1. What are the importance of the national income ?

 National Income of a country can be defined as the total

market value of all final goods and services produced in
the economy in a year.

The importance of National Income can be explained as

follows:
 For the Economy: National income data is important
for the economy of a country. In present times, the
national income data are regarded as accounts of the
economy, which are known as ‘Social Accounts’. It
tells us how the aggregates of a nation’s income,
output, and product result from the income of
different individuals, product of industries, and
transactions of international trade.
 National policies: National income data forms the
basis of national policies such as employment policy,
industrial policy, agricultural policy, etc. National
income also helps to generate economic models like
growth models, investment models, etc. Thus, proper
measures can be adopted to bring the economy to the
right path.
 Economic planning: For economic planning, data
pertaining to national income is very essential. It
includes data related to a country’s gross income,
output, savings, investment, and consumption which
can be obtained from different sources.
 Economic Research: National income data is also
used by the research scholars of economics. They
make use of various data of the country’s input,
output, income, savings, consumption, investment
employment, etc., which are obtained from social
accounts.
  Comparison of Standard of Living: National income
data helps us to compare the standard of living of
people in different countries as well as of people
living in the same country at different times.
 Distribution of Income: National income statistics
enable us to understand the distribution of income in
the country from the data related to wages, rent,
interest, and profits. We understand the disparities in
the incomes of different sections of society.
2. Explain how two sector model of circular flow of income is
different from three sector model?
 Circular Income Flow in a Two Sector Economy:

To begin with, to explain the circular flow of income and

expenditure we assume that all incomes which households
receive are spent on consumer goods and services and thus
there is no savings by them. Similarly, we assume that
there is no investment by business firms. Money flows of
income and expenditure corresponding to the real flows in
terms of goods, services and productive factors are shown
in Figure 2.1. In the upper loop of this figure, the resources
such as land, capital and entrepreneurial ability flow from
households to business firms as indicated by the arrow
mark. In opposite direction to this, money flows from
business firms to the households as factor payments such
as wages, rent, interest and profits. In the lower part of the
figure, money flows from households to firms as
consumption expenditure made by the households on the
goods and services produced by the firms, while the flow
of goods and services is in opposite direction from
business firms to households. Thus, we see that money
flows from business firms to households as factor
payments and then it flows from households to firms. Thus
there is, in fact, a circular flow of money or income. This
circular flow of money will continue indefinitely week by
week and year by year. This is how the economy functions.
It may, however, be pointed out that this flow of money
income will not always remain the same in volume. In
other words, the flow of money income will not always
continue at a constant level. In years of depression, the
circular flow of money income will contract, i.e., will
become lesser in volume, and in years of prosperity it will
expand, i.e., will become greater in volume. This is so
because the flow of money is a measure of national
income and will, therefore, change with changes in the
national income. In years of depression, when national
income is low, the volume of the flow of money will be
small and in years of prosperity when the level of national
income is quite high, the flow of money will be large.
In order to make our analysis simple and to explain the
central issues involved, we take many assumptions. In the
first place, we assume that neither the households save
from their incomes, nor the firms save from their profits.
We further assume that the government does not play any
part in the national economy. In other words, the
government does not receive any money from the people
by way of taxes, nor does the government spend any
money on the goods and services produced by the firms or
on the resources and services supplied by the households.
Thirdly, we assume that the economy neither imports
goods and services, nor exports anything. In other words,
in our above analysis we have not taken into account the
role of foreign trade. In fact, we have explained above the
flow of money that occurs in the functioning of a closed
economy with no savings and no role of government.

Circular flow of money in three sector economy with

Government sector:
In this model, we introduce the government sector as well
that purchases goods from firms and factors services from
households. Between households and the government
money flows from government to the household when the
government makes transfer payments. Like old age
pension, scholarship and factors payments of the
households. Money flows back to the government when it
collects direct taxes from the households. Similarly, there
are flows of money between the government sector and
firm sector. Money flows from firms to government when
the government realises corporate taxes from the firms.
Money flows from the government to the firms in form of
subsidies and payment made for the goods purchased.