1. National Income
National income means the value of
goods and services produced by a country
during a financial year. Thus, it is the net
result of all economic activities of any
country during a period of one year and is
valued in terms of money.
2. Definition
“The labour and capital of a country acting on its
natural resources produce annually a certain net
aggregate of commodities, material and
immaterial including services of all kinds. This is
the true net annual income or revenue of the
country or national dividend.” -
Marshall
National income committee of India, 1951,
defines it in a simple way “ A national income
estimate measures the volume of commodities
and services turned out during a given period
counted without duplication”.
3. 2019-2020
India's per capita income is expected to be ₹135,050 (US$1,800). It is
expected to grow at the rate of 6.8%; this is slower than its previous
growth.
2018-2019
India's per capita income was ₹1,26,406,. This represented a growth
rate of 10% over the previousyear.
2017-2018
India's per capita income was ₹1,13,500. It grew at a rate of 8.6%.
2016-2017
India's per capita income was ₹1,03,000, representing a rise of 9.3%
over the previous year.
7. National Income is the money measure of -
1. The net value of all products and services
2. Of an economy during a year
3. Counted without duplication
4. After having allowed for depreciation
5. Both in public and private sectors
6. In consumption and capital goods sectors.
7. Finally, throwing in the net gains from international
transactions comprising of gains, not merely from
export, import trade, but also from capital lent or
invested abroad.
8. National Product, National Income and
National Expenditure
National Product, National Income and National
Expenditure have close identity and they are similar
in the money value.
=
National Product
(i,e, Money value of all goods and
services produced by the firms
In the economy
National Income
(i,e, Money value of all incomes
earned by factors co-operating in
making these goods and services
Similarly, national income is equal to national expenditure
i.e The individual may do two things with his available income. He may
spend most of it and he may save the balance for future use. Like wise
the nation may spend its income on consumption and may save some of
its income.
9. Concepts of National Income
Common measures of national income are :
Gross Domestic Product ( GDP)
Gross National Product (GNP)
Net Domestic Product (NDP)
Net National Product (NNP)
10. Gross Domestic Product ( GDP)
GDP is sum of values of all final goods and services
produced within the domestic territories of a country
during an accounting period.
It includes income from exports and payment made
on imports during the year.
It does not include income the earnings of nationals
working abroad as also of the foreign nationals
working in our country.
GDP =C+I+G+ (X-M)
C=consumption;; G=government spending;;
I=investment;
11. Further, GDP is calculated at market price and is
defined as GDP at market prices. Different
constituents of GDP are:
1. Wages and salaries
2. Rent
3. Interest
4. Undistributed profits
5. Mixed-income
6. Direct taxes
7. Dividend
8. Depreciation
12. Gross National Product (GNP)
Gross National Product (GNP) : is the basic social
accounting measure of total output of goods and
services produced in a year of a nation.
It is defined as “the total market value of all final
goods and services produced in a year” .
The term ‘final’ refers to finished goods ready for
consumption for households and firms.
Net Factor Income from Abroad
GNP= GDP+NFIA
13.
14. GNP can be obtained in two ways...
1. Income method
2. Expenditure method
Income method:
GNP is calculated by adding the following items:
a) The value of consumption of goods which are
currently produced.
b) The value of all capital goods produced and
defined as gross investment (increase in
equipments). It includes depreciation and
replacement allowance.
c) The value of government expenditure on various
goods and services.
d) The value of net exports. The difference between
total exports and imports must be taken.
e) The net amount earned in abroad.
15. 2. Expenditure method
Under this method the following items of
expenditure are to be added:
a) Personal consumption expenditure
b) Gross Domestic investment (private)
c) Govt. Purchase of goods and services.
d) Net foreign investment.
16. Per capital Income:
The average income of the people of a country in a
particular year is called per capital income.
National Income
Per capita income = ____________
Total Population
17. Personal Income
Personal income is the total income received by the
individuals of a country from all sources before direct
taxes in a year.
It is derived from national income by deducting
undistributed corporate profits, profit taxes and
employees’ contributions to social security schemes.
Personal income = NI+ Undistributed corporate
profits-corporate taxes- Social Security Contributions
+ Transfer payments+ Interest on Public Debt
18. Personal Disposable Income;
Personal disposable income is the income which
can be spent on consumption by individuals and
families.
Personal disposable income= Personal Income – Personal
Taxes
22. Cont...
Circular/low of income refers to continuous circular
flow of money income and flow of goods between
different sectors of economy.
Flow of money is the aggregate value of goods and
services either as factor payment or as expenditure
on goods and services.
It is circular in nature because it moves in a circle
coming back to the starting point. Again it is circular
because it has neither beginning nor end.
The firms hire/purchase factor services from
households and produce goods and services. The
households as owners of factors of production (land,
labour, capital and enterprise) receive the payment
in terms of money (rent, wages. Interest and profit)
as reward for rendering production services
23. Cont...
Thus, income is generated. The recipients of these
incomes (i.e., factor owners or households) in turn
spend their incomes on purchase of goods and services
(produced by firms) to satisfy their wants.
Expenditure by households implies income going back
to firms (producers of goods and services).
This makes the circular flow of income complete. In
short, income is first generated by production units, and
then distributed among households (factor owners) for
rendering productive services and ultimately comes
back to production units (firms) by way of expenditure
on goods and services by households. In this way,
there is circular flow of income.
24. Keynesian Theory of National Income
Determination
According to Keynes, there can be different
sources of national income, such as government,
foreign trade, individuals, businesses and trusts.
For determining national income, Keynes had
divided the different sources of income into four
sectors namely’ household sector, business sector,
government sector, and foreign sector.
26. Cont...
The two-sector model of economy involves
households and businesses only, while three-sector
model represents households businesses, and
government.
While three-sector model represents households
businesses, and government.
On the other hand, the four-sector model contains
households, businesses, government, and foreign
sector.
27. Determination of National Income in
Two-Sector Economy:
The determination of level of national income in the
two-sector economy is based on an assumption that
two-sector economy is an economy where there is no
intervention of the government and foreign trade.
An economy can be a two-sector economy if it
satisfies the following assumptions:
1. Comprises only two sectors, namely, households
and businesses (mutual benefit)
2. Does not have government interference.
3. Comprises a closed economy in which the foreign
trade does not exist
28. Cont...
4. Contains no profit that is undistributed or savings by
the organization.
5. Keeps the prices of goods and services, supply of
factors of production, and production technique
constant.
Keynes believed that there are two major factors
that determine the national income of a country:
These two factors are..
a) Aggregate Supply (AS) and
b) Aggregate Demand (AD) of goods and services.
29. Cont....
Aggregate Supply
AS can be defined as total value of goods and
services produced and supplied at a particular point
of time.
It comprises consumer goods as well as producer
goods. When goods and services produced at a
particular point of time is multiplied by the respective
prices of goods and services, it provides the total
value of the national output.
The national output is the aggregate supply in the
form of money value.
The Keynesian AS curve is drawn based on an
assumption that total income is equal to total
expenditure.
30. The correlation between income and
expenditure is represented by an angle of
45°
According to Keynes theory of
national income determination, the
aggregate income is always equal to
consumption and savings.
The formula used for aggregate
income determination:
Aggregate Income =
Consumption(C) + Saving (S)
Therefore, the AS schedule is usually
called C + S schedule. The AS curve
is also named as Aggregate
Expenditure (AE) curve.
31. Aggregate Demand
AD refers to the effective demand that is equal to the
actual expenditure. Aggregate effective demand
refers to the aggregate expenditure of an economy
in a specific time frame.
AD involves two concepts, namely, AD for consumer
goods or consumption (C) and aggregate demand
for capital goods or investment (I).
The AD can be represented by the following
formula:
AD = C + I
32. Cont......
Therefore, AD schedule is also termed as C+I
schedule. According to Keynes theory of national
income determination in short-run investment (I)
remains constant throughout the AD schedule, while
consumption (C) keeps on changing.
Therefore, consumption (C) acts as the major
determinant or function of income (Y).
33. Cont...
C = a + bY
Where, a = constant (representing consumption
when income is zero)
b = proportion of income consumed = ∆C/∆Y
By substituting the value of consumption in the
equation of AD, we get:
AD = a + bY + I
34. Graphical representation of national
income determination in the two-sector
economy
•While drawing AS schedule it is
assumed that the total income and
total expenditure are equal.
Therefore, the numerical value of AS
schedule is one.
AD schedule is prepared by adding
the schedule of C and I. The
aggregate demand and aggregate
supply intersect each other at point E,
which is termed as equilibrium point.
beneath point E, the AD and AS
schedules represent that the
aggregate demand is more than
aggregate supply. In such a case, the
production by businesses is less than
the demand of households.
Therefore, businesses start
producing more and more products
and services
35. Cont..
Income-Expenditure Approach:
Income-expenditure approach refers to the method
in which the aggregate demand and aggregate
supply schedules are used for the determination of
national income.
Saving-Investment Approach:
Saving-investment approach refers to the method
in which the saving (S) and investment (I) are used
for the determination of national income. The
condition for achieving equilibrium with the help of
saving-investment approach is that the saving and
investment are equal (I = S).
36. Methods for Estimating the National
Income
1. The Product Method:
Also known as ‘Inventory method’ or ‘Commodity
Service Method’. It consists in finding out the
market value of all goods and services produced
in a country during a given period.
We sum up the value of the gross product of all
producers in an industry and from this total are
deducted the value of the intermediate products
consumed and depreciation of equipment during
the process of production.
37. 2. The Income Method:
This method consists in adding together all the income
that accrue to the factors of production by way of wages,
rents, interests and profits. This gives us national income
classified by distributive shares.
The factor owners are paid for the productive services
rendered by them in money.
The total money payments made to the factors of
production in the economy represent the total money
value at factor cost.
What is factor payment (cost) for the producers is factor
income (earning) for the factor owners.
Thus, under income approach GNP is found by adding up
the total factor incomes generated in producing the
national product.
38. 3. The Expenditure Method:
Under this method we add up personal consumption
expenditures, the gross private domestic investment,
the Government purchase of goods and services and
the net foreign investment to obtain GNP at market
prices.
We deduct depreciation to obtain NNP at market
price, less Indirect Taxes give us net national income
at factor cost. In this method of national product
measurement, the GNP is regarded as a flow of total
goods and services bought through the money
payments by the community.
39. 4. Social Accounting Method
This is another method of measuring national
income developed by Richard Stone in recent
times.
According to the social accounting method
various types of transactions are classified in
different groups.
These are producers, traders, final consumers,
etc. Estimates of national income are prepared
after taking into consideration the figures of
transactions of certain representative persons
with similar economic position belonging to
different groups
40. 5. Combined Method
It is not possible to estimate correctly the national
income by adopting a particular method.
Each method has its own weaknesses. In order to
overcome these practical difficulties we make use of
two or three methods to find out true national
income—it is called mixed or combined method.
Mixed or combined method is used in under-
developed countries to estimate the national income
because the dependence on one or a particular
method does not give correct results for want of
accurate figure.
This mixed method was followed in India in 1948-49 by
National Income committee because production or
income method alone could not give correct results.
41. Business Cycle
Business cycles are characterized by boom in one
period and collapse in the subsequent period in
the economic activities of a country.
These fluctuations in the economic activities are
termed as phases of business cycles.
The fluctuations are compared with ebb and flow.
The upward and downward fluctuations in the
cumulative economic magnitudes of a country
show variations in different economic activities in
terms of production, investment, employment,
credits, prices, and wages. Such changes
represent different phases of business cycles.
42. The different phases of business cycles
are...
There are basically two important phases in a business
cycle that are prosperity and depression. The other
phases that are expansion, peak, trough and recovery
are intermediary phases.
44. Cont..
1. Expansion:
The line of cycle that moves above the steady
growth line represents the expansion phase of a
business cycle. In the expansion phase, there is
an increase in various economic factors, such as
production, employment, output, wages, profits,
demand and supply of products, and sales.
In expansion phase, due to increase in
investment opportunities, idle funds of
organizations or individuals are utilized for
various investment purposes. Therefore, in such
a case, the cash inflow and outflow of businesses
are equal. This expansion continues till the
economic conditions are favourable.
45. Cont..
2. Peak
The growth in the expansion phase eventually
slows down and reaches to its peak. This phase is
known as peak phase.
In other words, peak phase refers to the phase in
which the increase in growth rate of business
cycle achieves its maximum limit.
In peak phase, the economic factors, such as
production, profit, sales, and employment, are
higher, but do not increase further.
In peak phase, there is a gradual decrease in the
demand of various products due to increase in the
prices of input.
46. Cont..
3. Recession
In recession phase, all the economic factors, such as
production, prices, saving and investment, starts
decreasing.
Generally, producers are unaware of decrease in the
demand of products and they continue to produce
goods and services.
In such a case, the supply of products exceeds the
demand.
Over the time, producers realize the surplus of supply
when the cost of manufacturing of a product is more
than profit generated.
This condition firstly experienced by few industries
47. Cont...
4. Trough
During the trough phase, the economic activities of a
country decline below the normal level.
In this phase, the growth rate of an economy
becomes negative. In addition, in trough phase,
there is a rapid decline in national income and
expenditure.
it becomes difficult for debtors to pay off their debts.
As a result, the rate of interest decreases; therefore,
banks do not prefer to lend money.
Consequently, banks face the situation of increase in
their cash balances.
the level of economic output of a country becomes
low and unemployment becomes high. In addition, in
trough phase, investors do not invest in stock
markets.
48. 5. Recovery
As discussed above, in trough phase, an economy
reaches to the lowest level of shrinking.
This lowest level is the limit to which an economy
shrinks. Once the economy touches the lowest
level, it happens to be the end of negativism and
beginning of positivism.
This leads to reversal of the process of business
cycle.
As a result, individuals and organizations start
developing a positive attitude toward the various
economic factors, such as investment, employment,
and production. This process of reversal starts from
the labor market.
49. Fiscal Policy in India
The means by which the government adjust its
spending levels along with tax rates to influence
and monitor the nation’s economy it is known as
fiscal policy.
Fiscal policy means the use of taxation and
public expenditure by the government for
stabilization or growth of the economy.
50. Objectives of a Fiscal Policy
1. In order to stabilize the pricing level in the
economy.
2. The main objective is to achieve and maintain the
level of full employment in the country.
3. Also, to stabilize the growth rate in the economy.
4. Also, promote the economic development in a
country.
5. In order to maintain the level of balance of
payment in the economy.
51. Various Types of Fiscal Policies
1. Contractionary Fiscal Policy
This involves cutting government spending or raising taxes.
Thus, the tax revenue generated is more than government
spending. Also, it cuts on the aggregate demand in the
economy. So, the economic growth leading to the reduction
in inflationary pressures of the economy.
2. Expansionary Fiscal Policy
This is generally used to give a boost to the economy. Thus,
it speeds up the growth rate of the economy. Also, during the
recession period when the growth in national income is not
enough to maintain the current living of the population.
So, a tax cut and an increase in government spending would
boost economic growth and decrease the unemployment
rates. Although this is not a sustainable solution. Because
this can lead to a budget deficit. Thus, the government
52. Cont........
3. Neutral Fiscal Policy
This policy implies a balance between government
spending and Furthermore, it means that tax revenue
is fully used for government spending. Also, the
overall budget outcome will have a neutral effect on
the level of economic activities.
53. Types of Fiscal Policy
1. Expenditure Policy
2. Taxation Policy
3. Surplus and Debt Management
Government expenditure includes capital
expenditure and revenue expenditure.
The government generates its revenue by imposing
both indirect taxes and direct taxes.
When the government receives more amount than it
spends than it is known as surplus. Also, when the
spending is more than the income than it is known
as a deficit. In order to fund the deficits, the
government needs to borrow from domestic or
55. Roles
1. To Mobilize Resources
2. To Accelerate the Rate of Growth
3. To Encourage Socially Optimal Investment
4. Inducement to Investment and Capital Formation
5. To Provide more Employment Opportunities
6. Promotion of Economic Stability
7. To Check Inflationary Tendencies
8. National Income and Proper Distribution
9. Subsidies in Consumption and Production
10. Reallocation of Resources
11. Incentive to Production
12. Balanced Growth
56. Aggregate supply
Firms make decisions about what quantity to supply
based on the profits they expect to earn. Profits, in
turn, are also determined by the price of the outputs
the firm sells and by the price of the inputs like
labour or raw materials (the firm needs to buy. )
Aggregate supply, or AS, refers to the total quantity
of output in other words, real GDP (firms will produce
and sell. )
The aggregate supply curve shows the total quantity
of output (real GDP)that firms will produce and sell at
each price level.
57. Cont...
The graph below shows an aggregate supply curve.
Let's begin by walking through the elements of the
diagram one at a time: the horizontal and vertical
axes, the aggregate supply curve itself, and the
meaning of the potential GDP vertical line.
The horizontal axis of the diagram shows real GDP—
that is, the level of GDP adjusted for inflation. The
vertical axis shows the price level. Price level is the
average price of all goods and services produced in
the economy. It's an index number, like the GDP
deflator.
58.
59. Aggregate demand,
Aggregate demand, or AD, refers to the amount of
total spending on domestic goods and services in an
economy. Strictly speaking, AD is what economists
call total planned expenditure. We'll talk about that
more in other articles, but for now, just think of
aggregate demand as total spending.
Aggregate demand includes all four components of
demand:
Consumption
Investment
Government spending
Net exports—exports minus imports
60. Cont..
This demand is determined by a number of factors;
one of them is the price level. An aggregate demand
curve shows the total spending on domestic goods
and services at each price level.
can see an example aggregate demand curve below.
Just like in an aggregate supply curve, the horizontal
axis shows real GDP and the vertical axis shows
price level. But there's a big difference in the shape
of the AD curve—it slopes down.
This downward slope indicates that increases in the
price level of outputs lead to a lower quantity of total
spending.
62. Cont...
Let's dig a little deeper. To fully understand why price
level increases lead to lower spending, we need to
understand how changes in the price level affect the
different components of aggregate demand.
Remember, the following components make up
aggregate demand:
consumption spending, Ctext{C}Cstart text, C, end
text; investment spending, Itext{I}Istart text, I, end
text; government spending, Gtext{G}Gstart text, G,
end text; and spending on exports, Xtext{X}Xstart
text, X, end text, minus imports Mtext{M}Mstart text,
M, end text.
63. Aggregate demand=C+I+G+X−Mtext{Aggregate
demand} = text{C} + text{I} + text{G} + text{X} -
text{M}Aggregate demand=C+I+G+X−Mstart text, A,
g, g, r, e, g, a, t, e, space, d, e, m, a, n, d, end text,
equals, start text, C, end text, plus, start text, I, end
text, plus, start text, G, end text, plus, start text, X,
end text, minus, start text, M, end text.
64. Cont..
The wealth effect holds that as the price level
increases, the buying power of savings that people
have stored up in bank accounts and other assets will
diminish, eaten away to some extent by inflation.
Because a rise in the price level reduces people’s
wealth, consumption spending will fall as the price
level rises.
65. The interest rate effect explains that as outputs rise,
the same purchases will take more money or credit
to accomplish.
This additional demand for money and credit will
push interest rates higher.
In turn, higher interest rates will reduce borrowing by
businesses for investment purposes and reduce
borrowing by households for homes and cars—thus
reducing both consumption and investment
spending.
66. The economic policy of governments covers
the systems for setting levels
of taxation, government budgets, the money
supply and interest rates as well as the labor
market, national ownership, and many other
areas of government interventions into the
economy.
There are four major goals of economic
policy: stable markets, economic prosperity,
business development and protecting
employment.
67. Macroeconomic stabilization policy, which attempts to
keep the money supply growing at a rate that does not
result in excessive inflation, and attempts to smooth out
the business cycle.
Trade policy, which refers to tariffs, trade agreements and
the international institutions that govern them.
Policies designed to create economic growth
Policies related to development economics
Policies dealing with the redistribution of income,
property and/or wealth
As well as: regulatory policy, anti-trust policy, industrial
policy and technology-based economic development
policy
