circular flow of income &
TRANSCRIPT
Circular Flow of Income
& National Income
Accounting
Group Members
Sneha Desai Kunal GaradMadhuri ThakurMangesh TalankarMilind WadkarRanjit GeorgeMayuri KhedekarAnamika VisputePratik LiyeNisha Ahide
National Income
Most important concept of macroeconomic is national income
National income represent total the income of nation
Measures of national income enables to know the economic growth, business cycle & so on
Circular flow of income
• It explains the process that determines national income & national output
• Functioning of the economy consist of the production of goods and services by production unit
• The cost of the production is expenditure to the firm and income the factor owner
Economic activities perform by economy are:
• Production • Distribution
• Consumption
• Exchange• Above activities are based on decision of economics agent i.e. firms and households.
Circular flow in a two sector economy without saving
Assumptions:• Economy consists of two sectors- Household and firms• Production takes place only in
firms• No inventory maintained by
firms• No government operations• No international economic
relations
Circular flow of economic activity
TWO SECTOR ECONOMY WITH
SAVING
Households
Financial markets
Firms
PAYMENT FOR GOODS AND SERVICES
FACTOR INCOMES
S
I
Households
Financial markets
Firms
FACTORS OF
PRODUCTION
FLOW OF GOODS
AND SERVICES
S
I
Households
Financial markets
Firms
FP S
I
FGS
FIPGS
TERMSY= NATIONAL INCOME
C = CONSUMPTION EXPENDITURE
I = INVESTMENT SPENDING
S = SAVINGS
Y = C + I
Y = C + S
C + I = Y = C + S
I = Y – C= S
I = S
Circular Flow In Three Sector Economy
• Government plays a major role in the functioning & governing of the economic system of a country
• Government receives income in the form of tax from households & firms
• Government expenditure comprises spending on goods & services & transfer payments.
• Money spent by government received by firms & households. hence circular flow.
• Thus leakages in the form of saving & taxes
Contd.
• Introduction of government affects the overall economic activity.
• Total expenditure = consumption + investment + government expenditure(E) = C + I + G
• Total income received is allocated to consumption , savings & taxes.
• Y= C + S + T
Contd.
• The economy is in equilibrium when the expenditure is equal to incomeC + I + G = C + S + T
I + G = S + T
G – T = S – I
sHouseholds FirmsFinancial Market
Government
Government
Circular Flow In An Open Economy Or Four Sector
Economy
World Economy
Households
Government
Business
FinancialMarkets
X - M
Fact
or In
com
e
Taxation Govt. spend
Taxation Govt. spend
Consumption
X – M
Investment
Savings
Importance of Circular Flow of Income
• Shows smooth functioning of Economy.
• Helps to know problem of disequilibrium.
• Helps to find out leakages in the circular flow.
• Highlights the importance of Monetary and Fiscal policies.
NATIONAL INCOME
• Sum of values of final goods and services produced in the economy in a year.
National Income
• Sum of all the incomes accruing to factors of production in the economy in a year.
National Income
• Sum of all the expenditures on final goods and services produced in an economy.
National Income
MEASURMENT
Product(Output) or Value
Added Method
Income Method
Expenditure Method
Product (Output) or Value Added Method
Add the value of all final goods and services produced in a given year
Problem of double counting can be avoided by adding only the value added by each firm at different stages of production.
Income Method
National Income = Sum of all the
incomes (Wages, Salaries, Rent,
Interest, Profits and Dividends)
Only income earned for productive services are included. (pensions, unemployment benefits are not included)
Expenditure Method
National income =C+I+G+(X-M)
Where, C=consumption expenditureI=Total investment expenditureG=Government expenditureNet receipts from foreign trade(i.e. export(X) - import(M))
Problems in the Measurement of National income
1. Capital Depreciation. • Replace the equipment worn out during
the process of production i.e. Depreciation
2.Market prices and Factor cost.Factor cost= Market price –indirect taxes + subsidies
OrMarket prices = Factor cost –indirect taxes + subsidies
3.Net factor incomes from abroad =R-P
Where,R=Income received by domestic factors for their contribution to production abroad.
P= Income paid to the foreign factors for their contribution to production in the domestic economy
Concept of National Income
Gross Domestic Product (GDP)
Gross Domestic Product is the money value of final goods and services produced within domestic territory of the country during a given period of time, a quarter or a year
In an open economyGDP = C + I + G + (X – M)In an closed economyGDP = C + I + G
Where,C=Consumption expenditure on domestically produced goodsI=Investment ExpenditureG=Government Expenditure(X-M)=Net receipts from foreign trade or net exports
Gross National Product (GNP)
GNP is the money value of final goods and services produced by the country’s factor of production wherever they are located during a given period of time, a quarter or a year.
GNP = GDP + Net Factor Incomes from abroad
Therefore,GNP = C + I + G + (X-M) + (R-P)
Net National Product (NNP)
&Net Domestic Product
(NDP)NNP = GNP – Depreciation
NDP = GDP – Depreciation
GNP, GDP, NNP and NDP at Market Price and at Factor
Cost
Market Prices=Factor Cost + Indirect Taxes – Subsidies
Factor Cost=Market Prices – Indirect Taxes + Subsidies
National income at current or constant
prices
•Current prices refer to price of goods prevailing in market at any given point of time i.e. market price of good and services•Constant prices e.g. GNP, GDP
Real Vs Nominal GNP
Nominal GNP
Real GNP
GNP at current prices
GNP at constant prices
GNP at current prices
GNP at constant prices
GNP deflector
GNP deflector
GNP deflector 2005-06
3363505
3239296
1.04156
Personal Income (PI) PI = National Income +Transfer Payment –
Undistributed Profits Of Corporate Sector-corporate Income Taxes –Social Security Contribution
Disposable Income (DI) DI=Personal Income –Direct Taxes Paid By
Individuals
Per capita income
National income
Population
Difficulties in measurement of national income
1. Treatment of non monetary transactions: w.r.t goods & services which are difficult to be assessed or are not transacted in terms of money.
2. Transfer incomes: income is received without any output of goods & services
3. Government income: received by government for any property or service rendered
Contd.
4. Income from illegal activities
5. Capital gains: gains or losses due to changes in market price
6. Imputed values: valuing of some goods & services that are not sold or bought
7. Inventories
Contd.
5. Depreciation
6. Problems of estimation in developing countries due to lack of
OrganizationAccounting practicesOccupational specializationStatistical data
Thank You