Unit-V Managerial

Economics
For- MBA First Year
By- Atul Raghuvanshi
National Income
• National income is the value of the aggregate
output of the different sectors during a certain
time period.
• In other words, it is the flow of goods and
services produced in an economy in a particular
year.
• National Income defines a country's wealth.
National Income
• National income is the sum total of the value of
all the goods and services manufactured by the
residents of the country, in a year., within its
domestic boundaries or outside.
• It is the net amount of income of the citizens by
production in a year.
National Income
• The aggregate economic performance of a nation is
calculated with the help of National income data.
• The basic purpose of national income is to throw light
on aggregate output and income and provide a basis
for the government to formulate its policy, programs,
to maximize the national welfare of the people.
• Central Statistical Organization calculates the national
income in India.
National Income
• According to Marshall: “The labor and capital of
a country acting on its natural resources produce
annually a certain net aggregate of commodities,
material and immaterial including services of all
kinds. This is the true net annual income or
revenue of the country or national dividend.”
Modern Approach of National Income

GDP GNP
Gross Domestic Product
• GDP, is the aggregate value of goods and services produced
in a country. GDP is calculated over regular time intervals,
such as a quarter or a year. GDP as an economic indicator is
used worldwide to measure the growth of countries
economy.
• Goods are valued at their market prices, so:
• All goods measured in the same units (e.g., Rupees in India)
• Things without exact market value are excluded.
• GDP = Consumption + Investment + Government Spending +
Exports - Imports.
Constituents of Gross Domestic Product
• Wages and salaries
• Rent
• Interest
• Undistributed profits
• Mixed-income
• Direct taxes
• Dividend
• Depreciation
Gross National Product
• Gross National Product (GNP) is an estimated value of
all goods and services produced by a country’s
residents and businesses.
• GNP does not include the services used to produce
manufactured goods because its value is included in
the price of the finished product.
• It also includes net income arising in a country from
abroad.
Constituents of Gross National Product
• Consumer goods and services
• Gross private domestic income
• Goods produced or services rendered
• Income arising from abroad.

• GNP = GDP + NR (Net income from assets abroad or Net

Income Receipts) - NP (Net payment outflow to foreign
assets).
Methods of Calculating National Income
• Product Method
• Income Method
• Expenditure Method
Product Method of Calculating National
Income
• In product approach, national income is measured as a flow
of goods and services.
• Value of money for all final goods and services is produced in
an economy during a year.
• Final goods are those goods which are directly consumed
and not used in further production process.
• All goods and services produced during the year in various
industries are added up.
• This is also known as value-added to GDP or GDP at the
sector of origin's cost factor.
Product Method of Calculating National
Income
• India includes the following items:
• agriculture and allied services;
• mining;
• development,
• construction,
Product Method of Calculating National
Income
• the supply of electricity, gas, and water, transport,
communication, and trade;
• banking and industrial real estate and property
ownership of residential and commercial services and
public administration and defence and other services
(or government services).
• It is, in other words, the amount of the added gross
value.
Income Method of Calculating National
Income
• In income approach, national income is
measured as a flow of factor incomes.
• Income received by basic factors like labor,
capital, land and entrepreneurship are summed
up.
• This approach is also called as income
distributed approach.
Income Method of Calculating National
Income
• In a nation that produces GDP during a year,
people earn income from their jobs.
• Thus the sum of all factor incomes is GDP by
revenue method: wages and salaries (employee
compensation) + rent + interest + benefit.
Expenditure Method of Calculating
National Income
• In this method, the income is calculated as the aggregate of
all expenditures incurred by households, firms, government,
and foreigners.
• It is assumed that all the factor income earned is spent in the
form of expenditure incurred in the production of the goods
and services, and circulated by the businesses in an economy.
• Therefore, the total final expenditure incurred is the Gross
Domestic Product at Market Price.
• It is often known as the Income Disposable Method.
Expenditure Method of Calculating
National Income
Circular Flow of Income
• How economies create wealth?
• In an economy, all factors of production (FoP) undergo
a production flow/cycle;
• In the process of which it generates wealth in the
form of making payments to the factor of production,
known as factor payments.
Circular Flow of Income
• Thus, the economic wealth of nations is created
by generating this flow and producing
commodities (goods and services), which are
then consumed by consumers who spend their
income on these goods and services.
Circular Flow of Income
• A simple economy assumes that there exist only two
sectors, i.e., Households and Firms.
• Households are consumers of goods and services and
the owners of the factors of production (land labour,
capital, and enterprise).
• However, the firm sector produces goods and services
and sells them to households.
Circular Flow of Income
• In the circular flow of income (two-sector economy), there is an
exchange of goods and services between the two players i.e., the
firms and households, which leads to a certain flow of money in
the economy. Households provide the firms with the factors of
production, namely Land (Natural Resources), Labor, Capital,
and Enterprise that generates goods and services, and consumers
spend their income on the consumption of these goods and
services. The firms then make factor payments to households in
the form of rent, wages, interest, and profit. This flow of goods
and services and factors payments between firms and households
reflects the circular flow of money in an economy. .
Circular Flow of Income
• In the circular flow of income (two-sector economy),
there is an exchange of goods and services between the
two players i.e., the firms and households, which leads
to a certain flow of money in the economy.
• Households provide the firms with the factors of
production, namely Land (Natural Resources),
Labor, Capital, and Enterprise that generates goods
and services, and consumers spend their income on the
consumption of these goods and services.
Circular Flow of Income in Two Sector
Economy
Circular Flow of Income in Two Sector
Economy