 There is always full employment

 Perfect competition
 Laissez Faire
 Closed economy
 Techniques of production remain unchanged.
 Money medium of exchange
 Rationality
 Efficient use of resources

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• Equality of saving and investment
Savings, according to classical economist are
just another form of spending; all income, they
believed, is partly spent on consumption and
partly on investment.
  Say’s law states that “ supply creates its own
demand” or “ supply calls forth its own
demand.”

 This law can be explained in the context of

both a barter system and a monetised
economy.

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1. No general overproduction or
underproduction
2. No unemployment under classical system

Classical economists did not rule out the existence of

voluntary and frictional unemployment in the state of full
employment.

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1. Aggregate production function, and
2. Labour supply and labour demand functions.

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 Whenever additional production takes place in the
economy, necessary purchasing power is also generated
at the same time to absorb the additional supply.

 Hence, there is no scope of supply exceeding demand

and causing unemployment.

 Say’s law was the basis of the assumption of full

employment in the economy which rested on the plea
that income is spent automatically at a rate which will
always keep the resources fully employed.
• National income is the single most important macro
variable that represents the ‘economy as a whole’.

• The level of national income determines the level of

all other macroeconomic variables—aggregate
consumption, savings and investment, employment
and the price level.

• The importance of national income accounting lies in

the fact that the performance and behaviour of an
economy are studied on the basis of the performance
of its macroeconomic variables.
  In general sense of the term, national income
refers to the aggregate money value of all
final goods and services resulting from the
economic activities of the people of a country
over a period of one year.

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 National income refers to the
 market value of goods and services
 produced by an economy
 during the period of one year,
 counted without duplication.
 Per capita income of a country refers to
 income per head
 of the population of that country,
 counted at current prices or at constant

prices.

Per Capita Income (2013) = National Income of

2013
Population of 2013
 Methods of Measuring National Income
1) Product Method or Value Added Method or Net Output
Method:

◦ National Income is estimated by taking the total of

value of production of various sectors like consumer
goods & services, capital goods & services,
production by govt. etc.

◦ Value added method, also called net output method,

is used to measure the contribution of an economy’s
production units to the GDP.

◦ In other words, value-added method measures value

added by each industry in an economy. 
• Gross Value Added = Value of Output – Value of
intermediate goods

Net Value Added = Gross Value Added – Depreciation

The following precautions should be taken while measuring
national income of a country through value added method:

•Sale
and purchase of second-hand goods should not be included in
measuring value of output of a year because their values were
counted in the year of output of the year of their production.

•Value
of production for self-consumption are be counted while
measuring national income.

•Value of intermediate goods must not be counted while measuring

value added because this will amount to double counting.
 National Income is estimated by taking total various factor
incomes like wages, rent, interest and profit.

 This method measures national income at the phase of

distribution and appears as income paid and or received by
individuals of the country.

 Individuals earn incomes by contributing their own services

and the services of their property such as land and capital to
the national production. 

 Therefore, national income is calculated by adding up the

rent of land, wages and salaries of employees, interest on
capital, profits of entrepreneurs (including undistributed
corporate profits) and incomes of self-employed people.
• In this method, National Income is estimated for different
activities in different ways.

The factor payments are classified into the following groups:

• i. Compensation of employees which includes wages and

salaries, both in cash and kind, as well as employers’
contribution to social security schemes.
• ii. Rent and also royalty, if any.
• iii. Interest.
• iv. Profits:

• Income from abroad – data provided by RBI.

While estimating national income through income method the
following precautions should be taken:

•Transferpayments are not included in estimating national income

through this method.

•Imputed rent of self-occupied houses are included in national

income as these houses provide services to those who occupy them
and its value can be easily estimated from the market value data.

•Illegal
money such as hawala money, money earned through
smuggling etc. are not included as they cannot be easily estimated.

•Windfall gains such as prizes won, lotteries are also not included.

•The receipts from the sale of second-hand goods should not be

treated as a part of national income. 
 Expenditure method arrives at national income by adding up
all expenditures made on goods and services during a year.

 Expenditure can be made by private individuals and

households or by government and business enterprises.

 We add up the following types of expenditure by households,

government and by productive enterprises to obtain national
income.

 Expenditure on consumer goods and services by individuals

and households. This is called final private consumption
expenditure, and is denoted by C.
 Government’s expenditure on goods and services to satisfy
collective wants. This is called government’s final
consumption expenditure, and is denoted by G.

 The expenditure by productive enterprises on capital goods

and inventories or stocks.

 This is called gross domestic-capital formation, or gross

domestic investment and is denoted by I or GDCF.
 The expenditure made by foreigners on goods and services of
a country exported to other countries which arc called
exports and are denoted by X We deduct from exports (X) the
expenditure by people, enterprises and government of a
country on imports (M) of goods and services from other
countries.

 GDPMP = C+G + I+ (X — M)
While estimating Gross Domestic Product through expenditure
method or measuring final expenditure on Gross National
Product, the following precautions should be taken:

•The expenditure made on second-hand goods should not be

included.

•Expenditure on purchase of old shares and bonds from other

people and from business enterprises should not be included.

•Expenditure
on transfer payments by government such as
unemployment benefits, old-age pension should also not be
included.
 • A double entry accounting system is one in which
both receipts and payments are recorded-
receipts on credit side and payments on debit
side of the account.

• Another aspect of the double accounting system

is that the account of a person need not balance.

• In this system, many types of accounts can be

imagined and operated.

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 Non-monetized Sector
 Lack of distinct differentiation in economic

activities
 Conceptual problems
 Black money
 Inter-regional differences
 Non-availability of data about certain

incomes
 Mass Illiteracy
 Difficulty in obtaining data about income
 Difficulties of sampling technique