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National Income: also known as National dividend The total income of the nation is called National Income In Real terms National Income ‘ is the flow of goods and services produced in an economy in a particular period of time

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National Income: also known as National dividend

  • The total income of the nation is called National Income
  • In Real terms National Income ‘ is the flow of goods and services produced in an economy in a particular period of time
  • National product: all G & S produced by the community and exchanged for money during a year.
  • National dividend: consists af all income, in cash and kind. Accuring to the factors of production in the course of generating the national product
  • National expenditure: total spending/outlay of the community on G & S produced during a given year.

Stock and flow concepts

  • A stock : quantity at a given point of time
  • Flow: quantity measured per unit of time

Calculation of NI has no meaning without the reference of time period.

bcoz. NI is a flow but not a stock concept

Marshall: Defined NI as “ labour and capital of a country acting o its natural resources produce annually a certain net aggregate of commodities, materials and immaterial including services of all kinds, this is true net annul income as revenue of a country or national dividend”


National Income

National income is a flow, expressed in terms of total output.


National income accounting

National Income Accounting represents the tools and methods by which economists and policy-makers measure economic activity and economic growth over time.

The aim of national income accounting is to place a money value on this year\'s output.


Approaches to national income measurements

There are three approaches to national income measurements:

1.Income method or factor income in the production process

2.Product method or value added in production process

3.Final expenditure method


1. Income method

The income method adds together the total value of all incomes that have been earned in the relevant time period.

This method approaches from Distribution side.

In this method Ni is getting by summing up the income of all the individual that have been earned in the relevant time period of the country

This method indicates the distribution of NI among different income groups like, land lord, capitalistic etc., this is called as NI by distributive shares


Expenditure method

  • This method by summing up by total consumption which made by private individuals, govt etc.,
  • According to this method GNP is calculated by 4 terms
    • Personal consumption
    • Gross domestic private investment
    • Govt. purchases
    • Net foreign investment

Production process

Production process is a Continuous one in which goods and services are produced with the help of various factors of production like our, land, capital, enterprise and so on.


Output method/ production /inventory method

  • This method measures the total output of the country
  • This method approaches the Ni from output side
  • In this method whole economy is dived in to different sectors i.e agriculture, mining, banking , industry etc.,
  • The net value of production of all the industry and sectors of economy + net income from abroad
  • This method unable to us trust the origin of NI this is called NI by industrial origin
  • This method help us to know the relative importance of different sectors of the economy

Standard of Living•

The standard of living refers to the amount of goods and services consumed by households in one year and is found by applying the equation:

•Standard of living = Real national income/population


Interpretation of the Standard of Living

•An increase in the standard of living may not mean a better life-style for the majority if:

•Only a small minority of wealthy people consume the extra goods.

•Increased output of certain goods results in more noise, congestion and pollution. •Leisure time is reduced to achieve the production increase.

•There is an increase in the amount of stress and anxiety in society


Important National Income concepts

1. Gross Domestic Product

  • Money value all final G& S produced by country residents in a particular time
  • Gross domestic Product (GDP): = GNP- Net factors income from abroad
  • GDP= C+I+G+(R-P)+(X-M)

2.Gross National Product

GNP=GDP+ Net factors income from abroad

3.Net National Product (NNP)

NNP/N.I @ Mkt Price= GNP-depreciation

4.National Income @ factor cost/ NNP @ factor cost

N I /N I @ factor cost = NNP (N I @ Mkt price)- Indirect taxes + subsidies


5.Personal Income: sum of all incomes actually received by individual


= P I – Personal taxes

D I Neither can be consumed /saved

D I = consumption+ savings


Difficulties/problems in calculating N I

  • Conceptual problems

relate to how and what is to be included and what not be include

vegetable grown in terrace garden

Service of housewives

  • Statistical problems
    • Double counting
    • Illiteracy
    • Lack of specialization
    • Untrained and inefficient staff


using G & s for satisfying wants

Destruction of utility

Relation between consumption and income is called consumption function



C- consumption



Cf is expressed as a linear function of income


APC= c/y

APC= average propensity to consume

C- consumption

Y- income



Marginal propensity to consume: ratio of change in total consumption to change in total income

MPC= change in consumption/ change in income

  • Determinant of consumption
  • Subjective or internal factors
    • Precaution motive- for unseen emergencies., sickness, accident, unemployment
    • foresight motive: future needs for children education etc
    • Motive for independence: desire to independent financially
    • Std of living: improve std of living

Objective or external factors

  • Distribution of income: more inequality in income distribution, lower propensity to consume
  • Expectations: every one has certain calculations about their future changes. This may expect price increase in the future, they tend to consume immediately
  • Windfall gains or losses: when get huge profit--- consume more
  • Fiscal policies: taxes decreased the DI of people increase
  • Stock of wealth: any one having more wealth in form of bonds, fixed deposits etc., he tend to consume more from his current income

Practical significance of consumption function

Useful in firms and business: APC and MPC useful in estimating demand for products in future

Helps in explaining business cycle: the decline in MPC undermines the prosperity phase and gives way to recession.

It is the base of multiplier: multiplier explains the income increase and the relationship with MPC.

Multiplier: ratio of change in national income resulting from change I autonomous investments

K= change in income/ change in investment

Increase in the demand needs an increase In the supply and so that employment also increases therefore income increases


Keynes suggested 4 important measures for raising/the consumption

  • Redistribution of income: in favor of poor
  • Comprehensive social security: unemployment doles, old age pension, sickness insurance etc for poor
  • Liberal wage policy: there is a gap between the rise of prices and rise of wages
  • wage policy should increase automatically along with the increase in price

Keynes assumed : rigid one

  • Credit facility: DIR loans

To summarize the relation between MPC and multiplier you have to remember three points

    • Higher MPC, K is stronger
    • Lower MPC, K Is weaker
    • MPC=0,K=1
    • MPC=1, K is infinite

Significance of Multiplier

It is not just theoretically important but also has practical significance

1. Public investment: shows a strong case of Govt.

Eg. In depression, the govt. investment is really important and gives positive effect through multiplier

2. Useful in planning employment policies: framing national employment policy

i.e how much govt. expenditure required to reach full employment.

3.Forecasting demand in response to government expenditure: helps to govt. to bring about change in aggregate demand and aggregate supply


Investment function

Investment means the capital expenditure or purchasing of equipment or machinery

Types of investment

Gross investment: total value of productive assets created during a given period i.e One year it include depreciation component

Net investment: GI- depreciation

Private and public investments:

made by private companies and corporate

made by govt.& departmental undertakings

Induced and autonomous investments

Autonomous;: income inelastic/ independent of level of income

Induced: income elastic i.e income increase invstmnt increase and vice versa


Real investment: increase in stock of capital goods in country viz., vehicle, machinery, factory building etc

Financial investment: refers to stock of funds and bonds

Real Investment- increase income & employment but not FI

Keynes concerned with Real investment rather than FI


Factors affecting investment

  • Investment and rate of interest
  • Marginal efficiency of capital (MEC): expected returns from investment
  • MEC: yield expected from a new unit of capital
  • Factors affecting MEC
  • short term factors
    • Expected demand for future
    • Level of income
    • Business expectation

Long term factors

      • Population growth
      • Economic polices of government
      • Infrastructure facilities

MEC depend s on 2 factors

  • Supply price/ replacement cost
  • Prospective yield

Accelerator: measures the change in investment goods industries as a result of change in consumption goods

Multiplier: shows the effect of consumption on investment

Acceleration shows the effect of investment on consumption

Acceleration= change in investment/change in consumption

Difference between K and A


Project on application of macro and micro economics in the process of decision making

Select any kind of industry

and prepare the project proposal by applying micro and macro economic concepts like supply and demand, market demand, elasticity , investment ,market structure, employment, monetary and fiscal policy etc.,




business cycles
Business Cycles
  • Business Cycle: the pattern of real GDP rising and falling.
  • Recession (Contraction): two or more successive quarters of falling real GDP.
  • Depression: a severe, prolonged economic contraction. Usually involves unemployment rising to greater than 10% for years.

1] A trade cycle is a wave like movement. It is characterized by alternation of expansion and contraction in economic activity


  • 2] The cyclical fluctuations are recurrent meansrepetitive. .
  • 3] A trade cycle contains self-generating forces that tend to terminate the phase of prosperity or depression. Therefore there cannot be either an indefinite prosperity or indefinite depression.

4] Every segment of the economy isaffected by the trade cycles.

  • 5] In cyclical fluctuations,prices and production generally rise or falltogether.
  • 6] The cyclical fluctuations, aremoremarked in capital goods industries than in consumer goods industries.
  • 7] Though the trade cycles arerecurrent, they are not uniform.


  • During Depression,the conditions in the economy are most deplorable.Real income consumed ,real income produced & the rate of employment are falling.
2 revival or recovery
2.Revival or Recovery

Depressiongives place torevival( recovery).There is revival of business and economic activities. First revival of business activities appears in the capital goods industry.

3 full employment
3.Full Employment

The cumulative process of revival or recovery continues till the economy reaches the stage of full employment. Full employment implies that all the available resources in men and materials are fully employed. During this phase, the level of economic activity isoptimumand all the factors of production are fully employed.

Interest, profits and wages arehigh. Employment is maximum and unemployment is little. Bank credit and bank clearings are large

4 prosperity or inflation or boom
4.Prosperity or inflation or boom

Any increase in investment after the stage of full employment leads to an increased pressure on the available resources in men and materials. Profits reach a new height. Businessmen become over-optimistic and therefore they increase their capital investment. Boom conditions prevail everywhere.Over-optimismprevails all over the economy.

It leads to situation ofprosperity or inflation or boom

5 recession or disinflation
5.Recession or disinflation

The boom conditions carry with them the seeds of self-destruct The cost of production goes up very high and upsets the calculations of the entrepreneurs. Failure of business units increases, investments ceases and unemployment rises. This leads to fall in incomes expenditure, prices, profits,

and trade and industrial activities. There is panic in the stock market and the prices of

stocks and shares fall rapidly. The rate of interest also rises.

It ends in a hopeless depression,the first phase of the business cycle.

measures to control business cycles
Measures to control Business Cycles

1.Monetary Policy

Refers to thecentral banksprogram of changing monetary variablesie total supply of money,interest rates & credit rationing, to achieve certain pre determined objectives

monetary policy
Monetary policy

1.Open markets operations .

2 bank rate or rediscount rate

3 statutory reserve ratio

2 fisical policy
2. Fisical policy

It refers to the government policy of changing its policy of taxation & public expenditure programstoachieve economic stabilization.

Taxation is the measure oftransferring the funds from private to public.

Public expenditure on other hand increase private incomes.

It is based on therelationship of public expenditure & taxes to national incomes & the G N P

economic indicators
Economic Indicators
  • Leading Indicators
    • A variable that fairly consistently changes before real GDP changes
  • Coincident Indicators
    • A variable that fairly consistently changes at the same time as real GDP changes
  • Lagging Indicators
    • A variable that fairly consistently changes after real GDP changes


Crowther: a state in which the value of money is falling that is prices are rising.

Is persistent and appreciable rise in the GPL or average of prices


Two widely PINS used r

    • WPI/ PPI: measure the general rate of inflation
    • CPI: measure the rise in the cost of living

Measures of inflation

  • 2 common measures
    • Percentage change in price index numbers (PIN)
    • Change in GNP deflator

PIN: Rate of inflation=

Where PINt and PINt-1 r the index numbers in the year selected for measuring inflation and in the preceding year, respectively

Eg. WPI (1981-82) for all commodities increased from 182.7 in 1990-91 to 207.8 in 1991-92


Rate of inflation= 207.8- 182.7/ 182.7 x 100

Soln: 13.74%

Annual average rate of inflation in India 1990-91 to 1994-95


Measuring inflation by GNP deflator

Is the ratio of nominal GNP to real GNP of the same year

GNP deflator= Nominal GNP/ Real GNP


Nominal GNP is GNP at current prices

Real GNP is GNP at constant prices


number unemployed

number in the Labor Force


The unemployment rate is the percentage of the labor force that is not working.


Rate ofUnemployment

interpreting the unemployment rate
Interpreting the Unemployment Rate
  • Discouraged Workers are workers who have looked for work in the past year, but who have stopped looking because they believe no one will offer them a job.
  • Underemployment is the employment of workers in jobs that do not utilize their productive skills.
types of unemployment
Types of Unemployment
  • Seasonal Unemployment
    • A product of regular, recurring changes in the hiring needs of certain industries on a monthly or seasonal basis.
  • Frictional Unemployment
    • Occurs because workers and employers have to find one another.
    • A product of the short-term movement of workers between jobs, and of those just entering the labor force.
  • Structural Unemployment
    • Reflects an imperfect match-up of employee skills and the skill requirements of the available jobs.
    • A product of technological change and other changes in the structure of the economy.
  • Cyclical Unemployment
    • A product of business cycle fluctuations.
    • When there is a general downturn in business activity, cyclical unemployment increases.
unemployment and its costs
Unemployment and Its Costs
  • Natural Rate of UnemploymentThe level of unemployment that results when the rate of unemployment is normal, considering both frictional and structural factors. Also called the NAIRU (Non accelerating Inflation Rate of Unemployment)
  • Potential Real GDPThe level of output produced when nonlabor resources are fully utilized and unemployment is at its natural rate.
  • GDP gap = potential real GDP – actual GDP
types of inflation
Types of Inflation
  • Demand-pull inflation: caused by increases in aggregate demand outpacing increases in aggregate supply.
  • Cost-push inflation: caused by increases in production costs cause firms to raise prices.
  • Hyperinflation: extremely high rate of inflation.