Basic MacroeconomicsINTRODUCTION AND CONCEPTS

Meaning of National IncomeNational Income of a country is the total market value of all goods and services produced within a country in a year.

Final Goods

Intermediate Goods

National Income = National Product = National Expenditure

Cicular FlowTwo Sectors, between HH and Firms

Three Sectors, between HH, Financial Sector, Firms

Four Sectors, between HH, FS, Firms, Govt.s

Full, Five Sectors, HH, FS, Firms, Govt.s

National Income Identities: Equations for now

◦ Two Sectors

◦ Y=C+I

◦ Y=C+S

◦ C+S == Y == C+I

◦ C+S=C+I

◦ S=I

◦ Three Sectors?

◦ Four or Five Sectors?

GNPGross National Product

Total Market Value of all final goods and services in a country in a year◦ Monetary Value

◦ Counting Care, e.g. count products/service each only once. Avoid problem of double/multiple counting

Final Goods?

Intermediate Goods?

Normal Residents? Both national and foreigners dwell in a country.

Components of GNPValue of Final Goods/Consumed by Consumers, C

Value of New Capital/Investment Goods, consumed by Firms, I

Value of expenditure by Govt/Govt Consumption, G

Net Exports, Exports minus Imports

Net Factor Income, include wages, rents, interest/profits etc

What Incomes are added in GNP: A Simple Rule

GNP=

Net Factor Income from Abroad (FI) +

Gross Private Investment (I) +

Net Exports (Xn) +

Govt Expenditure (G) +

Private Consumption ( C )

GDPGross Domestic Product

It is GNP-Net Factor Income

GDP=GNP - FacInc , FacInc is Factor Income as defined earlier.

GNP=GDP + FacInc

NOTE: FacInc is not Net Exports

GDP=C+I+G+Xn

Consider: Will the machinery etc will wear and tear during the year of producing GDP/GNP?

Simple Rule: Contd.GNP= GDP=

Net Factor Income from Abroad (FI) +

Gross Private Investment (I) + Gross Private Investment (I) +

Net Exports (Xn) + Net Exports (Xn) +

Govt Expenditure (G) + Govt Expenditure (G) +

Private Consumption ( C ) Private Consumption ( C )

NNPDepreciation?

NNP=GNP-Depreciation

Note, includes some indirect taxes which are not meant to be levied on the payer specially. Like some sales tax which is actually paid by the firms on selling points. Hence, actual price of products is different than what consumers really pay. Consumers paid price includes indirect taxes or subsidies. Hence, care is needed for considering it before final counting.

Indirect Tax? Cost Price plus Tax, Tax is collected by Govts from firms

Subsidy? Cost Price minus Subsidy, Subsidy is paid by Govts to businesses

Simple Rule: ContdGNP= GDP= NNP=

Net Factor Income from Abroad (FI) +

(Subtract Depreciation from Gross private Investment)=Ig-Depreciation=In

Gross Private Investment (I) + Gross Private Investment (Ig) + Net Private Investment (In) +

Net Exports (Xn) + Net Exports (Xn) + Net Exports (Xn) +

Govt Expenditure (G) + Govt Expenditure (G) + Govt Expenditure (G) +

Private Consumption ( C ) Private Consumption ( C ) Private Consumption ( C )

National IncomeWhen NNP is accounted for Indirect Taxes and Subsidies

So NNP-Tax/Subsidies=NNI

Simple Rule: Contd.

GNP= GDP= NNP= NI=

Net Factor Income from Abroad (FI) +

Subtract Net Foreign Income from GNP

(Subtract Depreciation from Gross private Investment)

=Ig-Depreciation=In

Subtract Net Indirect Taxes from NNP and add Subsidy

Gross Private Investment (I) + Gross Private Investment (Ig) + Net Private Investment (In) + Net Private Investment (In) +

Net Exports (Xn) + Net Exports (Xn) + Net Exports (Xn) + Net Exports (Xn) +

Govt Expenditure (G) + Govt Expenditure (G) + Govt Expenditure (G) + Govt Expenditure (G) +

Private Consumption ( C ) Private Consumption ( C ) Private Consumption ( C ) Private Consumption ( C )

Personal IncomeAs each final income receiver has also to pay some more types of taxes and get other benefits in addition to what is stated earlier, like Indirect Taxes and Subsidies, So final income at the disposal of normal consumers to spend/consume is a different entry/value.

NNI - Undistributed Corporate Profits, Corporate Taxes and Social Security Contribution

+ transfer payments (any payment that is not related to get back something in return like pensions, unemployment compensation, relief payment, interest payment on public debt, etc.)

Personal Income can be at disposal for consumption if any further personal income tax are paid by the recipient.

Measurement of National Income

Value Added Method

Income Method

Expenditure Method

Anything else?

Oh, its only Thank you.