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Objectives of macroeconomics
iv) External balance: this objective aims at getting the balance of payments
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NATIONAL INCOME
National income is a measure of the total monetary value of the flow of final goods
and services arising from the productive activities of a nation in any one year.
i. Gross Domestic Product (GDP): Total monetary value of all final goods
term 'gross' implies that no deduction for the value of the expenditure goods
from the investments and possessions owned abroad is not included, only the
value of the flow of goods and services produced in the country is estimated.
ii. Gross National Product (GNP): Total monetary value of all goods and
abroad.
production may be carried out with the assistance of inputs belonging to the
residents-of other countries while it is also possible for the residents of a given
The difference between GDP and GNP will be greatest in those countries which
allow a high level of foreign investment but do not invest heavily themselves. This
considerably abroad themselves. Thus their estimated GDP is usually greater than
their GNP.
The concept of Net National Product provides for capital consumption. Capital
NNP at factor cost = N.N.P. (at market price) - indirect taxes + subsidies.
In measuring Net National Product, market prices are initially used to value
outputs so that they can be aggregated. This implies that to the extent that market
prices include indirect taxes and subsidies, the value of the output will not equal
the value of the incomes paid out to factors of production. This arises because it is
the revenue received by firms after indirect taxes which is distributed as factor
incomes. Therefore indirect taxes are deducted while subsidies are added. The Net
National Product at factor cost is consistent with the value of incomes paid to the
factors of production.
payments.
This concept becomes useful where a country receives substantial transfers from
National income is concerned with changes in the volume of output. But to obtain
money value can occur because of a change in either quantity or price. Thus money
value can change while leaving the volume of goods and services constant. So an
level.
country. It represents the average income of the people in a given year (income per
Head).
Total population
it.
National income statistics play a role in the planning of both short and long run
They enable the government to assess what policy measures to take to correct
adverse trends such as low investment. They are useful in preparing the budget so
changes in the budget, for instance, will be compared against the likely outcome.
statistics can help to better understand the manner and pattern of economic activity,
and to provide an empirical data base upon which economic models are built.
5. Business community
The business community can use some of the data provided by •national income
national income sectorial data can assist in showing which sectors are growing and
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Limitations of using national income statistics to indicate the standard of
living
proportion of wealth does not flow, for example, property and houses, rare
paintings, stocks and shares. Thus national income statistics do not take
our welfare such as leisure time, long holidays, job satisfaction, health, good
ii. Inflation:
(in terms of how many goods and services we are receiving) because
statistics are recorded in money terms while the value of money itself can
services we will receive and not in receiving more money that will buy less.
iii. Population
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The measurement of the total value of goods and services produced in a year
may have similar levies of GDP but considerably different levels of GDP per
head. In addition, a country may have a rising GDP per head, not because
that all people are receiving the same proportion of the national cake.
population.
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An increase in national income may be the result of longer working hours
journeys to work.
defence expenditure is ten times more than that of building new houses, can
we claim that defence expenditure improves our welfare 10 times more than
National income figures are based on private costs and benefits. Social costs
income should thus ideally incorporate these 'hidden' costs and benefits.
National income is swollen when people pay for services they previously
services performed.
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x. The level of accuracy
The level of accuracy of estimated data between the time periods being
living. Levels of unemployment are not taken into account in using per
National income statistics are often used to compare the standards of living in
different countries. GDP statistics also form the basis of major international
contributions and receipts. GDP forms the basis on which the IMF quotas are
fixed, and through that the members' voting power, the amount of foreign
exchange that can be drawn from the IMF and the allocation of Special Drawing
Rights (SDKs).
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Limitations of using national income statistics to compare standards of living
in different countries
i. Different currencies
Since figures are expressed in different currencies, they need to be converted into a
common denominator. It is difficult to convert all the figures into one currency
valuation.
The goods and services included in the definition of national income differ from
country to country. Thus, for example, the former Eastern European countries
excluded the value of non-material services such as public administration, and they
also included defence and personal and private services. When comparisons are
made, account must be taken of these different definitions to avoid rendering them
United Kingdom exclude the subsistence sector, for developing countries to do this
would significantly undervalue both their national product and their standards of
living. The problem here is one of the product boundary. In addition, goods
high average income per head which is earned by a minority while the majority of
the population is poor. This is the case, for example, in some of the oil -producing
In using per capita income as measure of the standard of living, the standard of
another country finds valuable For example, the fact that people in northern
countries spend more money on heating does not make their better off. This
Since price levels deficit considerably between countries, a random selection will
An increase in national income may be the result of longer working hours, inferior
Differing levels of employment make comparisons harder since they make it hard
major adjustments that have to be made so that the statistics are accurately
recorded and the estimates by different methods are equivalent. Each time a
ii. The same sum of money will be received as income by the different
iii. The value of the commodity sold will have resulted from the value added to
The above implies the total monetary value of goods and services produced
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ii. Adding the income received by different factors of production which have
iii. Determining the value of each firm's contribution to output or its "value
added".
These alternative measures provide a basis for the expenditure, income and output
methods which are really three ways of arriving at the same total.
1. Income method
The income approach takes national income as the sum of all incomes earned by
factors of production in the economy: included are personal incomes which have
been earned for services rendered and in respect of which there has been some
be imputed as income from employment both in private and public sectors, the
corporations and the government, imputed rent (rent broadly taken to include
income from land or property such as housing; and income from subsistence
production..
Net property income from abroad is a standard adjustment for all the three methods
of measurement.
Adjustments
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i. Transfer payments are deducted otherwise double-counting would occur.
ii. Stock appreciation is deducted since it has already been adjusted in output
iii. Residual error: Errors resulting from collection of data. This correcting
item is added on to, or taken away from the output and income totals to
iv. Net factor income from abroad.- the difference between the incomes
machines and tools have been produced to replace worn out and obsolete
equipment.
which no goods or services have been produced (this implies that there is no
net increase in income). A problem arises since it "is difficult to impute the
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proportion of income constituted by these transfers, and especially difficult
when transfers took place and no record was made of them since inclusion
especially profits of private firms, which may want to evade tax It is also
iv. There is a problem of handling illegal activities which yield an income to the
recipient.
This constitutes the most direct approach, Using this approach, national income is
found by adding up the value of all final goods and services produced by firms
during the year. National income is assumed to be the total of the value added to
output by all enterprises in economy. The total or value added by different stages
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It measures the value which a firm has 'added' to the raw materials and
value added at each stage of production and then obtains the total value of all final
products.
Adjustments:
the interest paid to the firms lending money. Unfortunately, this interest on
borrowed money is also recorded as a cost in the firms that borrowed it. It is
v. Depreciation.
income.-
factor cost is also unsatisfactory since a rise in factor cost may not be
vii. The problem of valuing illegal activities which might have entered into
3) Expenditure Method
final goods and services in the economy. Total expenditure is broken into 5 broad
Adjustments
i. Imports: Under both the output and income methods, imports are excluded.
Imports must therefore be excluded under this method because they do not
ii. Exports: Exports are included because they may create income
domestically.
iii. Taxes are not a payment (or anything produced and has therefore not been
taxes
iv. Subsidies: These make the final product appeal less valuable than it really if-
vii. Less the value of physical increase in stocks and work in progress.
income
sector.
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ii) Imputing the value of spending of the subsistence sector on its output is
difficult.
goods.
iv) Double-counting: This may arise, for example, from government expenditure
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CIRCULAR FLOW OF INCOME AND EXPENDITURE
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There are therefore, a total of four flows and a complete symmetry between the
two sectors of households and firms. Each provides the other with some real
resources and each receives cash in return. In addition, each spends that cash on
the supply of the other. The same cash is spent by one sector and then the other
continuously. National income can be measured by either of the two cash flows,
total wages and salaries comprise the income measure, while the total household
spending comprises the expenditure measure. These two are different sides of the
same coin and. in an economy where all income is spent domestically, will
In the case of subsistence production, households are at the same time the
producing and consuming units. They can be regarded from the expenditure point
of view as spending on then own output and from the income point of view as
1) Investment
2) Exports
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3) Government spending
simply not included since transactions are not recorded because buyers and
However, this forecast life is only an estimate. The capital, say a welding
statistics.
v. Economic 'goods' and 'bad' People may be working and be paid an Income
yet they may not really be producing anything. There's a wide range of
products that appear to improve the standard of living, but frequently have
diverted away from other uses, thus lowering the general standards of living
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THE CONCEPT OF EQUILIBRIUM INCOME
The equilibrium level of national income is that level of national income which
aggregate demand for the economy's goods and services is just equal to the total
AD = C + 1 + G + (X - M)
The total value of goods and services is measured by the national income.
I.e
Y=C+S+T
C + 1 + G + X- M = C + S+T
1+G+X=S+T+M
Injections=Withdrawals
Investment, government spending and exports are known as injections into the
flow of national income while savings, taxes and imports are called withdrawals
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from that flow. Injections refer to an exogenous addition to the income of firms or
income; Withdrawals or leakages refer to any income that is not passed on in the
circular flow of income and is therefore not available for spending on currently
national income.
national income can then be considered as that level of national income where
I + G + X = S + T+ M
- It is not necessary for each withdrawal to equal its respective injection, only that
the value of all injections equals the value of all withdrawals. It follows that if
there is any disturbance in the equilibrium the necessary condition for return to
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DIAGRAM: Using a graph to determine equilibrium national income
EQUILIBRIUM
following way:
Y =C + Io + Go........................................... (10.1)
Where:
C = Consumption expenditure
I0 = Investment expenditure
Go = Government expenditure
The equation (10.1) implies that national income equals total expenditure.
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A functional relationship can further be developed between
In the above function a does not depend on the level of national income and is
function, on the other hand, depends on the level of income and is known as
induced consumption. Since the consumption function has a positive slope, this
implies that as the level national income increases so does the consumption
expenditure.
The marginal propensity to consume is the change in consumption that arises from
In the model represented by equation (10.1) income (Y) and consumption (C) are
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An endogenous variable is one whose value is determined within a set of
The equilibrium national income (Y) and consumption (C) can be determined in
Y = a + bY + Io + Go
Y - bY = a + Io + Go
(1-b)Y = a + Io + Go
= a + Io + Go
1-b
If Y substitute this value for Y into equation (10.2) we can obtain the equilibrium
Example;
Calculate;
2) Consumption
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Answer
The above model refers to a closed economy with no taxes. This framework can
Y= C + 1 + G + (X – M)
Where:
C = a + bY
And M = m + mY
ii. mY which represents induced imports that depend on the level of national
income.
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The coefficient m is referred to as the marginal propensity to import. The
MPM = M
Example
Taking a Simple numerical example where: 1o = I80. Go = 130,X0 = 80, a = 40, m0 =140, b =
Calculate;
2) Consumption
Answer
An inflationary gap is said to exist when the aggregate expenditure exceeds the
maximum attainable level of output with the result that there is an upward pressure
on prices.
DIAGRAM
level of income where resources achieve the maximum attainable level of output.
Ye represents the equilibrium level of national income which is greater than the
full employment level of income. As a result there is an inflationary gap with that
being Toto reduce aggregate demand by the full amount of the inflationary gap.
Deflationary Gap
A deflationary gap refers to a situation where the aggregate expenditure falls short
of that required to produce a level of national income that would ensure full
expenditure function which cuts the 45 degree line at less than the full employment
DIAGRAM
TRADE CYCLES
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Cyclical fluctuation in the level of economic activity can be observed through the
examination of annual changes in real national income over a number of years. The
DIAGRAM;
1) Slump or depression;
capital.
- A low level of both consumption and investment leads firms to cut back on their
production, lay off workers and leave capital equipment lying idle.
-Despite the availability of money for firms to borrow and low interest rates,
3) Peak/Boom
- High profits.
- output and employment levels fall as businessmen once again become pessimistic
about the future level of demand for their product and extremely reluctant to invest
in new capital.
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Eventually the slump is reached and the whole process starts again.
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