National Income and Related Aggregates

Dr. A K M Nazrul Islam

Associate Professor

School of Business and Entrepreneurship

Independent University, Bangladesh (IUB)
10th October 2021
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 Circular Flow of Income
⚫ The process of production is a continuous process. In it,
various factors of income (FOI) such as land, labor, capital &
entrepreneurship are combined together for the production of
goods & services.
⚫ The supply of these FOP come from these FOP from
households. These factors offers their services to the producers
(also known as firms) who in returns produce goods & services
& make payments as reward in the form of rent, wages, interest
& profits.
⚫ The households spend this money on goods & services
produced by the firms. Thus income or money first flows from
the firms to the households in the form of factor payments &
then from the households to the firms in the form of
consumption expenditure.
⚫ The income continue to flow in a circular way so it is called
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circular flow of income.
 Two Sector Model
Goods & Services
Factor Services

Househo Industry
lds

Factor Payments
Factors for Goods & Services

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⚫ In the previous model, it is assumed that household sector
and firms do not save at all. But in actual practice it does not
happen so. Households save some part of their income for
various reasons like precautionary reasons, transactionary
reasons &speculative reasons.

▪ Similarly firms also save some of their receipts for reasons

like-expansion of their business etc.

⚫ All the banking institutions, insurance companies &

financial houses taken together constitute capital market of
the economy.

⚫ From capital market these savings flow to firms as loans for

investment. 4
Two Sector Model With Savings
Goods & Services

Factor Services

Savings Borrowings

Household Capital
Market Industry
s Savings
Borrowings

Factor Payments
Payment For Goods & Services

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 Three-Sector Model With Savings
Governm
ent Su
b
s In sidi
nt dir e
e ec s
ym

Borrowings
tT
Pa

Savings
xes ax
es
Ta
Savings Borrowings
Capital
Households Market Industry
Savings
Borrowings

Factor Payments
Payment For Goods & Services

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 Four-Sector Model
Govt. receives
Factor Services loans Rest of the
Governm Interest paid world

t or ent Su
bs
ac al In idi
F dir
er + oci xes ec es

Borrowings
f s
ns ent +S t Ta tT

s
Export
Savings

Imports
a
Tr ym ent rec ax
es
Pa ym cesDi
Pa rvi
Se Savings Borrowings
Capital
Households Market Producers
Savings
Borrowings

Factor
Payments
Payment For Goods & Services

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 Withdrawals & Injections
⚫In reality, however, there are leakages from and
additions to the circular flows of income and
expenditure

⚫The leakages and additions are also called withdrawals

and injections, respectively.

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 Withdrawals
⦿Withdrawal is the amount that is set aside by the households and
the firms and is not spent on the domestically produced goods and
services over the period of time. Example a household sets aside a
part of income for old age or against the loss of job.

⦿ Saving is a withdrawal.

⦿When savings are invested, they take a form of injections

⦿Firms may also withhold a part of their total receipts and may not
return it to the circular flows in the form of factor payments in
anticipation of depression

⦿Such withdrawals reduce the size of circular flows

⦿S+T+M (savings, taxes, imports)

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 Injections
⚫Amount that is spent by households and firms in
addition to their incomes generated within the regular
economy

⚫Injection by the household may be in the form of

spending inherited savings or the hoarding

⚫Firms can inject money by spending their retained

earnings or borrowing from outside

⚫Injections increase the size of circular flows

⚫I+G+X (investment, govt. exp., exports)

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 The circular flow of income

INJECTIONS

Export
expenditure
Investment (X)
(I) Government
Consumption of expenditure
(G)
Factor domestically
BANKS, etc GOV. ABROAD
payment produced goods
s and services (Cd)
Import
Net expenditure
Net taxes (T)
saving (M)
(S)
WITHDRAWALS

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 National Income
⚫ National Income (NI) refers to the money value of all final
goods & services produced by residents of a country while
working both within or outside the domestic territory in an
accounting year.

⚫ NI is expressed in monetary terms.

⚫ It reflects the value of final goods & services.

⚫ NI Is expressed over 1 financial year.

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 National Income- Meaning
⚫ It is a sum total of factor incomes accruing to normal
residents of a country within an accounting year.

⚫ The concept of National Income can be explained from

three sides –
I) Production
II) Income and
III) Expenditure

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 DEFINITIONS
⚫Central Statistical Organization (CSO, India): -
“National Income is the sum total of factor incomes
earned by the normal residents of a country in the
form of wages, rent, interest and profit in an
accounting year”.

⚫Prof. Kuznets: “The sum total of the market value

of final goods and services, produced by normal
residents of a country in one year is known as
national product.”

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 National Income -Excluded Items
⚫ NI excludes sale & purchase of second hand goods.

⚫ It excludes income from illegal activities – smuggling, black

marketing, gambling etc.,

⚫ It does not includes transfer payments – old age pension,

scholarship to students etc.,

⚫ Transfer payment are those earning for which no

contribution is made to the flow of goods & services.

⚫ In other words they are not earned but received only.

⚫ T.P are received without doing or producing any commodity

or services. 15
Concepts/Aggregates of National Income
⚫Gross Domestic Product at Market Price (GDPMP)
⚫Gross National Product at Market Price (GDPMP)
⚫Net National Product at Market Price (NNPMP)
⚫Net Domestic Product at Market Price (NDPMP)
⚫Gross Domestic Product at Factor Cost (GDPFC)
⚫Gross National Product at Factor Cost (GNPFC)
⚫Net National Product at Factor Cost (NNPFC)
⚫Net Domestic Product at Factor Cost (NDPFC)
⚫Private Income
⚫Personal Income
⚫Personal Disposable Income
⚫National Disposable Income 16
 Basic Concepts -
⚫Domestic and National Concepts
1.Domestic Income = National Income – NFIA
2. National Income = Domestic Income + NFIA

⚫Market Price and Factor Cost Concepts

1. Market Price = Factor Cost + NIT
2.Factor Cost = Market Price – NIT

⚫Gross and Net Concepts

1. Gross Product = Net Product + Depreciation
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2.Net product = Gross Product – Depreciation
 Concepts related to
National Income (NNPFC)
⚫GDP: Value of all final goods and services produced
within the domestic territory of a country during an
accounting year.

⚫GNP = GDP + Net factor income from abroad

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Gross Domestic Product (GDP) Gross National Product (GNP)
It refers to the money value of all final It refers to the money value of all the
goods & services produced within the final goods & services by the normal
domestic territory of a country . residents of a country.

It is a domestic concept as it is It is a national concept because it is

concerned with the domestic territory concerned with the normal resident
of a country. of a country.

GDP = P(G) + P(S) GNP = GDP + NFIA

If we add net factor income from If we subtract NFIA from it we get
abroad to it, we get GNP. GDP.

GDP would be greater than GNP, if GNP>GDP if NFIA is positive.

NFIA is negative.

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 Net Domestic Product at Market Net National Product at Market
Price (NDPMP) Price (NNPMP)

It refers to the money value of all It refers to the money value of all the
final goods & services produced final goods & services by the normal
within the domestic territory in a residents of a country.
year.

It is a domestic concept as it does not It is a national concept because it

include NFIA. includes NFIA

NDPMP = GDPMP – Depreciation NNPMP = GNPMP – Depreciation

= NNPMP - NFIA = NDPMP + NFIA

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Net Domestic Product Net Domestic Product (NDPFC)/
(NDPMP) Domestic income

It refers to the market value of all It is the income received by the

final goods & services produced factors of production while working
both by residents or non-residents within the domestic territory of the
within the domestic territory of a country in a year.eg-Rent , Interest ,
country in an accounting year. Wages , Profits

Net Indirect Taxes are included in it. Net Indirect Taxes are not included
in it.

NDPMP = NDPFC + Indirect Taxes - NDPFC = NDPMP – Indirect Taxes

Subsidies + Subsidies

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