inflow of income takes place when foreign firms buy
goods and services from domestic ones
Salaries
Factor
Payments
Remittances
for purchases
Taxes
Factor Inputs
Households
Savings
(S)
Exports
Financial Market
Goods
Investment
(I)
Exports
Consumption
Expenditure
Imports
Foreign Nations
(X-M)
Firms
Imports
Macro-economic Variables
Aggregate Demand and Aggregate Supply
Aggregate Demand is the sum of demand for all goods and
services by all the consumers for a given period of time.
aggregate demand (AD) for consumer goods i.e. consumption
demand (C)
aggregate demand for capital goods i.e. (I).
Thus AD = C+I
Aggregate supply is the total national output produced and supplied by
all the factors of production in an economy.
It refers to the supply of all goods and services in the economy for a
given period of time.
Aggregate supply (AS) consists of
supply of consumer goods (C) and
Supply capital goods (where capital comes from savings (S),
Hence AS=C+S
Macro-economic Variables
Stock and Flow
Stock may be defined as any economic variable which has
been accumulated at a specific point of time
like money, assets and wealth.
Stock=Inflows-Outflows
Intermediate and Final Goods
Intermediate goods (and services) are items purchased by
firms for using them in production of some other good of utility.
Also known as producer goods because they are used as
inputs in the production of other goods.
Macro-economic Variables
Capital formation
The process of savings being converted into investment is known as
capital formation
Gross Capital Formation refers to the aggregate of additions to fixed
assets (Fixed Capital Formation) and increase in stocks of inventories
during a period of time.
Employment
An employed person is willing and capable to work in a productive activity
and is engaged for certain number of hours per week, whether working for
self or someone else.
The population of any country is divided into working population (age group
of 16 to 65 ) and dependents.
National Income
National income is defined as the money value of all
the final goods and services produced in an economy
during an accounting period of time, generally one
year.
Real GDP =
Nominal GDP
GDP deflator
GDP deflator is the ratio of nominal GDP in a year to real GDP of that year
GDP deflator measures the change in prices between the base year and
the current year.
National Income
Total Population
Income Method
Limitations
Summary
GDP is the sum of money values of all final goods and services produced
within the domestic territories of a country during an accounting year. It can be
measured at current or constant prices.
GNP is the aggregate final output of citizens and businesses of an economy in
one year. NNP is GNP less depreciation.
The average income of the people of a country in a particular year is per capita
income for that year.
National income can be measured by product method, income method and
expenditure method.
National income accounting data are of utmost importance for the economy of
any country; such data reveal the aggregate production of the economy and
also help to determine the total expenditure and total income of that country.
Difficulties in measuring national income include multiple counting, exclusion of
non market transacted services, self consumption of output, inflation or
deflation, confusion about informal sector, etc.
National income is considered as a measure of economic welfare. As national
income rises, the aggregate production of goods and services rises. Therefore,
there is a positive relation between increase in national income and welfare.