Economic Analysis

Module 6. National income

Lesson 24
NATIONAL INCOME

24.1 Introduction

National income (NI) is the total market value of the final goods and services produced within a nation during a given year. It measurs the diverse goods and services produced with its land, labour and capital resources. The NI is the most comprehensive measure of a nation’s total output of goods and service.

The question is Can the GDP give an overall picture of the state of the economy? In this chapter, we explain how economists measure NI and other major macroeconomic concepts.

Meaning of GDP

Gross Domestic Product (GDP) measures the total value of goods and services produced in a year. GDP is part of the national income and product accounts (or national accounts), which enable policymakers to determine whether the economy is contracting or expanding and whether a severe recession or inflation threatens. When economists want to determine the level of economic development of a country, they look at its GDP per capita.

NI equals the total production of consumption and investment goods, government purchase and net exports to other lands. It is the sum of the rupee values of consumption (C), gross investment (I), government purchases of goods and services (G) and net exports (X) produced within a nation during a given year.

In symbols:

NI is used for many purposes, but the most important one is to the measure the overall performance of an economy.

There are different ways of measuring NI and distinguishing real from nominal GDP. National income and product accounts are commonly used to measure GDP. The major components of GDP are extracted from Samuelson & Nordhaus book (2005

(Source: Samuelson and Nordhaus (2005) Economics, 18^th Edition)

Fig. 24.1 Gross domestic product can be measured either via (a) flow of final products or equivalently, or as (b) a flow of costs

The upper loop represents the final goods and services and flow of their spending each year is one of gross domestic product. The lower loop measure the annual flow of costs of output: the earnings that businesses pay out in wages, rent, interest, dividends and profits. The two measures of GDP must always be identical, which presented the circular flow of supply and demand.

Different measures of NI are

GDP, GNP, NDP and NNP

They are expressed at factor cost (FC) and market price (mp). Therefore there are measures of NI. It can be calculated by three approaches-product, expenditure and income approach.