National Income

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National Income
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The circular flow
The circular flow shows how real resources and
financial payments flow between firms and
households
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Circular flow of income diagram
Expenditure (C)
Goods Services
Firms
Households
Factors of production
Factor incomes (Y)
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• The circular flow diagram suggests three ways to
  measure economic activity in an economy
• The value of goods and services produced
• The level of factor earnings
• The value of spending on goods and services

National Output
National Expenditure
National Income


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National Income Accounting

• Gross domestic product (GDP) measures the output
  made in the domestic economy, regardless of who
  owns the production inputs.
• Value added is the increase in the value of goods
  as a result of the production process.
• Final goods are purchased by the ultimate user,
  either households buying consumer goods or firms
  buying capital goods.
• Intermediate goods are partly finished goods that
  form inputs to a subsequent production process
  that then uses them up.

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Adding savings investment
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Injections must equal leakages
Y ? C S
E ? C I
C S ? C I   ?? S ? I
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The government sector
Expenditure on goods services
Gov expenditures
Taxes
Government
Net taxes
Gov net borrowing
Saving
Banks
Investment
Firms
Households
Capital Goods
Rent, wages, interest profit
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Leakages injections with the government sector
I G ? S T
GDP at market prices measures domestic output
inclusive of indirect taxes on goods and
services GDP at basic prices measures domestic
output exclusive of indirect taxes on goods and
services.
E GDP at market prices C I G
GDP at basic prices (C I G) indirect taxes
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The foreign sector
Foreign Trade
Imports
Expenditure on goods services
Govt expenditures
Exports
Taxes
Government
Govt net borrowing
Net taxes
Firms
Saving
Capital Goods
Banks
Investment
Households
Rent, wages, interest profit
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Leakages and injections with a foreign sector
I G X ? S T M
E GDP at market prices C I G (X-M)
GDP at basic prices C I G (X-M) indirect
taxes
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From GDP to GNI
GNP (and GNI) at market prices
GNI (GNP) measures total income earned by
domestic citizens regardless of the country in
which their factor services were supplied.
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From GNI to national income
Depreciation or capital consumption is the rate
at which the value of the existing capital stock
declines per period as a result of usage or
obsolescence National income is the economys
net national product. It is calculated by
subtracting depreciation fro GNP at basic prices.
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Nominal and real GNP
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Per capita real GNP
Per capita real GNP is real GNP divided by the
population. This figure allows us to see what is
happening to the standard of living of an average
person in a country.
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A comprehensive measure of GNP

• It is hard to quantify the production of bad
  output such as noise and pollution
• Many goods are not marketed and therefore
  difficult to measure e.g. DIY or production for
  self-consumption
• The Black economy (estimated in the UK to be
  worth 10 of National Income
• What value should an economy place on other
  factors such as leisure time and climate?