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National Income - Mr Agate

  • Date Submitted: 10/12/2011 11:41 AM
  • Flesch-Kincaid Score: 61.6 
  • Words: 1499
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The national income is the money value of the total amount of goods and services produced in country over a period, usually a year.
It is variously called GDP, GNP.

The Circular Flow of Income shows how the national income is created and how it is measured.
The circular flow of income can be explained using a simple model with the following assumptions:
  1. Only 2 groups/sectors: households and firms: no international trade, no gov’t.
  2. Households spend all their incomes on goods: no savings, no taxes.
  3. Firms do not retain any profits for re-investments, and they do not pay taxes.

Households supply factors services: they are paid factor incomes: rent, wages/salaries, interests, profits.(upper section)
Firms supply goods/services: they receive payments by way of consumer spending.(lower section)
In such a simple economic model, what is earned is what is spent; what is spent is equal to the value of goods and services i.e. income = expenditure = output.

In the real world situation,
  1. Gov’t enters into the economy both as a producer and a consumer.
  2. there is international/foreign trade
  3. there are withdrawals/leakages from the circular income flow by way of
        a. Savings by households and firms; the savings of firms may be called retained profits.
        b. tax payments by both firms and households
        c. spending on imported goods
      4.   There are injections into the circular flow of income through
        d. investment: expenditure on capital goods by private firms
        e. Gov’t expenditure both exhaustive and transfers
        f. Export earnings:   expenditure by foreigners on a country’s goods/services.

The Withdrawal/Leakages, S+T+M, lead to a fall in the circular flow of income.
Injections, I+G+X, add to the size of the circular income flow.

Significance of the Circular Income Flow:
  1. It shows national income as a flow of both goods/services and as money between...


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