Transcript National Income

CHAPTER NO 1
Introduction
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MICRO ECONOMICS
The term' Micro’ is derived from the a Greek word ‘MIKROS’ which
means ‘small’. so microeconomic is the study of economic actions of
individuals. Economic units which are small come under
Microeconomic study. Micro means a “Millionth ” part. It deals with a
small part or small component of national economy of a country . It is
the study of particular unit rather than all units combined.
Definitions:
According to BOULDING
Microeconomics is the study of particular firm, particular household,
individual price, wage , income , industry and particular commodity.
In the words of Prof . McConnell
“Microeconomics is concerned with specific economic units and a
detailed consideration of the behavior of those individual units”.
MACROECONOMICS
The term ‘Macro’ as used in English language is derived from the Greek word
’MAKROS’ which means large. Macroeconomics is the study of economics
system as a whole . It is the study of overall conditions of an economy e.g.
its total production, total consumption, total saving ,total investment etc. It
deals with aggregates such as national income , output , employment and
general price level .It is therefore also called ‘aggregate economics'. It thus
deals not with one family but with all the families, not with one firm but with
all the firms in an economy: not with one industry but with the entire
industrial structure of an economy.
Definitions:
 In the words of Boulding .”Macroeconomics deals not with individual
quantities as such, but with aggregates of these quantities, not with
individual income but with national income , not with individual output but
with national output.”
 According to Shapiro. “Macroeconomics deals with the functioning of the
economy as a whole.”
OBJECTIVES
The objective of studying macroeconomics is to:
 Help you learn how the national economy works.
 Enable you to understand such issues as:
 Why key economic variables are at their present levels?
 What may be the likely future paths of these variables?
 Causes and consequences f recessions, inflation, etc.
 What the government can do about these problems?
 Side effects of government actions.
 Pros and cons of free trade versus trade restrictions.
IMPORTANT ISSUES IN MACROECONOMICS
Why does the cost of living keep rising?
 Why are millions of people unemployed, even when the
economy is booming?
 Why are there recessions?
Can the government do anything to combat recessions?
Should it??
 What is the government budget deficit? How does it
affect the economy?
 Why do the economies have such a huge trade deficit?
 Why are so many countries poor?
 What policies might help them grow out of poverty?

The field covered by macroeconomics is as under:
Macroeconomics studies the concepts of
national income , its different elements , methods of its
measurement etc.
It studies the problems of employment and
unemployment . Different factors of determining employment such
as aggregate demand , aggregate supply , total consumption, total
savings , and total investment etc.
Changes in the demand and supply of money have
a great bearing on the levels of employment . Thus under
macroeconomics functions and theories of money ,banks and
financial institutions are studied.
Problems concerning inflation
,deflation are part of study of macroeconomics.
SCOPE OF MACROECONOMICS
CONTINUED
Macroeconomics also studies
the problems concerning economic growth and standard of
living , besides the study of government fiscal and monetary
policies it studies the factors and retard growth and those
which brings the economy on the path of development.
It also studies the principles
determining trade among different countries .Policies of free
trade and protection , studies of tariffs quota and foreign aid
comes under the study of macroeconomics.
It deals with the fluctuations in the
level of employment ,expenditure and general price level and
how these business fluctuations can be controlled.
Macroeconomics is the study of aggregate mode
model of the economy, with specific focus on
problems associated with those models : the
problems of growth , business cycles ,
unemployment , and inflation . The
macroeconomic study is designed to explain
low supply and demand in the aggregate .Thus
the key macroeconomic concepts are growth ,
business cycles, unemployment, and inflation.
Following are the uses of macroeconomics:
It is only through macroeconomic analysis
that we can have an idea of an economy’s aggregate
output, income, consumption, saving , employment
and the like . It gives a bird’s eye view of the entire
economy.
Macroeconomics
is of special importance for poor countries in
understanding their basic problems and in
suggesting various ways and means to reach the
destination of economic development.
Macroeconomics has brought into
light , a great value of the national income and social
accounting studies, without which no economic policy or
plan can be formulated.
Macroeconomics analysis
helps us in understanding and regulating the economic
fluctuations.
Macroeconomics explains level of full employment or near full
employment, because all the determinants of employment
i.e. aggregate demand and aggregate supply, aggregate
consumption, aggregate investment, aggregate savings etc. ,
come under macroeconomics study.
Macroeconomics or
economics aggregates provides us great help in
understanding inflationary gaps and how to fill up both these
gaps.
Macroeconomics analysis is suitable to all systems.
Capitalistic , socialistic, and mixed economic systems are
making use of macroeconomics.
Macroeconomics provides modern governments , a solution
to the problems of an economy like unemployment , rising
and falling prices , problems of over production etc.
DIFFERENCE BETWEEN MICRO AND
MACROECONOMICS
The main difference between micro and macroeconomics are the following:
1.
In microeconomics the letter ‘I’ for
individuals and in macroeconomics the letter ‘A’ for aggregates is
significant. Microeconomics give a microscopic view of some specific
component of the economy, whereas , macroeconomics gives a bird’s eye
view’ or the macroscopic view of the economy.
2.
Microeconomics studies the problems of scarcity and
choice at the level of individual ,a household , a firm or an industry,
Whereas macroeconomics studies the problems of scarcity and choice at
the level of an economy as a whole.
3.
Microeconomics and macroeconomics are
based on a different set of assumptions. Certain variables are assumed to
be constant in microeconomics , whereas they are assumed to be
changing in macroeconomics and vice versa.
DIFFERENCE BETWEEN MICRO AND
MACROECONOMICS CONT…..
Allocation of resources is the central issue in
microeconomics .Determination of overall level of output (and
employment ) is the central issue in macroeconomics.
F0cusing on the entire economy , method of study
in microeconomics is often described as ‘ general equilibrium
analysis’ . On the other hand , focusing on specific market(s) , like
commodity market or factor market, method of study of
microeconomics is often described as ‘ partial equilibrium analysis’.
Microeconomics deals with individual
and individuals are mortal . Man dies after passing some lifetime in
the world. Therefore , the tool of the study of microeconomics i.e.
man is mortal . On the other hand , Macroeconomics is concerned
with the aggregate . It studies the problems of the whole economy
.The tool of its study is society , Society never ends .Man may come
and man may go but the society never ends .So therefore
Macroeconomics study is immortal.
DIFFERENCE BETWEEN MICRO AND
MACROECONOMICS CONT…..
Microeconomics analysis
is simple , whereas, macroeconomics analysis
is complex.
In
macroeconomics the assumptions of ‘other
things being equal ‘ and the assumption of ‘full
employment’ are presumed whereas these
assumptions have no relevance under
macroeconomics.
CHAPTER 2
National Income and its
Measurement
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CHAPTER OUTLINE
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Meaning and definition of NI
Significance of National Income
Factors effecting the volume of
National Income
Various concept of NI.
Three approaches used to measure NI.
1.
2.
3.

Product approach
Income approach
Expenditure approach
Difficulties in measuring NI.
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Explanation of some terms

Goods. All those tangible things which are used to satisfy
human needs are called goods.
There are two types of goods
1.
Consumer goods. Those goods which the consumer
are consuming in routine life are called consumer goods.
2. Capital goods. Those goods which are used to produce
more goods are called capital goods. Such as plants &
machines, buildings etc.
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
Services. All those economic actions which satisfy human
wants and needs are done for money rewards are known as
services.
There are two types of services :
1.
Physical service. The service which is done
2.
Mental service. That actions which are done mentally
physically
by a person is known as physical service such as labor,
barber, cobbler, tailors etc.
for satisfying human needs are called mental services. For
example the service of doctor, engineer, professors, etc.
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DEFINITION TO NATIONAL INCOME

National Income is the monetary value of all
goods and services produced in a country during
the course of one year, including income derived
from abroad.
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IT MAINLY INCLUDE THE OUTPUT OF THE
FOLLOWING SECTORS:
•
•
•
•
•
•
•
Agriculture
Industry
Natural Resources
Trade
Transport & communication
Health & education
Banking
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SIGNIFICANCE OF NI

It seeks to measure the level
production in the country in one year.
of

We can know whether the economy is
growing or declining by comparing it with
the previous years .
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CONT`D


National income shows contributions by various
sectors in the economic development
of
economy.
Living standard and economic welfare of
the people can be compared with other
countries.
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From National Income Data we can see
the employment situation sector wise.
By Looking the National Income Data we
can see which sector of the economy is
week so we can focus on it to improve its
performance.
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FACTORS INFLUENCING THE VOLUME
OF NI:

Natural Resources:A Country having large deposits of natural
resources will have large production and
hence large volume of national income.

Human Resources:If the human resources of a country are
healthy ,well-educated and trained, the
production of the country will be large and
hence large volume of national income.
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
Man-made Resources:If man-made sources are greater in number,it
will increase the volume of business in the
country and hence volume of national income.
Credit Facilites:Credit facilities in a country will increase the volume of
business activities in a country and hence volume of
national income.
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
Technology:A country having advanced technology will have
maximum production and hence will have large
volume of national income.

Political Stability:if a country is politically stable, Local and
foreign investment will be high so production
and national income will be high.
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Various Concepts of National Income
GDP or ( Gross Domestic Product)

GDP
shows the money value of all final goods
and services produced only within the geographical
boundaries of a country using the natural
resources of the country.
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GNP OR ( GROSS NATIONAL PRODUCT)

GNP or Gross national product is the money value of all
final goods and services produced by the people within
and outside the country for one year.
GNP = GDP + (exports – imports)
Exports of both physical goods and services
Import of both physical goods and services
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NNP OR ( NET NATIONAL PRODUCT)


NNP is the monetary value of all output
after deducting depreciation allowances
from GNP.
In producing GNP we consume or use up some capital like
equipments and machinery, these capital goods falls in its
value due to wear and tear in the production process.This
wear and tear of machines is called depreciation.
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CONT`D

Thus :
NNP = GNP – Depreciation allowances
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NDP OR ( NET DOMESTIC PRODUCT)


NDP is the monetary value of all output
after deducting depreciation allowances
from GDP.
In producing GDP we consume or use up some capital like
equipments and machinery, these capital goods falls in its
value due to wear and tear in the production process.This
wear and tear of machines is called depreciation.
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CONT`D

Thus :
NDP = GDP – Depreciation allowances
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PI OR ( PERSONAL INCOME)
Personal income = National income –
Corporate income tax – undistributed profit +
transfer payments ( pension, old age benefits,
unemployment fund etc)
In personal income of an individual direct taxes
are also included such as income tax.
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DPI OR ( DISPOSABLE PERSONAL INCOME)
 DPI is the amount which is left with individuals
after paying direct taxes.This is the money
income which individuals can either spend or
save as possible as they can according to their
needs and wants.
DPI = Personal income – Direct tax.
DPI = Consumption + Saving
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PER CAPITA INCOME
Per Capita Income is the average
income per head of the country.
Per Capita Income is obtained by
dividing the National Income of a
country by its population.
Per Capita Income =
National Income
Population
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MEASUREMENT OF NI
There are three methods which are used to
measure National Income:
PRODUCTION OR Value Added METHOD
Income Method
Expenditure Method
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PRODUCT METHOD OR VALUE ADDED
METHOD
The national income is calculated by adding up the net values of
all production that has taken place in different sectors of
economy during a year.
in this method the economy is divided into various
sectors such as….
 Agriculture
 industry
 Infrastructure
 Banking
 Health
 Education
 Transport and communication etc.
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CONT’D.....
The net market or money value of all these sectors is added
and the result is coming as national income.
Example…..
production sectors
Net value (billions)
Agriculture
340
industry
210
Trade
290
Transport & communication
200
Health & education
250
Banking
160
NATIONAL INCOME
1450
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PRECAUTIONS REGARDING PRODUCT METHOD
OR VALUE ADDED METHOD:
Following are the precautions regarding product method or value added
method:
1.
Value of the sale and purchase of second hand goods is not
included in value added. Because , value of second hand goods is
already accounted for during the year they were produced.
2.
Goods produced for personal use will also be included in estimating
value added . Because, these goods are like those produced for
market . They are simply not sold owing to their own need by the
producer.
3.
Value of intermediate goods is not included in the estimation of
value added . Because , value of intermediate goods is already
included in the value of final goods .
4.
Commission earned on account of the sale and purchase of second
hand goods is included in the estimation of value added . Because
commission is reward for the services rendered.
CONTINUE…….
5. Imputed rent on the owner occupied house is also
taken into account . Because , all houses have
rental value, no matter these are self occupied or
rented out.
6. Services for self consumption is not considered
while estimating value added . Simply because , it
is difficult to estimate their market value , like ,
for example , services of housewives.
7. Income from illegal activities is not included in
national income.
INCOME METHOD

This approach explains that money value of all the final goods
and services produced in a year goes into the hands of the
enterpreneure who in turn distribute it among the four factor of
production. This constitutes the annual aggregate income/
rewards of the four factors of production, whose sum or total
makes the National Income through income method.
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CONT’D

We will make it clear from the following
hypothetical table:
S.No.
Rewards(per annum)
Total amount
(Billion Dollars)
1
Wages and Salaries
150
2
Interest
50
3
Rent
100
4
Profits
200
National Income
500
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PROBLEMS REGARDING INCOME METHOD
Following are the main difficulties in the use of product method:
1.
It is difficult to differentiate between intermediate and final goods.
For example a farmer is selling wheat on a flour mill . So for the
flour mill the value of wheat is an intermediate good and for the
farmer it is final good. Now this flour mill will sell this flour on a
baker , so flour is final good for flour mill and intermediate good for
the baker. Now the baker will sell it to a shopkeeper.
So
value of output = $ 40 +$60+ $80+$100 = $280
2.
Difficulties in calculating depreciation cost.
3.
Difficulty regarding valuation of the product method.
4.
Difficulty regarding measuring self consumption goods.
5.
Statistical difficulties as in underdeveloped economies farmers and
small business firms do not keep proper accounts.
EXPENDITURE METHOD
The amount of expenditure by the people on consumer goods
produced by either the private or public sector and capital
goods produced by either the private or public sector and either
inside or outside the country, summing up together, would be
the National Expenditure/National income.
In order to arrive at National Expenditure we would have to
calculate various expenditures which are as follow:
o Personal consumption expenditure
o Gross domestic private investment
o Govt. expenditure on goods and services
o Gross domestic public investment
o Export surplus
o Net foreign investment

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CONT’D
We will make it clear with the help of a hypothetical table:
S.NO.
Items
Amount (Billion Dollars)
1
Personal consumption expenditure
400
2
Gross domestic private investment
100
3
Govt. expenditure on goods & services
50
4
+ Gross domestic public investment
25
5
Export surplus
10
6
Net foreign investment
15
7
8
9
G.N.P
- Depreciation allowances
N.N.P
600
25
575
10
+ Govt. subsidies
50
11
- Indirect taxes
95
12
- Transfer payment
25
13
- Statistical discrepancy
5
National Income
500
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DIFFICULTIES IN THE MEASUREMENT OF NATIONAL INCOME
So far we have discussed the methods of measuring the National Income. Now
we will take up the obstacles which prevent us from arriving at the most
appropriate calculation of national income. These difficulties are generally
prevailing in the third world countries.
 shortage of statistical data: one of the main problems in measuring

national income is that there is shortage of statistical data. Furthermore,
there is also absence of statistical and technical procedures which are not
generally adopted and people generally do not keep up to date on their
earnings, expenditure etc.
Lack of trained manpower: the problem arises as there is a shortage of
manpower to be employed to data collect the data regarding national
income, for example , in Afghanistan statistical division is unable to provide
reliable data on all aspects of the economy.
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