2. Circular Flow of Income
A model that indicates how money moves throughout an economy,
between businesses and individuals.
Investors spend their income by consuming goods and services
from business, paying taxes and investing in the stock market.
Businesses use the money spent by individuals while consuming
and the money raised from selling stock to pay for capital to run
their business, purchase material to manufacture products and to
pay employees.
All expenditures from individuals become the income of the
businesses, and the expenditures of the businesses become the
income of the individuals.
3. Circular Flow….
The circular flow of income is a theory that describes the movement
of expenditure and income throughout the economy.
In an economy households provide factors of production, such as
labor, to firms. Firms use these factors to produce goods and
services which they sell to the households. (This is represented by
the red, inner loop in the diagram below.)
The households then spend money on the goods and services
produced by firms. This money is then used by firms to pay the
households for their work, through wages. (This is represented by
the green, outer loop in the diagram below.) This process repeats
itself and forms the circular flow of income.
6. National Income
The total net value of all goods and services
produced within a nation over a specified period of
time, representing the sum of wages, profits, rents,
interest, and pension payments to residents of the
nation.
(Economics) economics the total of all incomes
accruing over a specified period to residents of a
country and consisting of wages, salaries, profits,
rent, and interest.
7. Concepts you must be aware…
Gross Domestic Product GDP
Gross National Product GNP
Net National Product NNP
Personal Disposable Income PDI
Personal Income PI
8. GDP (Gross Domestic Product)
The value of country's overall output of goods and
services (typically during one fiscal year) at market
prices, excluding net income from abroad.
Income from abroad means the nationals of the
country working in other countries. Their
remittances include in GNP of their country & in
GDP of the country where they are serving.
GDP = GNP – Income from abroad
9. GNP (Gross National Product)
Gross National Product GNP is the total market value of
all final goods and services produced within a nation in a
particular year, plus income earned by its citizens
(including income of those located abroad)
Basically, GNP measures the value of goods and services
that the country's citizens produced regardless of their
location.
GNP is one measure of the economic condition of a
country, under the assumption that a higher GNP leads to a
higher quality of living, all other things being equal.
Unproductive transactions like pensions, old age benefits &
bonuses are excluded from GDP
10. NNP Net National Product
The total net market value of final goods &
services of a nation or country produces in a
year.
It subtracts the depreciation on capital goods
Mathematically
NNP = GNP - Depreciation
11. Personal Income
Total compensation received by an individual. Personal
income includes compensation from a number of
sources - salaries, wages and bonuses received from
employment or self-employment; dividends and
distributions received from investments; rental receipts
from real estate investments; profit-sharing from a
business and so on. In most jurisdictions, personal
income above a certain exemption threshold is subject
to taxation. Personal income is generally computed on
a pre-tax basis.
Also referred to as "gross income."
12. How to compute Personal Income
Corporate profit Tax (-)
Undistributed corporate profits (-)
Social Security Contribution(-)
Government Transfer Payments (+)
Remittances from abroad (+)
Business Transfer Payments (+)
13. Personal Disposable Income
This is the segment of the income that is
actually available to consume.
in fact, individuals & households have to pay
some taxes in form of income tax, property tax,
withholding tax etc.
PDI = PI –Personal Direct Taxes
18. GDP Calculation by Expenditure Approach
GDP = C + I + G + (X- M)
C = Private consumption expenditure
I = Investment Expenditure
G= Government Consumption
Expenditure
X = Value of Exports
M = Value of Imports
27. GDP Calculation by Income Approach
GDP= Y+r+i+p+EY+Bt+D+NF income
Y= Employees Compensation
r= Rent, i= Interest & p= corporate profits
EY= Entrepreneur's Income
Bt= Business Taxes
NF= Net foreign factor income
28. GDP by Product or Value Approach
GDP Defined
GDP or gross domestic product is the market
value of all final goods and services produced in a
country in a given time period.
This definition has four parts:
Market value
Final goods and services
Produced within a country
In a given time period
29. GDP by Product or Value Approach
Two Things To Avoid
Intermediate Goods
Transfer Payments
30. Two Things to Avoid when Compiling GDP
Multiple counting
Only expenditures on final products – what
consumers, businesses, and government
units buy for their own use belong in GDP
Intermediate goods are not counted
Used goods are not counted
31. Two Things to Avoid when Compiling GDP
Transfer payments
Transfer payments are not payments for currently
produced goods and services
When they are spent for final goods and
services they will go into GDP as consumer
spending
Financial transactions don’t go into GDP
32. Things to Avoid when Compiling GDP
Why only Final Goods…??
34. This is confusing…..!
The tires that come
with the car is not
counted as a final good
However if you get
a flat and buy the same
tire it is counted as
final good
35. Value Added Approach Eliminates Double
Counting
P articipants
Farm er
C ost of
M aterials
V alue A dded
0
$ 100
$ 100
C one factory
and ice
cream -m aker
100
250
150
M iddleperson
250
400
150
V endor
400
500
100
$ 750
$1,250
$500
Totals
$
V alue of
S ales
36. Purpose of calculating National Income
Economic Trend Analysis
Economic Growth, welfare
Per capita income, state & city contribution
Distribution of income
Taxation policies & methods
Forecasting future & planning for unemployment,
illiteracy, inflation & over population
Preparation of Annual Budget
37. Problems in measuring National Income
Non-Market activities
Improved Product Quality
Underground Economy
Barter System
Lack of proper recording
Inefficient Government Department
Tax Eradication
Double counting
Differentiation in economic functioning
Foreign Payments
