National Income: also known as National dividend

1. National Income: also known as National dividend • The total income of the nation is called National Income • In Real terms National Income ‘ is the flow of goods and services produced in an economy in a particular period of time • National product: all G & S produced by the community and exchanged for money during a year. • National dividend: consists af all income, in cash and kind. Accuring to the factors of production in the course of generating the national product • National expenditure: total spending/outlay of the community on G & S produced during a given year.

2. Stock and flow concepts • A stock : quantity at a given point of time • Flow: quantity measured per unit of time Calculation of NI has no meaning without the reference of time period. bcoz. NI is a flow but not a stock concept Marshall: Defined NI as “ labour and capital of a country acting o its natural resources produce annually a certain net aggregate of commodities, materials and immaterial including services of all kinds, this is true net annul income as revenue of a country or national dividend”

3. National Income National income is a flow, expressed in terms of total output.

4. The Circular Flow: Households and Firms

5. The Circular Flow: Households, Firms, and Foreign Countries

6. National income accounting National Income Accounting represents the tools and methods by which economists and policy-makers measure economic activity and economic growth over time. The aim of national income accounting is to place a money value on this year's output.

7. Approaches to national income measurements There are three approaches to national income measurements: 1.Income method or factor income in the production process 2.Product method or value added in production process 3.Final expenditure method

8. 1. Income method The income method adds together the total value of all incomes that have been earned in the relevant time period. This method approaches from Distribution side. In this method Ni is getting by summing up the income of all the individual that have been earned in the relevant time period of the country This method indicates the distribution of NI among different income groups like, land lord, capitalistic etc., this is called as NI by distributive shares

9. Expenditure method • This method by summing up by total consumption which made by private individuals, govt etc., • According to this method GNP is calculated by 4 terms • Personal consumption • Gross domestic private investment • Govt. purchases • Net foreign investment

10. Production process Production process is a Continuous one in which goods and services are produced with the help of various factors of production like our, land, capital, enterprise and so on.

11. Output method/ production /inventory method • This method measures the total output of the country • This method approaches the Ni from output side • In this method whole economy is dived in to different sectors i.e agriculture, mining, banking , industry etc., • The net value of production of all the industry and sectors of economy + net income from abroad • This method unable to us trust the origin of NI this is called NI by industrial origin • This method help us to know the relative importance of different sectors of the economy

12. Standard of Living• The standard of living refers to the amount of goods and services consumed by households in one year and is found by applying the equation: •Standard of living = Real national income/population

13. Interpretation of the Standard of Living •An increase in the standard of living may not mean a better life-style for the majority if: •Only a small minority of wealthy people consume the extra goods. •Increased output of certain goods results in more noise, congestion and pollution. •Leisure time is reduced to achieve the production increase. •There is an increase in the amount of stress and anxiety in society

14. Important National Income concepts 1. Gross Domestic Product • Money value all final G& S produced by country residents in a particular time • Gross domestic Product (GDP): = GNP- Net factors income from abroad • GDP= C+I+G+(R-P)+(X-M) 2.Gross National Product GNP=GDP+ Net factors income from abroad 3.Net National Product (NNP) NNP/N.I @ Mkt Price= GNP-depreciation 4.National Income @ factor cost/ NNP @ factor cost N I /N I @ factor cost = NNP (N I @ Mkt price)- Indirect taxes + subsidies

15. 5.Personal Income: sum of all incomes actually received by individual 6.DisposableIncome: = P I – Personal taxes D I Neither can be consumed /saved D I = consumption+ savings

16. Difficulties/problems in calculating N I • Conceptual problems relate to how and what is to be included and what not be include vegetable grown in terrace garden Service of housewives • Statistical problems • Double counting • Illiteracy • Lack of specialization • Untrained and inefficient staff

17. CONSUMPTION

18. Consumption: using G & s for satisfying wants Destruction of utility Relation between consumption and income is called consumption function C=f(y) Where, C- consumption F-function Y-income Cf is expressed as a linear function of income C=a+by APC= c/y APC= average propensity to consume C- consumption Y- income

19. APS=S/Y Marginal propensity to consume: ratio of change in total consumption to change in total income MPC= change in consumption/ change in income • Determinant of consumption • Subjective or internal factors • Precaution motive- for unseen emergencies., sickness, accident, unemployment • foresight motive: future needs for children education etc • Motive for independence: desire to independent financially • Std of living: improve std of living

20. Objective or external factors • Distribution of income: more inequality in income distribution, lower propensity to consume • Expectations: every one has certain calculations about their future changes. This may expect price increase in the future, they tend to consume immediately • Windfall gains or losses: when get huge profit--- consume more • Fiscal policies: taxes decreased the DI of people increase • Stock of wealth: any one having more wealth in form of bonds, fixed deposits etc., he tend to consume more from his current income

21. Practical significance of consumption function Useful in firms and business: APC and MPC useful in estimating demand for products in future Helps in explaining business cycle: the decline in MPC undermines the prosperity phase and gives way to recession. It is the base of multiplier: multiplier explains the income increase and the relationship with MPC. Multiplier: ratio of change in national income resulting from change I autonomous investments K= change in income/ change in investment Increase in the demand needs an increase In the supply and so that employment also increases therefore income increases

22. Keynes suggested 4 important measures for raising/the consumption • Redistribution of income: in favor of poor • Comprehensive social security: unemployment doles, old age pension, sickness insurance etc for poor • Liberal wage policy: there is a gap between the rise of prices and rise of wages • wage policy should increase automatically along with the increase in price Keynes assumed : rigid one • Credit facility: DIR loans

23. To summarize the relation between MPC and multiplier you have to remember three points • Higher MPC, K is stronger • Lower MPC, K Is weaker • MPC=0,K=1 • MPC=1, K is infinite

24. Significance of Multiplier It is not just theoretically important but also has practical significance 1. Public investment: shows a strong case of Govt. Eg. In depression, the govt. investment is really important and gives positive effect through multiplier 2. Useful in planning employment policies: framing national employment policy i.e how much govt. expenditure required to reach full employment. 3.Forecasting demand in response to government expenditure: helps to govt. to bring about change in aggregate demand and aggregate supply

25. Investment function Investment means the capital expenditure or purchasing of equipment or machinery Types of investment Gross investment: total value of productive assets created during a given period i.e One year it include depreciation component Net investment: GI- depreciation Private and public investments: made by private companies and corporate made by govt.& departmental undertakings Induced and autonomous investments Autonomous;: income inelastic/ independent of level of income Induced: income elastic i.e income increase invstmnt increase and vice versa

26. Real investment: increase in stock of capital goods in country viz., vehicle, machinery, factory building etc Financial investment: refers to stock of funds and bonds Real Investment- increase income & employment but not FI Keynes concerned with Real investment rather than FI

27. Factors affecting investment • Investment and rate of interest • Marginal efficiency of capital (MEC): expected returns from investment • MEC: yield expected from a new unit of capital • Factors affecting MEC • short term factors • Expected demand for future • Level of income • Business expectation Long term factors • Population growth • Economic polices of government • Infrastructure facilities

28. MEC depend s on 2 factors • Supply price/ replacement cost • Prospective yield

29. Accelerator: measures the change in investment goods industries as a result of change in consumption goods Multiplier: shows the effect of consumption on investment Acceleration shows the effect of investment on consumption Acceleration= change in investment/change in consumption Difference between K and A

30. Project on application of macro and micro economics in the process of decision making Select any kind of industry and prepare the project proposal by applying micro and macro economic concepts like supply and demand, market demand, elasticity , investment ,market structure, employment, monetary and fiscal policy etc.,

31. UNEMPLOYMENT AND INFLATION

32. Business Cycle

33. BUSINESS CYCLE BUSINESS CYCLES IS THE PERIODIC BUT IRREGULAR UP AND DOWN MOVEMENTS IN ECONOMIC ACTIVITY, MEASURED BY FLUCTUATIONS IN REAL GROSS DOMESTIC PRODUCT AND OTHER MACROECONOMICS VARIABLES

34. Business Cycles • Business Cycle: the pattern of real GDP rising and falling. • Recession (Contraction): two or more successive quarters of falling real GDP. • Depression: a severe, prolonged economic contraction. Usually involves unemployment rising to greater than 10% for years.

35. Characteristics of Business Cycles

36. 1] A trade cycle is a wave like movement. It is characterized by alternation of expansion and contraction in economic activity . • 2] The cyclical fluctuations are recurrent meansrepetitive. . • 3] A trade cycle contains self-generating forces that tend to terminate the phase of prosperity or depression. Therefore there cannot be either an indefinite prosperity or indefinite depression.

37. 4] Every segment of the economy isaffected by the trade cycles. • 5] In cyclical fluctuations,prices and production generally rise or falltogether. • 6] The cyclical fluctuations, aremoremarked in capital goods industries than in consumer goods industries. • 7] Though the trade cycles arerecurrent, they are not uniform.

38. The Phases of Trade Cycles

39. Figure 2: The Business Cycle

40. Depression • During Depression,the conditions in the economy are most deplorable.Real income consumed ,real income produced & the rate of employment are falling.

41. 2.Revival or Recovery Depressiongives place torevival( recovery).There is revival of business and economic activities. First revival of business activities appears in the capital goods industry.

42. 3.Full Employment The cumulative process of revival or recovery continues till the economy reaches the stage of full employment. Full employment implies that all the available resources in men and materials are fully employed. During this phase, the level of economic activity isoptimumand all the factors of production are fully employed. Interest, profits and wages arehigh. Employment is maximum and unemployment is little. Bank credit and bank clearings are large

43. 4.Prosperity or inflation or boom Any increase in investment after the stage of full employment leads to an increased pressure on the available resources in men and materials. Profits reach a new height. Businessmen become over-optimistic and therefore they increase their capital investment. Boom conditions prevail everywhere.Over-optimismprevails all over the economy. It leads to situation ofprosperity or inflation or boom

44. 5.Recession or disinflation The boom conditions carry with them the seeds of self-destruct The cost of production goes up very high and upsets the calculations of the entrepreneurs. Failure of business units increases, investments ceases and unemployment rises. This leads to fall in incomes expenditure, prices, profits, and trade and industrial activities. There is panic in the stock market and the prices of stocks and shares fall rapidly. The rate of interest also rises. It ends in a hopeless depression,the first phase of the business cycle.

45. Measures to control Business Cycles 1.Monetary Policy Refers to thecentral banksprogram of changing monetary variablesie total supply of money,interest rates & credit rationing, to achieve certain pre determined objectives

46. Monetary policy 1.Open markets operations . 2 bank rate or rediscount rate 3 statutory reserve ratio

47. 2. Fisical policy It refers to the government policy of changing its policy of taxation & public expenditure programstoachieve economic stabilization. Taxation is the measure oftransferring the funds from private to public. Public expenditure on other hand increase private incomes. It is based on therelationship of public expenditure & taxes to national incomes & the G N P

48. Great Depression

49. Economic Indicators • Leading Indicators • A variable that fairly consistently changes before real GDP changes • Coincident Indicators • A variable that fairly consistently changes at the same time as real GDP changes • Lagging Indicators • A variable that fairly consistently changes after real GDP changes

50. The Indicators