National Income is one of the basic concept in Economics and it's base is Circular Flow of Income. This chapter is based upon ISC Economics. I hope it will be useful. I tried animations for the circular flow...Enjoy it...

1. CLASS – XII

2. It is regarded as the most
comprehensive measure of the
level of economic activity and
index of economic growth of an
economy.

3.  It is defined as the value of all final
goods and services produced by the
normal residents of a country,
whether operating within the domestic
territory of the country or outside, in a
year.

4.  Money – Common Denominator
 We can assign monetary value in terms
of market prices or in terms of factor
costs.

5.  These are sold to the final users during the
year.
 Finished goods for
final consumption and investment.
 Final goods and services:
◦ Food items, refrigerators etc. – consumption
◦ Machines, buildings etc. - Investment

6.  These are used by the producers as
input into a further stage of
production.
 Resold after converting into final
goods.
 Seeds, fertilizers, etc.

7.  All goods and services produced during a
year must be counted once, but not more
than once.
 Intermediate products are excluded from NI.
i.e. flour mills sell flour to bakeries, and
bakeries use this flour in making breads
which are sold to households…

8.  NI is a flow concept. It is the flow of goods
and services. A flow is a quantity which is
measured over a period of time.
 It tells us how many rupees worth of goods
and services are flowing in the economy per
unit of time.
 Conventionally, NI is expressed over one year.

9.  NI measures the value of currently produced
goods and services.
 Excludes ‘pure exchange transactions’, such
as sale and purchase of second hand goods
or used goods, purchase and sale of
securities and transfer payments. Why?
Because, nothing new is produced in the
current year.

10.  What to do with the value of the services of
the commission agents involved in the
second hand sales?
 Regarding sale and purchase of financial
assets (both old and new) like bonds and
shares?
 Services of the share brokers?
 Transfer payments like social security
payments (pensions, etc.), donations and
gifts (unilateral payments).

11.  Those persons who ordinarily reside in a
country which they live and whose economic
interest lies in that country.
 May or may not be the citizens of that
country, i.e. normal residents include
national, as well as foreign nationals.
 They produce goods and services by selling
their factor services to production units
located within and outside the domestic
territory of a country.

12.  Geographical or political boundary excluding
foreign embassies and international
institutions located within the geographical
territory, and including the embassies of this
country located outside its geographical
territory.
 Domestic product: value o final goods and
services + NFI received from abroad
 NI is not the sum total of personal incomes

13.  Interaction and inter-dependence between
various economic activities like production,
exchange and consumption is called the
circular flow of income.
 NI is a flow concept.
 Production give rise to Income which gives
rise to Consumption/Expenditure and
expenditure gives rise to income again.
 It goes on continuously and indefinitely in a
circular way; it has neither any beginning nor
any end.

14.  Thus, CFI is defined as the flow of
payments and receipts for goods and
services and factor services between
different sectors of the economy.
 Flows:
◦ Real Flows
 Flow of factor services
 Flow of goods and services
◦ Money Flows

15. 1. Production 2. Income
3. Expenditure

16. 1. The Producing Sector 2. The Household Sector
3. The Government Sector 4. Rest of the World Sector

17. LAND LABOUR
CAPITAL
ENTREPRENEUR

18. Producers/ Firms Households
1
Factor Services (Real Flow)
3
Goods & Services (Real Flow)
2
Factor Payments (Money Flow)
4
Consumption Expenditure (Money Flow)

19. Producers/ Firms Households
Goods & Services (Real Flow)
Factor Services (Real Flow)
Money / Finance
SavingBorrowing for
Investment
Factor Payments (Money Flow)
Consumption Expenditure (Money Flow)

20. Producers Households
Money / Finance
Saving
Borrowing
Transfer Payments
Consumption Expenditure
Government
Taxes
Expenditure on Goods & Services
Taxes
Borrowing
Saving
Saving
Borrowing
Subsidies
Factor Payments

21. Producers Households
Money / Finance
Saving
Borrowing
Government
Borrowing
Saving
Govt. Consumption Expenditure
Transfer Payments
Taxes
Transfer
Payments
Taxes
Borrowing
SavingRest of the World
ExportReceipt
Import
Payment

22. Flow Variables which have negative impact on
the process of production in the economy.
Savings [S]
Taxes [T]
Imports [M]

23. Flow Variables which cause expansion in the
process of production in the economy.
Investment [I]
Govt. Consumption
Expenditure [G]
Exports [X]

24. Investment (I)
Government
expenditure (G)
Export
expenditure (X)
BANKS, etc
Net
saving (S)
GOV.
Net
taxes (T)
ABROAD
Import
expenditure (M)
The circular flow of income
Leakages
INJECTIONS
Consumption
of domestically
produced
goods &
services (Cd)
Factor
Payments

25. 2.Innovative Technology both in the
areas of Production and
Management
1. The discovery of
new resources

26. Knowledge of Interdependence
Identification of Injections & Leakages
Estimation of National Income
Level and Structure of Economic
Activity

27. State following sentences whether true of false
 Economy is broadly classified into two sectors
 Production refers to ‘Value Addition’
 2-sector model of economy is also known as
Open Economy
 Triplet Identity in circular flow is;
Production=Income=Expenditure
 Money flows are opposite to real flows in
circular flow
 Circularity stops when leakages are there in
system