National Income

Preface

• National income is an important concept of macroeconomics.

It is the measure of economic activities in a country. It is the
money value of all final goods and services produced by
residents of a country in a year. It is also defined as the sum of
factor incomes in a country in a year. It is also expressed in
terms of aggregate expenditure of a country in a year.
 Importance of National Income Estimates
• Indicator of Economic Progress;
• Measure of Economic Growth;
• Comparison with other Countries;
• Significance in Business Policy Making;
• Significance for Trade Unions;
• Knowledge of Structural Changes;
• Signification for Economic Analysis, etc.
 Some Basic Concepts
• Domestic Territory of a Country: It includes land mass of a
country, territorial waters, ships and aircrafts owned and
operated by residents across countries, fishing vessels, oil rigs
and floating platforms and embassies abroad.
• Normal Residents: A person or institution who ordinarily
resides in a country and whose centre of economic interest
lies in that country.
Normal Residents = Nationals living in Bangladesh + Non-
nationals living in Bangladesh
• Non- resident of a Country: if a Bangladeshi national goes
abroad and stays there for a period less than one year, he will
remain normal resident of Bangladesh. But, if he stays there
for more than one year he will be treated as non- resident of
Bangladesh.
 Some Basic Concepts
• Flow: It is quantity that can be measured over specific period
of the time.
• Stock: It is quantity measureable at particular Point of the
time.
• Accounting Year: The financial year which the flow of income
in an economy is recorded.
• Capital formation: The surplus of the production over
consumption in an accounting year which is further used for
production.
• Final Goods: Goods which directly satisfies human wants.
• Intermediate Goods: Goods which are used in the production
process to produce other goods.
 Some Basic Concepts
• Subsidies: Economic assistance given to the producing unit by
the state for compensating the cost of product so that it is
available to consumers at affordable prices.
• Factors of production/Primary Inputs/Economic Resources:
Resources/goods which is used in the production process. For
example land, labour, machines, power etc.
 Concepts of National Income

• NI: National income is the money measure of the annual flow

of goods and services in an economy.
• GNP: GNP is the aggregate money value of all final goods and
services produced by the economy in a given year.
GNP = C + I + G + (X – M)
• GDP: GDP is the aggregate money value of all final goods and
services produced within the geographical boundary of a
country in a given year.
GDP = C + I + G
 Concepts of National Income

• NDP: NDP = GDP – Depreciation cost or CCA

• NNP: NNP = GNP – Depreciation cost or CCA
• Nominal GNP: Nominal GNP can be measured at current year
price.
• Real GNP: Real GNP can be measured at base year price. That
is, real GNP build up by the relevant price index of nominal
GNP.
• GDP deflator: It can be calculated by the ratio of nominal GDP
and real GDP.
GDP Deflator = 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃/𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 × 100
 Personal Income Vs Disposable Income

• PI: Personal income is the sum of all incomes actually received

by all individuals.
• DI: Disposable income is total personal income minus
personal current taxes.
DI = PI – Tax
 Per Capita National Income

• The average income of the people of a country in a particular

year is called Per Capita Income for that year.
Circular Flow of Income in a Two-sector
Economy
Monetary Flow
Spending on Goods and
Services
Goods and Services
Real Flow

Households Business Firms

Land, Labour,
Capital, Organisation
Rent, Wages,
Interest, Profit
Circular Flow of Income in a Four- sector
Economy
 Methods of Measuring National Income

• There are four methods of measuring national income. Which

method is to be used depends on the availability of data in a
country and the purpose in hand.
1) Product Method:
According to this method, the total value of final goods and
services produced in a country during a year is calculated at
market prices.
Y = X1P1 + X2P2 +-------+ XnPn
2) Income Method:
According to this method, the net income payments received by
all citizens of a country in a particular year are added up.
Y = Σr + Σw + Σi + Σπ - ΣTP
 Methods of Measuring National Income

3) Expenditure Method:
According to this method, the total expenditure incurred by
the society in a particular year is added together and includes
personal consumption expenditure, net domestic investment,
government expenditure on goods and services, and net
foreign investment.
Y = C + I + G + (X – M)
4) Value Added Method:
Another method of measuring national income is the value
added by industries. The difference between the value of
material outputs and inputs at each stage of production is the
value added.
 Difficulties of Measuring National Income

a) Inadequacy, non-availability and unreliability of accurate data

relating to the various sectors of the economy;
b) Difficulties of reducing the various, diverse economic activities
of the people to a common measurable denominator;
c) Difficulties in excluding raw materials and semi-finished goods
from the estimates of national income, in order to avoid the
errors of double counting;
d) Difficulties in discovering true transfer payments (e.g.,
unemployment allowances or interest on public debts, relief
payments or old-age pensions) for their exclusion from the
national income estimates;
 Difficulties of Measuring National Income

e) Difficulties in making proper adjustment of the changes in the

price-level in the national income estimates;
f) Difficulties in treating some major items like government taxes
and expenditure, the earnings from abroad, etc., in calculating
the national income;
g) Difficulties in expressing the national product in terms of
money owing to the fluctuations in the value of money,
existence of non-mentioned transactions, unpaid services and
non-monetary economic activities, voluntary work, illegal
transactions, etc.; and
h) Conceptual difficulties in defining national income properly
for calculating it with accuracy. These difficulties are also to be
faced in estimating India’s national income.
 Some Important Identities

• Y=C+S
• Y=C+I
• S=I
• Y=C+I+G
• Y = C + I + G + (X – M)
 Multiplier

• Multiplier is the ratio of change in income (∆Y) to a change in

government spending (∆G). Thus,
KG = ∆Y/∆G and ∆Y = KG. ∆G
Its formula (i.e., KG) is:
 NI Determination

Ex-1: S = -10 + 0.2Y

I = 50
i) Find equilibrium Y and C.
ii) If investment increases by US$10million , What will be the
new level of Y and C?
iii) Find the value of multiplier.
 NI Determination

Ex-2: C = 60 + 0.75Y
I = 35
i) Find equilibrium Y and C.
ii) If full employment level of NI is $460 crore, what investment
is required to be undertaken to ensure equilibrium at full
employment?
 NI Determination

Ex-3: C = 20 + 0.8 Yd
I = 50
G = 20
T = 10
i) Find equilibrium Y and C.
ii) If lump-sum tax increases by $10 million, what will be the
new Y and C?
iii) If govt. expenditure increases by $10 million, what will be
the new Y and C?
 NI Determination

Ex-4: Given the following information about the economy of a

country-
Consumption function, C = 85 + 0.5Yd
Investment function, I = 85
Government spending, G = 60
Net Taxes, T = 40 + 0.25Y

i) Solve for equilibrium income (Y) and consumption (C).

ii) How much does the government collect in net taxes when the
economy is in equilibrium?
iii) What is the government’s budget deficit or surplus?
 NI Determination

Ex-5: C = 80+ 0.8 Yd

I = 80
G = 60
T = 60
X = 20
M = 0.20Y

i) Find equilibrium Y , C, and M.

ii) Find the current account balance or trade balance.
iii) Find the value of multiplier.
 NI Determination
Ex-6: C = 100+ 0.8 Yd
I = 50
G = 50
T = 50 + 0.25Y
X = 10
M = 5 + 0.10Y

i) Find equilibrium Y , C, T and M.

ii) If equilibrium NI falls short of full employment income by
$50 crore, how much govt. should increased its expenditure
to attain full employment?
iii) Find the value of multiplier.
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