Midterm-exam on: [National income]

Course Name: Macroeconomics (121)

Submitted To: Submitted By:

Dr. Haripada Bhattacharjee
Name: Sakib Hossen
Professor
Section: C
Department of Marketing
Roll: 209
University of Dhaka
Department of Marketing
University of Dhaka

Submission Date:29 December,2020

 National Income

 National income means the total income earn by the people of a particular country
in a particular year. It includes payments made to all resources in the forms of
wages, interest, rent, and profits.

It is related to GDP (Gross Domestic Product).

 GDP means the total money value earn from selling all the final made goods and
service produce in a year.

The output of an economy is major though the gross domestic product(GDP) .

 GDP can be calculated in two ways:

i. Product Approach
ii. Income Approach (land + wage + capital + profit)

 There are four elements of calculating GDP.

1) Consumption
2) Investment
3) Government Expending
4) Net import and export

GDP of a country must be equal to consumption, investment, government expending and the
net of export (the different between export and import).

Therefore,

GDP = C+ G+ I + Nx (Nx = net of

export) In case of Bangladesh,

GDP = C + I + G - Nx
So the growth rate of GDP is declined in Bangladesh.

GDP growth rate can be calculated using the following formula:

GR(growth rate) =

{(current year GDP value - previous year GDP value) ×100}

previous year GDP

Example:

GR (growth rate) = (110 – 100)

100

Real growth rate is adjusted with inflation.

Example:

If growth rate = 7% and inflation = 5%

Then, real growth rate = (7% – 5%) = 2%

The actual price of the economy can be identified by calculating real GDP value. Which
means, when current year price is adjust with rate of inflation (inflation is called the devilish
of the economy.

 The policy instrument to increase the GDP of a country

National income is determined by the interconnection between the Aggregate Demand and
Aggregate supply. Aggregate demand means total expending of a nation and Aggregate
supply means total quantity of good and services supplied by the businessmen in a particular
period of time with a given price.

Aggregate demand is influenced by monetary policy and fiscal policy along with other
forces of an economy.

 Component of Monetary policy:

There are basically four component of Monetary Policy:
1) Short term interest rate
2) Availability of credit
3) Foreign exchange rate
 4) Market forces

Monetary policy is made by central bank.

Monetary policy is basically two types:

1) Expansionary Monetary policy

2) Contractionary Monetary policy

When interest rate is lower, credit policy is

Simplified, exchange rate is also simplified and other forces are also simplified, money
supply of the will increase and finally national income will also increase and the employment
is also increase, this is called expansionary monetary policy.

When the interest rate is increase, tough credit policy and exchange rate are fall than

investment will decline and employment and output will also fall, this is called contractionary

monetary policy.

The only occurrence of expansionary policy is it increase inflation.

The continues rise of price of all goods and services is called inflation.
  Fiscal policy:

components:
1)Taxation - a) income
b) corporate
c) inheritance
d) capital gain
2) Government expending
3) Government borrowing

 Taxation:

There are two types of taxation:

1) Direct tax - income tax, corporate tax, inheritance, capital tax

2) Indirect tax - VAT

The major source of government revenue is the indirect tax. The example of indirect tax is
VAT.
The tax paid at the time of purchasing the product is known as indirect tax.

Government expending: It include administrative expenses and development expenditure.

Government Borrowing: When government income collected from the tax doesn’t cover all
expenditure than government borrows money from the international development agencies
such as world Bank, IMF, ADB, IDB to makeup the development expenditure. Government
also sometimes takes loans from the long term purpose. And also sometimes collect money
by selling various types of bonds and security.

Fiscal policy is two types:

1) Expansionary fiscal policy
2) Contractionary fiscal policy

Expansionary:
When both direct and indirect tax are reducing than the price of the goods and
services will decline and the conjunction will increase. If consumption increase GDP of a
country will also increase. Similarly, if government expending increase money supply will
also rise. And similarly if government borrowing increase economy will also become boom.
However, expansionary fiscal policy increases the inflation rate of a country.

Contractionary:
When tax is increase, government expending decrease and government
borrowing also falls than price of goods and services will rise, money supply of the economy
will fall and finally country GDP will also decline. However, inflation will fall and
employment will also decrease.
 However, there is a contradiction of using expansionary and contractionary fiscal policy
between the inflation and employment.

 How to calculate nominal GDP, real GDP and GDP deflator:

Price of product Price of product

Year Quantity Quantity
X Y
2005 Tk. 1 100 Tk. 2 50
2006 Tk. 2 150 Tk. 3 100
2007 Tk. 3 200 Tk. 4 150

 Calculation of nominal GDP:

2005: (1 × 100) + (2 × 50) = 200 Tk.

2006: (2 × 150) + (3 × 100) = 600 Tk.
2007: (3 × 200) + (4 × 150) = 1200 Tk.
 Calculation of real GDP:

2005: (1 × 100) + (2 × 50) = 200 Tk.

2006: (1 × 150) + (2 × 100) = 350 Tk.
2007: (1 × 200) + (2 × 150) = 500 Tk.
 Calculation of GDP deflator:

Formula: (Nominal GDP / Real GDP) × 100

2005: (200 / 200) × 100 = 100
2006: (600 / 350) × 100 = 171.43
2007: (1200 / 500) × 100 = 240
Between 2005 and 2006 inflation rate was 71% and between 2005 and 2007 inflation rate was
140%. (GDP deflator is used to calculate inflation rate of a country)

There are many things that doesn’t calculate in GDP. For example –

 GDP doesn’t major the health condition of population.

 It doesn’t major the quality of education.
 GDP doesn’t take into account our wisdom.
 GDP doesn’t measure women emancipation.
 It doesn’t take into account environmental pollution.
 Law and order situation are not also considering in GDP.
 GDP doesn’t consider the value of underground economy.
 The value of the unpaid who administrator is not considering in GDP.
 GDP doesn’t measure the beauty of poetry.
 GDP doesn’t measure the freedom of speech.