MODELS OF

NATIONAL INCOME
BY : Cramer rule
 MEET THE TEAM

 TEESA BISHT

 D I K S HA K U M AR I ​

 P R AT I S T HA S I N G A L

 AVNEET KAUR

 A S H W I N A G R AWA L

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INTRODUCTIO
N

The national income is total amount of income

accruing to a country from economic activities in
years time. It includes payment made to all resources
either in form of wages, interest, rent, and profits.

The progress of a country can be determined by the

growth of the national income of the country.

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 VA LU E A DD E D National income is calculated by adding ‘net value added at FC’ by
/ OUT PU T/ PROD UCT all the producing units during an accounting year within the
domestic territory.

The income method measures national income generated among 4

INCOME/ factors of production in the form of wages, rent, interest and profits
DISTRIBUTION In exchange of their factor services.

EXPENDITURE/
DISPOSITION Expenditure method measures final ‘expenditure on gross domestic
product at market price’ during a period of one year. Final
METHOD
expenditure is the expenditure made on consumption and investment

NATIONAL INCOME MEASUREMENT IN DIFFERENT WAYS

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 MATRIX

A matrix is simply defined as a

rectangular array of numbers or
expressions arranged in rows and
columns.

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 TYPES OF MATRIX

 Row matrix  Column matrix

 Square matrix  Null matrix

 Identity matrix  Diagonal matrix

 Scalar matrix  Triangular matrix

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 KEYNES MODEL OF INCOME
DETERMINATION IN TWO SECTOR
ECONOMY
J.M. Keynes in his famous book, 'General theory', has used two methods for the
determination of national income at a particular time:
(1) Saving Investment Method.
(2) Aggregate Demand and Aggregate Supply Method.

Both these approaches lead us to the determination of the same level of national
income. It may here be mentioned that Keynes model of income determination is
relevant in the context of short run only.

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 NATIONAL INCOME MODEL

National income model is another area of application of matrix algebra. We

will consider a simple two-equation national income model for an
economy . In order to keep the exposition simple, we have not included
government and trade relationship with external countries in the present
analysis. Our objective is geared towards the computation of equilibrium
national income as well as consumption of an economy .

Y=C+I (1)

C = a + bY (2)

Where, Y is national income , C is consumption , I is autonomous

investment, a and b ae constants.

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MARKET DEMAND AND SUPPLY EQUILIBRIUM

It is seen in microeconomics that the demand for a commodity and its supply are expressed
as functions of its own price only. The resultant equilibrium of such a relation is given by
the equality between demand and supply equations . To see the process of determination of
equilibrium price and quantity, lets us consider a hypothetical example of car industry.
EXAMPLE : if demand and supply curves for car are :
D=100 -6p, S= 28+3p, where P is the price of cars, what is the quantity of car bought and
sold at equilibrium?
ANSWER : we know that the equilibrium quantity will be where supply equals demand. So
first we’ll set supply equal to demand:
[100-6p] = [28+3p]
on equating these matrices we get:
72= 9p
p=8

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Since we have worked out the equilibrium price, we can solve for the equilibrium price, we can solve for
the equilibrium quantity by simply substituting p= 8 into the supply or the demand equation. That is, if p
is substituted into supply equation to get :

S=28+3x8

= 28+24

=54

Thus, the equilibrium price = 8, and the equilibrium quantity = 52.

However, this simple market formulation presupposes that the demand for and the supply of a
commodity are not influenced by other factors such as price of substitutes and complementary goods. In
reality such types of assumptions do not hold good. To accommodate such scenarios a better option could
be an inclusion of prices of other commodities also into demand and supply equations.

It may be useful to point out that the above-mentioned approach to demand-supply equations of
interrelated markets of related commodities. In such a framework, the equilibrium prices and quantities
of the included commodities comprising a large number of supply and demand equations can be obtained
using system of simultaneous equations as well as by using matrices.

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 SUMMARY
The concept of matrix is very useful in
economics in solving simultaneous equations,
in input output analysis, in regression analysis
as well as in national income model. From our
discussion, inversion of matrix is possible if
and only if two conditions are satisfied. First
of all, matrix whose inverse is required is a
square matrix otherwise we cannot be able to
form the determinant of the matrix. Secondly,
the determinant of the matrix should not be
zero which implies that the matrix whose
inverse is required should be non-singular. .

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THANK YOU

BY: CRAMER RULE

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