MBA HOSPITALITY MANAGEMENT

National Income
Determination.

LECTURE 4

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 National income

A measure of the value of the output of the

goods and services produced by an economy
over a period of time, usually one year.

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 Circular flow of income: simplified

Circular flow: no withdrawals and no injections

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 Circular flow of income: W and J

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 Withdrawals (W)

• Any income received by domestic household

(H) not passed on to domestic firm (F) or
• Any income received by domestic firm (F) not
passed on to domestic household (H)
• i.e. W = S + T + M.

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 Injections (J)

• Any income received by domestic household

(H) not from domestic firm (F) or
• Any income received by domestic firm (F) not
from domestic household (H)
• i.e. J = I + G + X.

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 National Income Definitions (1)
• Gross Domestic Product: GDP

• Value of output produced (and incomes

received) by domestic residents (F and H)
using resources located within the domestic
economy

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 National Income Definitions (2)
• Gross National Product: GNP

• Value of output produced (and incomes

received) by domestic residents (F and H)
from their ownership of resources wherever
these happen to be located

• GNP = GDP + net property income from

abroad
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 National Income Definitions (3)
• NNP = GNP – depreciation

• Market prices: valuations include taxes (inflate

prices) and subsidies (deflate prices)

• Factor cost: valuations exclude taxes and

subsidies (so subtract taxes and add
subsidies)

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 NI Measurement: Output Method (1)
• Value added at each stage of production

OR

• Value of final output to be included

• Double counting will otherwise result

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 NI Measurement: Output Method (2)
• Logger sells trees to sawmill for £500
• Sawmill sells timber to merchant for £800
• Merchant sells wood to B & Q for £900
• B & Q sells wood to consumer for £1,500

• Total value of intermediate + final output =

£3,700
• Total value added = £1,500
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 NI measurement : Income method
• Only include those incomes paid in return for
productive activity
• Exclude transfer payments e.g. pensions,
benefits paid for non-productive activity
• Include undistributed profits (surpluses)
• Exclude stock (inventory) appreciation
• To move from GDP to GNP add net property
income from abroad

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 NI measurement: Expenditure method
• Expenditure on final output only, to avoid
double counting

• Must be current expenditure (i.e. in that year)

• GDP = C + I + G + X - M

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 Standard of living
• Real GDP per head
• Problems of international comparisons,
variations in:
– Quality of life
– Purchasing power
– Needs of residents
– Levels of unrecorded activity
– Working conditions
– Distribution of income

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 Equilibrium NI: W/J approach

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 Components of Withdrawals (W)

How savings (S), taxes (T), imports (M) and withdrawals (W) vary with national
income (Y)
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 Average and Marginal Propensities to
Withdraw (1)
• APW = Total Withdrawals =W
Total National Income Y
• APW = APS + APT + APM
• MPW = Change in Total Withdrawals = Δ W
Change in Total Income ΔY
• MPW = MPS + MPT + MPM

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 Average and Marginal Propensities to
Withdraw (2)

The withdrawals function (W), average propensity to withdraw (apw) and marginal
propensity to withdraw (mpw)
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 Equilibrium NI : 45O diagram

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 Component of Aggregate Expenditure (E)
• E=C+J

• E = C + (I + G + X)

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 Average and Marginal Propensities to
Consume (1)
• APC = Total Consumption =C
Total National Income Y
• Note: APC + APW = 1

• MPC = Change in Total Consumption = Δ C

Change in National Income Δ Y
• Note: MPC + MPW = 1
MPW = 1 - MPC

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 Average and Marginal Propensities to
Consume (2)

The consumption function C, average propensity to consume (apc) and marginal

propensity to consume (mpc)
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 Changes in National Income: Injections

Changes in national income (Y) following a change in injections

(J = I + G + X)
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 Changes in National Income: Withdrawals

Changes in national income (Y) following a change in withdrawals (W = S + T

+ M)
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 NI Multiplier (K)

Finding the national income multiplier

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 Inflationary and Deflationary Gaps