I think this material is best B.S students who are studying economics.

1. WOMEN UNIVERSITY MARDAN
(WUM)
DEPARTMENT OF ECONOMICS
Assignment 1
Course tittle: Principals of Macroeconomics
Submitted to:
Ma’am Nayab
Submitted by:
Munazza Wardak
Date: 7/12/2020

3. NATATIONAL INCOME
DEFINITION:
National income is the aggregate measure of economic activity in an economy during some
given period.
Prof. Marshal in his book “principles of economics” defines NI as sum of all the physical goods
produced and services provided by utilizing the natural resources of the country with the help
of labor and capital.
CONCEPT RELATED TO NATIONAL INCOME
The important concepts usedabout national income are:
GROSS NATIONAL PRODUCT(GNP)
GNP is the most comprehensive and basic measure of aggregate economic activity. IT
measure the rupee value of national output. GNP Is the money value of all final goods and
services produced annually by an economy.
GNP includes all production by the residents of a country, whether it is done in the country or
somewhere abroad. The GNP of a country, say Pakistan, includes the profits sent home by all
Pakistani firms and incomes of individuals even if they are working outside Pakistan.
The following points should be remembered about GNP:
1. It is a money measure. Because different units of measurement are employed for
different goods, it is not possible to add unlike items such as apples and shoes directly. So
their money value is taken and added.
2. In order to avoid double counting, the values of only final goods are included in the
estimate.
3. Only the value of goods produced in current year is included.
4. GNP is calculated either by Summing total expenditure on all final output or by
summing the incomes derived from production of that output.
If expenditure method is used, then
GNP = consumption expenditure + investment expenditure + government spending
5. GNP is used as a measure of a nation’s welfare.
6. It provides basis for economic comparison of countries.
7. Increase in GNP is an indicator of improved economic performance of the country.

4. If GNP is measure in current prices, it is called nominal GNP. By using index of general
price level, nominal GNP is deflated and converted into prices of some base year. The
GNP adjusted for price changes is called real GNP or GNP at constant prices.
GNP = GDP – foreigners earning + foreign remittances
OR
GNP = GDP – factor payment to abroad + factor payment from foreign
GROSS DOMESTIC PRODUCT (GDP)
Domestic product means total value of production done within a
country. The concept of GDP ignores the incomes received by its
national from their property in other countries, or the amounts
received for services rendered abroad. It only records what is
the sum total of incomes when goods and services are produced
inside a country.
GDP of a country for some years is the total value of goods and
services, which it produces within the boundaries of a country
during a given period of time (usually on year)
FORMULA
GDP= C + G + I + ( N – M )
FOR EXAMPLE:
SERVIS (shoes) is a Pakistani firm while BATA is a foreign firm working in Pakistan. Similarly
individuals working in a country be either locals or foreigners. Total value of output by all kinds
of firms, which they produce inside Pakistan, is included in GDP of Pakistan. Thus production of
both SERVIS and BATA is included in GDP of Pakistan.
The following point about GDP should be remembered.
1. GDP is money measure of total domestic production.
2. Only the value of goods produced in current year in included.
3. Growth rate of GDP is use to judge the success of government economic policies.
Between the Great in
1929-1933, GDP fell from$104
billionto$56 billion.Thissharp
decline inthe dollarvalue of
goodsand servicesproducedby
the Americaneconomycaused
hardship,bankruptcies,bank
failures,riots,andpolitical
turmoil.
Consumption
Government
spending
Investment
Net exports export
- imports

5. 4. The relative importance of various sectors of the economy is determined on the basis
of each sectors share in GDP.
5. Increase in GDP is an indicator that economy is growing and expending.
NET NATIONAL PRODUCT (NNP)
NNP is the measure production of a country obtained by
deducting the amount of depreciation from GNP.
NNP is the total incomes of Nation’s residents GNP minus
losses from depreciation.
NNP = GDP – Depreciation
FOR EXAME:
GDP = R s. 150 billion
Depreciation allowance = R s. 20 billion
NNP (Net National Product) = Rs.130 billion
NNP is the true measure of national income of a country
Net Nationalincome at FactorCost
National income is the total of all incomes earned by the factors of production in the form
of wages, rent, interest and profit.
The cost is the payments made to the factors of production which includes land, labor,
capital, and entrepreneurship.
NNP = C + Ig + G + Xn
NNP at factor cost = NNP at market price – indirect taxes + subsidies
FOR EXAMPLE: Suppose
NNP = Rs 130 billion
Indirect taxes (-) = Rs 15 billion
Subsidies (+) = Rs 5 billion
Then National income (at factor cost = (130 – 15 + 5) = 120 billion
DEPRECIATIONISTHEWEAR AND
TEAR ON THE ECONOMYS STOCK OF
EQUIPMENT ANDSTRUCTURES.

6. We must remember about national income that if government increases indirect taxes, then
the market value of output will increase but the income received by factor will remain the
same
PERSONALINCOME
Personal income is the total income received by the people from all sources.
NI does not show how much amounts are possessedby the people. There are the persons
who get incomes without rendering their services. As the case of transfer payments like
pensions, unemployment allowances, social security allowances and stipends, etc. On the
other side, may also happen that despite offering the services some people remain deprived
of the payment. It is the case taxes on profits, welfare deductions undistributed profits. If
we include transfer payments and subtract undistributed profits, etc. from NI we get
personal income. it is as:
Where PT = taxes on profits, R = transfer payments and UP = undistributed profits.
DISPOSABLE PERSONALINCOM
If personal taxes are subtract from personal income we get DPI. It is as:
Where TP = personal taxes, Yd = DPI
GROSS DOMESTIC PRODUCT
If we subtract the income earned through foreign services, we get GDP.
It is as:
Where FI = foreign income
MATHODS OF MEASURING NATIONAL INCOM:
There are three methods for measuring National Income. They are: Product Method, Income
Method and Expenditure Method.
1. INCOME METHOD:
In this method, National, income is measured by totaling the income received by
individuals, institutions and Governments.Generally in this method we add rent, wages;
PI = NI + R – PT – UP
Yd = DPI – TP = C + S
GDP = GNP – FI

7. interestand profit received by all people in the country. The total national income is
called factors payment total. While product method calculates National Income from the
production point of view, income method calculates National Income from the distribution
point of view. In this method some precautions must be taken.
2. PRODUCT METHOD:
This method is also called output method. In this method, national income is calculated
by finding the net values of all goods and services produced in a country during a year.
Production is carried in different sectors like agriculture, industry, mining, transport
etc. We must calculate the net values of all goods and services produced from each
sector. While estimating national income by this method, the values of finished income
goods have to be taken. The values of intermediate goods should not be taken into
account.
The total of the net value of the goods and services produced in all the industries and in all
the sectors .of economy plus the net income obtained from foreign countries will give us the
gross national product. After deducting the depreciation charges from the gross national
product, we get the net national income.
3. EXPENDITURE METHOD:
Under this method, the National Income is measured by adding up all the
expenditure on goods and services during a year. Income is spent either on
consumption goods or investment goods. So, we can know the national income by
adding up all the consumption expenditure and investment expenditure made by
the individuals, business firms and Governments While calculating National
Income through this method, the savings of the people will be added to the national
income. Thus, national income can be estimated by adopting any one of the
above methods. But the best way is to employ all these three methods to check tin
the correctness of our result.
Precautions in measuring National Income:
1. Only net income should be taken into account but not gross income.
2. The Income from the sale of assets should not be taken into account.
3. Transfer earnings, like the income of beggars, petitioners, unemployment dolls etc.,
should not be added to National Income.

8. 4. The income of the company and the income of the share holders should not be calculated
separately.
5. The undistributed profits must be added to National income as they represent income
earned during the period.
6. The net income of the self-employed persons must be added.
To determine the income of the persons, we can make use of the tax returns, Government
reports, and the annual reports of various companies. This method helps to study the
distribution pattern of wealth in the society. Unless people are honest, this method cannot
become an effective one.
DEFFRENCE BETWEAN GDP AND GNP?
GDP is defined as the total value of all the goods and services produced within a country in
a given period of time which is usually taken a calendar year. It is calculated in the
following manner.
GDP= consumption+ investment+ government spending+ (exports- imports).
GNP on the other hand is the gross national product which is a figure obtained by adding
all the income generated by nationals of the country made within or outside the country to
the GDP.
 GROSS DOMESTIC PRODUCT:
GDP is the total value of final goods and services produced during a given
period within the geographic boundaries of a country regardless of by whom.
The goods and services are produced domestically.
 GROSS NATIONAL PRODUCT:
GNP is the total value of final goods and services produced during a
given period within the Citizen of a country no matter where they live.
The goods and services are produced by the “nationals” of a country.

9. INFLATION
What is inflation?
The overall increase in price is called inflation.
The persistent increase in the general price level of a country is known as inflation,
or too much money chase too few goods is called inflation.
CONNECTION BETWEEN MONEYAND PRICES:
When increase transaction demand for money that is increase demand of money “
TYPES OF INFLATION:
Inflation is classified in to three types: (1) Demand pull inflation (2) Cost push inflation (3)
Built-In
DEMAND PULL:
It is a situation where the aggregate
demand persistently exceeds the available
supply of output, which causes the general
price level to go up. Demand-pull inflation
occurs when the overall demand for goods and
services in an economy increases more rapidly
than the economy's production capacity. It creates
a demand-supply gap with higher demand and
lower supply, which results in higher prices.
For instance, when the oil producing nations
decide to cut down on oil production, the supply
diminishes. It leads to higher demand, which
results in price rises and contributes to inflation.

10. Causes:
1. Population growth
2. Deficit financing
3. Increase in wages
4. Foreign remittance
COST PUSH INFLASION:
It is situation where rises in the general price level is initiated
sustained by cost due to which prices go up. FOR EXAMPLE: when the
cost raw material goes up, the prices of goods also go up which lends to inflation.
Cost-push inflation is a result of the increase in the prices of production
process inputs. Examples include an increase in labor costs to manufacture a good or
offer a service or increase in the cost ofrawmaterial. These developments lead to higher
cost for the finished product or service and contribute to inflation.
CAUSES:
1) Increase in the costof raw materials.
2) Increase in the wages rate.
3) Decrease inthe production.
4) Imported inflation.
5) Indirect taxes.

11. Key takeaway
Inflation isthe rate whichthe general level of price for goods
and services is rising and consequently, the purchasing power
of currency is falling.
Inflation isclassified intothree types, Demand pullinflation,
Cost push inflation, Builtin inflation.
Most commonlyused inflation areconsumer price index(
CPI) and wholesalepriceindex(WPI)
Inflation can be view positivelyor negativelydependingon the
individual’sviewpointrate of change.
People holding cashmaynot likeproperlyor stocked
commodities, mayliketo see some inflation asthat rises that
valueof their assets.