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Showing posts from March, 2013

Introduction to National Income

Introduction  The total output of goods and services produced by a country is given importance by economists and governments due to its influence on the national economy. The higher the total output, the greater the number of people employed and hence the standard of living.  Countries use three different measures of annual output of goods and services. They are;  Gross Domestic Product (GDP)  Gross National Product (GNP)  Net National Product (NNP) 

The National Income

Definition  National Income refers to the total money value of the output of goods and services produced by the factors of production owned by a particular country over a one-year period.  Methods of Measuring National Income  The National Income of a country can be measured in three ways.  1. The value Added Method/Output Method  It measures the total value added by each economic activity in the production of country’s annual output of goods and services.  The sum of value added at each stage of production is called as GDP. On to it is added the NIPA (including net profits, rent, dividends etc) to arrive at GNP. Depreciation of country’s stock of capital is deducted form the GNP to give NNP/National Income. 

The Circular Flow of Income

Definition  The Circular Flow of Income (CFI) refers to the continuous circulation of income and expenditure among the economic agents.  A Closed Economy  The following illustrates the CFI through a simple model of an economy, which excludes the Government Sector and Foreign Trade Sector. Households provide firms with land, labour and capital  Firms employ the factors of production and make payments to households in the form of rent, wages and salaries, interest and profits.  Households use their income to buy goods and services form firms. 

Economic Policy

Definition   Economic Policy refers to the strategies and measures adopted by the government to manage the economy as a means of achieving its economic objectives.  The Economic Objectives   The following are the usual objectives of the government.  Lower Inflation (Price level should be lower)  Lower Unemployment (Less people who are jobless)  Lower Balance of Payments Deficit (X>M)  Higher Economic Growth (Higher RGDP per capita)  Equal Distribution of Income and Wealth (Lower gap between the poor and the rich)  Sponsored Link: