Concept of National Income

Microeconomics
Microeconomics

is the study of how individual households and firms make decisions and how they interact with one another in markets.

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Macroeconomics
Macroeconomics
Its

is the study of the economy as a whole.

goal is to explain the economic changes that affect many households, firms, and markets at once.

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Macroeconomics
Macroeconomics

answers questions like

the following:
Why

is average income high in some countries and low in others? Why do prices rise rapidly in some time periods while they are more stable in others? Why do production and employment expand in some years and contract in others?

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The Economys Income and Expenditure

When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning.

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Def- National Income

The

total market value of all final goods and services produced in the economy in a given year.

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The Circular-Flow Diagram The equality of income and expenditure can be illustrated with the circular-flow diagram.

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The Circular-Flow Diagram

Revenue

Goods & Services sold

Market for Goods and Services

Spending Goods & Services bought

Firms

Households

Inputs for production

Wages, rent, and profit

Market for Factors of Production

Labor, land, and capital

Income

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Approaches to Measurement of National Income Circular flow of income arises out of the process of activity chain in which: Production creates income ; Income generates spending ; Spending induces production

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Three measures of National Income

Total

value of goods and services produced (Production Approach) Total of all income received by factor owners in a year (Income Approach) Total of consumption expenditure, net investment expenditure and government expenditure on goods and services. (Expenditures Approach)
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National Income at Current Price and National Income at Constant Price:

Current

Prices refer to the prices prevailing in the market during the year for which estimates are made. Constant Prices refer to the prices prevailing in the market in the base year. National income is measured at both the levels in order to enable a comparison

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National Income concepts

The

following are the concepts of national income Gross Domestic Product GDP Gross National Product GNP Net National Product NNP Per capita Income PCI Personal Income PI
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GDP at market price

GDP is the market value of all final goods and services produced within a country in a given period of time.

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The Measurement of GDP

Output

is valued at market prices. It records only the value of final goods, not intermediate goods (the value is counted only once). It includes both tangible goods (food, clothing, cars) and intangible services (haircuts, housecleaning, doctor visits).

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The Measurement of GDP

It

includes goods and services currently produced, not transactions involving goods produced in the past. It measures the value of production within the geographic confines of a country.

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What Is Counted in GDP?

GDP includes all items produced in the economy and sold legally in markets.

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What Is Not Counted in GDP?

GDP

excludes most items that are produced and consumed at home and that never enter the marketplace. It excludes items produced and sold illicitly, such as illegal drugs.

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Expenditures Approach

GROSS DOMESTIC PRODUCT

Income Approach

Consumption by Households by Businesses

+ Investment
Purchases

+ Government

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by Foreigners

+ Expenditures

G = D = P

Adjustments

+ Rents + Interest + Profits + Statistical

Wages

The Components of GDP

GDP (Y ) is the sum of the following:

Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX)

Y = C + I + G + NX
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Real versus Nominal GDP

Nominal

GDP values the production of goods and services at current prices. Real GDP values the production of goods and services at constant prices.

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Gross National Product (GNP)

Gross

national product (GNP) is the total income earned by a nations permanent residents (called nationals). It differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn here.

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GNP and GDP tend to be used as synonyms

GDP GDP = GNP Net income earned from abroad

GNP GNP = GDP + Net income earned from abroad

GNP = value of all (final) goods and services produced in a country in one year + income earned by its citizens abroad income earned by foreigners in the country
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Net National Product (NNP)

Net

National Product (NNP) is the total income of the nations residents (GNP) minus losses from depreciation. Depreciation is the wear and tear on the economys stock of equipment and structures.
GNP

Depreciation = NNP

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PER CAPITA INCOME

Average earning of an individual in a particular year Per capita income = national income of a country/population of a country

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Personal Income PI
Income

earned by all the individuals and institutions during a year in a country The entire national income does not reach individuals and institutions
A part of it goes by way of corporate taxes Undistributed profits Social security contributions

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Personal Income PI
People

sometimes get incomes without any productive activity They are called Transfer Payments Example: Unemployment benefits, old age pensions etc. Such transfer payments are not included in the National Income However they are added to Personal Income
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Personal Income PI
Income PI: PI is computed by using the following formula
Personal

PI = National Income (Corporate taxes, undistributed profits, social security contributions) + Transfer Payments

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PROBLEMS IN CALCULATING NATIONAL INCOME

Conceptual Difficulties
Black Money Non-Monetization Overlapping of occupation Services go unaccounted

Statistical Difficulties
Error of double counting

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