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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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 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
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.
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
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
relate to how and what is to be included and what not be include
vegetable grown in terrace garden
Service of housewives
using G & s for satisfying wants
Destruction of utility
Relation between consumption and income is called consumption function
Cf is expressed as a linear function of income
APC= average propensity to consume
Marginal propensity to consume: ratio of change in total consumption to change in total income
MPC= change in consumption/ change in 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
Keynes assumed : rigid one
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 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
Long term factors
MEC depend s on 2 factors
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.,
UNEMPLOYMENT AND INFLATION
BUSINESS CYCLES IS THE PERIODIC BUT IRREGULAR UP AND DOWN MOVEMENTS IN ECONOMIC ACTIVITY, MEASURED BY FLUCTUATIONS IN REAL GROSS DOMESTIC PRODUCT AND OTHER MACROECONOMICS VARIABLES
Characteristics of Business Cycles
The Phases of Trade Cycles
Depressiongives place torevival( recovery).There is revival of business and economic activities. First revival of business activities appears in the capital goods industry.
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
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
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.
Refers to thecentral banksprogram of changing monetary variablesie total supply of money,interest rates & credit rationing, to achieve certain pre determined objectives
1.Open markets operations .
2 bank rate or rediscount rate
3 statutory reserve ratio
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
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
Measures of inflation
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
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
Eg. Nominal price in 1990-91 was 4,70,269 and real GNP was 2,08,481
Soln: 2.2557 x 100= 225.57
number in the Labor Force
The unemployment rate is the percentage of the labor force that is not working.