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National Income Indicators

National income indicators are various measures used to assess the overall economic activity of a country. Some key indicators include:

  1. Gross Domestic Product (GDP):
    • Represents the total monetary value of all goods and services produced within a country’s borders over a specified period.
    • Can be measured using three approaches: production, expenditure, and income approach.
  2. Gross National Product (GNP):
    • GDP plus the net income earned from abroad (such as remittances, investments, etc.).
    • GNP = GDP + Net factor income from abroad.
  3. Net National Product (NNP):
    • GNP minus depreciation (the loss of value of capital assets over time).
    • NNP = GNP – Depreciation.
  4. Net Domestic Product (NDP):
    • GDP minus depreciation. It shows the value of goods and services produced within a country without accounting for capital depletion.
    • NDP = GDP – Depreciation.
  5. Personal Income (PI):
    • The total income received by individuals and households before taxes are deducted.
    • It includes wages, rents, interest, and profits, but excludes corporate taxes and undistributed corporate profits.
  6. Disposable Income (DI):
    • The income left after paying taxes. It represents the amount available for consumption or saving by individuals.
    • DI = PI – Taxes.

  7. Per Capita Income:

    • Reflects the average income per person, calculated by dividing national income by the total population.
    • Indicator of living standards and economic well-being.

  8. Gross Value Added (GVA):

    • Represents the contribution of different sectors (e.g., agriculture, industry, services) to GDP.
    • Formula: GVA = GDP – Taxes + Subsidies on products.
Importance of National Income Indicators:
  • Measure economic growth and development.
  • Guide policy decisions on taxation, spending, and investment.
  • Compare economic performance across countries.
  • Evaluate the standard of living and income distribution within a country.
CIRCULAR FLOW OF INCOME

The circular flow of income is an economic model that illustrates how income, output, and expenditure circulate in an economy. It reflects the continuous movement of money and resources among different sectors.

1. Two-Sector Model (Households and Firms)

Structure:

  • The economy comprises only two sectors: households and firms.
  • It assumes no government, no foreign trade, and no savings.

Key Flows:

  • Households supply factors of production (land, labor, capital, entrepreneurship) to firms.
  • Firms use these inputs to produce goods and services and, in return, make factor payments (wages, rent, interest, profit) to households.
  • Households use their income to purchase goods and services from firms, thus completing the loop.

Types of Flows:

  • Real Flow: Physical flow of factors and goods/services.
  • Monetary Flow: Income and expenditure in monetary terms.

Assumptions:

  • All income received is spent.
  • No savings or investments occur.
  • No role of government or external sector.

This model represents a closed economy with no leakages or injections.

2. Three-Sector Model (Adding Government)

The three-sector model includes government in addition to households and firms.

New Elements:

  • Taxes (T): Collected from households and firms – considered a leakage from the income stream.
  • Government Expenditure (G): On goods, services, and transfers – an injection into the economy.

Key Interactions:

  • Government collects taxes and uses the revenue for public goods, infrastructure, subsidies, and welfare schemes.
  • It affects the circular flow by redistributing income and altering consumption and production patterns.

Impact:

  • Introduces leakages (T) and injections (G) into the economy.
  • Makes the flow more realistic by accounting for fiscal policy.
3. Four-Sector Model (Adding Foreign Sector)

This model includes the foreign sector along with households, firms, and the government. It represents an open economy.

New Components:

  • Exports (X): Domestic goods/services sold to foreigners – considered an injection.
  • Imports (M): Foreign goods/services purchased by residents – considered a leakage.

Additional Flows:

  • Remittances, foreign direct investment, and international aid may also be part of the foreign sector’s influence.

Key Equation for Equilibrium:

  • In an open economy, the equilibrium condition is:
     Savings + Taxes + Imports = Investment + Government Expenditure + Exports

This model provides a comprehensive understanding of income flow in a globalized setting.

STOCK AND FLOW CONCEPTS

Stock and flow are fundamental concepts used to measure economic variables.

Stock
  • Definition: A stock is a quantity measured at a specific point in time
  • Nature: Static.
  • Examples:
    • Capital stock
    • National wealth
    • Money supply
    • Foreign exchange reserves

Key Point: A stock shows the position or value of something on a given date (e.g., India’s forex reserves on 1st April 2025).

Flow
  • Definition: A flow is a quantity measured over a period of time.
  • Nature: Dynamic.
  • Examples:
    • National income
    • Government expenditure
    • Investment
    • Exports and imports

Key Point: A flow shows economic activity or changes between two dates (e.g., GDP growth in FY 2024–25).

Relationship between Stock and Flow
  • Flows accumulate into stocks over time. For instance:
    • Savings (flow) add to wealth (stock).
    • Investment (flow) increases capital stock (stock).

Understanding this relationship helps in analyzing macroeconomic performance and planning policies effectively.

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