1 / 27

NATIONAL INCOME ACCOUNTING

NATIONAL INCOME ACCOUNTING. INCOME AND EXPENDITURE. What is Income?. 1. Income is the earnings of individuals. NATIONAL INCOME ACCOUNTING. 2. The income of a corporation is called revenue. 3. One way that government derives income is through taxing individual and firms.

kirsi
Download Presentation

NATIONAL INCOME ACCOUNTING

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. NATIONAL INCOME ACCOUNTING

  2. INCOME AND EXPENDITURE What is Income? 1. Income is the earnings of individuals. NATIONAL INCOME ACCOUNTING 2. The income of a corporation is called revenue. 3. One way that government derives income is through taxing individual and firms.

  3. INCOME AND EXPENDITURE What is Expenditure? 1. Expenditure is what individual, firms and the government spend on. NATIONAL INCOME ACCOUNTING • Expenditure of Individuals is denoted as C. • Expenditure of firms (corporations) is denoted as I • Expenditure of governemnt is denoted as G.

  4. The National Expenditure/Income NATIONAL INCOME ACCOUNTING In any economy, we expect Income = Expenditure National Income/Expenditure is = C + I + G

  5. To Calculate the Expenditure of an Economy The total or aggregate expenditure of an economy that does not import or export any goods and services is calculated by using the formula below: NATIONAL INCOME ACCOUNTING Aggregate Expenditure = C + I + G (without imports or exports)

  6. Aggregate Expenditure (AE) and Aggregate Demand (AD) Aggregate Expenditure is also called Aggregate Demand (AE = AD). This means that to calculate Aggregate demand we also use the AE formula: AD = C + I + G (without exports (X) and imports (M)) AD = C + I + G + (X – M) (with exports and imports) NATIONAL INCOME ACCOUNTING *We call the (X-M) component the external economy. While the (C+ I + G) is called the domestic economy. Note: Some countries do not have an import & export sector as they are closed and self sufficient. (eg some remote pacific Island country)

  7. Aggregate Demand (AD) Aggregate demand is the total expenditure of an economy . It consist of the spending of consumers (C) + firms (I) + government (G) + (X-M). AS NATIONAL INCOME ACCOUNTING AD The AD curve looks like a normal demand curve but is actually different from a demand curve. AD is the total demand of the whole country at a certain price level while the regular demand curve represents a the demand of a person, a firm or an industry for a good or service.

  8. Aggregate Demand (AD) If any of the components in the AD are increased or decrease, the AD will shift right and left accordingly. GPL AS Increase Decrease NATIONAL INCOME ACCOUNTING C or I or G or X C or I or G or X AD GDP (Y)

  9. Aggregate Demand (AD) If any of the components in the AD are increased or decrease, the AD will shift right and left accordingly. GPL AS Increase Decrease NATIONAL INCOME ACCOUNTING C or I or G or X C or I or G or X AD GDP (Y)

  10. How Taxes Affect Consumption and Investments C= (Income – Tax) I = (Revenue – Tax) From the formula above if tax increases, then consumption (C) and investments (I) decreases. NATIONAL INCOME ACCOUNTING Quiz 1 What would consumption be if the average income of Singaporeans was $60,000 and the tax rate was 10%? Average C wll drop to $54,000 Quiz 2 What would happen to Aggregate Demand or GDP when taxes increase? GDP will decrease as C & I decreases. AD shifts left.

  11. Recap: Aggregate Demand (AD) If taxes increased, the AD will shift left accordingly. GPL AS Increase Decrease NATIONAL INCOME ACCOUNTING C or I or G or X C or I or G or X GPL1 GPL2 AD GDP2 (Y) GDP1 GPL 1 > GPL 2 the general price level has decreased GDP 1 < GDP 2 the gross dometic product has decreased

  12. Aggregate Demand and Economic Growth When aggregate demand shifts left and GDP decreases, we say that the economic growth of a country has been reduced. ie GDP2 < GDP1(after AD has shifted left)

  13. How Interest Rate (r) Affect C & I C & I borrow money from the bank to spend. If r decreases, then it would be cheaper for C & I to borrow and to spend. NATIONAL INCOME ACCOUNTING Quiz 1 In 2013 Interest rates fell from a year ago 6.5% to 5%, how will C & I adjust their expenditure. C & I will increase their expenditure Quiz 2 What would happen to Aggregate Demand and economic growth when interest rate (r) increases? GDP will decrease as C & I will decrease. AD shifts left.

  14. Recap: Aggregate Demand (AD) If any of the components in the AD are increased or decrease, the AD will shift right and left accordingly. GPL AS Increase Decrease NATIONAL INCOME ACCOUNTING C or I or G or X C or I or G or X GPL1 GPL2 AD GDP2 (Y) GDP1 GPL 1 > GPL 2 the general price level has decreased GDP 1 < GDP 2 the gross dometic product has decreased

  15. How will increasing money supply affect C & I The government can increase money supply in an economy (eg. Printing money and distributing it via the banks). When there is more money circulating in the economy, it becomes easier and cheaper for consumers and firms to obtain money to spend. ie. C + I will increase. NATIONAL INCOME ACCOUNTING Quiz 1 Explain how economic growth will be affected when government decreases money supply. Answer When government reduces the money supply, there will be less easily available money circulating in the economy and as such consumption and investment will be decreased causing GDP to be reduced and economic growth to fall.

  16. How Government Spending can affect C & I When Governement (G) spends, it will influence GDP directly since : NATIONAL INCOME ACCOUNTING AD (GDP ) = C + I + G Question If government spending can directly influence the GDP of a country, what does this imply about the power of Government? Answer This implies that government has the power to influence or increase the GDP (and ultimately economic growth) when the economy is not doing well. It can also decrease the GDP to bring down inflation when the GPL is too high.

  17. Government Policies – Demand Side Any government policies that government implement that can affect the aggregate demand to increase or decrease are called demand-side policies. NATIONAL INCOME ACCOUNTING • Demand Side Policies Consist of: • Fiscal Policies : • a. Government influencing AD/GDP via increasing/decreasing taxes. • b. Government influencing AD/GDP via • increase/decreasing government spending (G) • - Monetary Policy: • a. Government influencing AD/GDP via increasing or decreasing money supply. • b. Increasing, decreasing the interest rate.

  18. Q1: The economy of the United States has not been growing for the last 5 years. Explain the policies the Fed (US central bank) implement to spur economic growth. (6 points) Hint: slide 17 Answer: NATIONAL INCOME ACCOUNTING • Gov. can use fiscal policy: • Reduce Taxes • Increase government spending (eg.on infrastructure, retraining etc) • Appropriate diagram to illustrated • Monetary policy: • Increase money supply so as to make funds more readily available for consumers and firms to spend. • Decreasing the interest rate.

  19. Fiscal & Monetary Policies If government wants to spur economic growth, they could use the demand side polices of either fiscal or monetary policies. GPL Fiscal -Decrease Tax -Increase G Monetary -Decrease Interest Rate -Increase MS. AS NATIONAL INCOME ACCOUNTING NATIONAL INCOME ACCOUNTING GPL2 GPL1 AD GDP1 (Y) GDP2 GPL 2 > GPL 1, ie GPL has increased, increasing inflation. GDP 1 <GDP 2 the gross domestic product has decreased

  20. Q2. If a country is suffering high prices (as in high inflation), what policy tool can the Gov. use to tame inflation? (6 points) Answer: NATIONAL INCOME ACCOUNTING • Gov. can use fiscal policy: • Increase Taxes • Decrease government spending (eg.on infrastructure, retraining etc) • Appropriate diagram to illustrated • Monetary policy: • Decrease money supply so as to make funds more readily available for consumers and firms to spend. • Increase interest rate to make it more expensive to borrow and spend.

  21. If government wants to lower inflation, they could use the demand side polices of either fiscal or monetary policies. GPL AS Fiscal -Decrease G -Increase T Monetary Decrease Money Supply NATIONAL INCOME ACCOUNTING GPL1 GPL2 AD GDP2 (Y) GDP1 GPL 1 > GPL 2 the general price level has decreased, thus lowering inflation by lowering GPL. But GDP 2 < GDP 1. the gross domestic product has decreased lowering economic growth.

  22. NATIONAL INCOME ACCOUNTING

  23. NATIONAL INCOME ACCOUNTING

  24. NATIONAL INCOME ACCOUNTING

  25. NATIONAL INCOME ACCOUNTING

  26. NATIONAL INCOME ACCOUNTING

  27. NATIONAL INCOME ACCOUNTING

More Related