me unit 3 managerial economics

8/13/2019 ME Unit 3 Managerial Economics

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Introduction to National Income

Models of National Income

Determination - Economic Indicators -

Technology and Employment - Issues andChallenges; Business and Government.


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The well-known writer, Paul

Studenski, writes: "Nationalincome is both a flow of goodsand services and a flow of moneyincomes. It is therefore callednational product as often asnational income".


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Gross National Product(GNP) Gross Domestic Product(GDP)

Net National Product(NNP)

National Income(NI) Personal Income(PI)

Disposable Income(DI)


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Total market value of all goods and servicesproduced in a country in a particular year, andthe income which is earned by its citizens, whoare located abroad minus the income of nonresidents located within that country.

GNP is a measure of the value of goods andservices, which the nationals or residents of thecountry produce regardless of where they arelocated.

Total Income of a nation as earned by the

citizens of a nation GNP = GDP incoming money from abroadOutgoing money to abroad


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It includes the value of goods produced suchas houses and food grains and the value ofservices such as broker's services andeconomist's lectures


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Total market value of all the final goods andservices produced by all the enterprises(boththe residents and non residents) within thedomestic territory of a country in a particular

year

GDP=C+I+G+NX

Nominal Vs. Real GDP

GDP Deflator(Nominal GDP/Real GDP)*100


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Farmer produced Wheat and sold 100 kg of it@ 2000 Rs. (Original value)

Flour mill, purchased it, grinded it and soldthe flour to baker @ 2500 Rs.

Baker made breads, cookies and biscuits andsold the total production @3500 Rs to itsfinal customers.


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Year Quantity ofBanana Price ofBanana Quantity ofApple Price ofApple2005 100 2 50 10

2006 150 3 70 15

2007 200 4 90 20

Answers:Nominal GDP:

2005=7002006=1500

2007=2600Real GDP:

2005=7002006=10002007=1300


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GNP=GDP + Factors payment from Abroad-Factor payments to abroad


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GDP GNP

Definition: An estimated value of the total worth of

a countrys production and services,

calculated over the course on one year

GDP (+) total capital gains from

overseas investment (-) income earned

by foreign nationals domestically

Stands for: Gross Domestic Product Gross National Product

Formula for Calculation: GDP = consumption + investment +

(government spending) + (exports

imports)

GNP = GDP + NR (Net income from

assets abroad (Net Income Receipts))

Layman Usage: Total value of products & Servicesproduced within the territorial boundary

of a country

Total value of Goods and Servicesproduced by all nationals of a country

(whether within or outside the country)

Application (Context in which these

terms are used):

To see the strength of a countrys local

economy

To see how the nationals of a country

are doing economically


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NNP(at market price)=GNP- Depriciation


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NNP at factor cost National Income= NNP at Market price-

Indirect Taxes+Subsidies

NI=NNP at Market price-Net Indirect Taxes


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Sum of all incomes actually received by allindividuals or households during a givenyear.

PI=NI-(corporate profits+social securitycontributions+NetInterest)+(Dividends+Transfers from Govt. toIndividuals+personal interest income)


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Aggregate Demand and Aggregate SupplyApproach

Saving-Investment Approach


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Consumption Function(C)=Ca+ bYWhere Ca= Intercept of consumption function on Y

axis

b= Slope of the consumption function(MarginalPropensity to Consume)

Y=Disposable Income

Aggregate Demand=Total Value of Output

Y=C+IWhere C=Consumption

I= Investment


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Y=C+I ..(1)Substituting value of consumption function in

equation 1

So, Y= Ca+ bY+I

Y-bY= Ca+I

Y= 1 (Ca+I)

1-b


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S=-Ca+ sYE

Income

PlannedSaving andPlannedInvestment

Ca

I


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Now AD=AS

C+I=C+S

We can write as follows

I=SSubstituting saving function in above equation

I=- Ca+(1-b)Y

Y= 1 (Ca+I)

1-b


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1. In an economy, the basic equations are asfollows. The consumption function isC=120+0.80Y and Investment I=250. Find

1. The equilibrium level of income

2. The equilibrium level of consumption3. The equilibrium level of saving

Answers:

1. Y=18502. C=16003. S=250


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1. If in an economy C=450+0.80Y,Investmentis I=540

1. Determine the equilibrium level of income andconsumption

2. Derive the saving function and determine thesavings at equilibrium

3. Determine the equilibrium level of income


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2. In an economy, basic equations are asfollows: the consumption function isC=150+0.80Y and investment I= Rs.180Crore. Find:

1. The equilibrium level of income2. The equilibrium level of income when investment

increases from Rs. 180 Crore to Rs. 200 Crore.


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Low Per Capita Income and Low rate of economicGrowth

High Proportion of people below the poverty line

Low level of productive efficiency due to

inadequate nutrition and malnutrition Imbalance between population size, resources

and capital

Problem of Unemployment

Instability of output of agriculture and relatedsectors

Imbalance in distribution and growinginequalities


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1. Government enterprises2. Price fixation

3. Direct intervention

4.

Indirect intervention5. Control of monopolies


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me unit 3 managerial economics

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