NATIONAL INCOME

National income refers to the sum total of all the final goods and services produced in a country and net income from abroad in a year.

National income may be expressed in the following ways.

1.      Gross Domestic Product:  GDP is the total money value of all final goods and services produced within the country by the nationals of the country and by the foreigners staying in the country during a year.

Thus GDP = C +I +G +net X

Where, C= the value of consumer goods produced.

             I= the value of producer goods produced.

            G= Total Government expenditure on goods and services.

        Net X =Net exports where the value of exports is higher than the value of     imports.

2.      Net Domestic Product:  In production process, after some time capital assets need repairs and replacement.  Hence a part of the capital is set aside in the form of depreciation cost.  Net Domestic Product is the total money value of all final goods and services produced within the country less depreciation. 

NDP= C+I+G+ net X- DC or

NDP=GDP- Depreciation Cost.

3.      Gross National Product(GNP):  Gross National Product is the total money value of all final goods and services produced in a nation during a year plus income earned by its non-residents minus income earned by foreigners staying in that country.

Thus GNP = C+I+G+(X-M) +(R-P)

(R-P) is the difference between income received from abroad(R) and income paid to foreigners (P).

4.      Net National Product (NNP):  Net national Product refers to the total value of the goods and services produced in a country during a year minus depreciation cost.

NNP= C+I+G+(X-M) +(R-P)-DC

 National Income at Factor Cost:  The above equation gives us NNP at market prices.  But Market prices include indirect taxes which are paid to the government and subsidies which are paid by the government.  So to know the NNP at factor cost, we have to deduct indirect taxes and add subsidies.

NNP at factor cost= NNP at market prices-(Indirect taxes +subsidies).

5.     Personal Income (PI):  The national income of a country is distributed among the people of a country in the form of factor income.  Therefore, personal income is that part of national income of a country which is received by people or households.

PI= National income at factor cost –Undistributed corporate profits- Corporate income taxes- social security contributions( like insurance , provident fund etc.)+ transfer payments (old age pension, widow pension etc).

6.     Personal Disposable Income (PDI):  The entire personal Income which can be spent after paying direct taxes to the government is called Personal Disposable Income.

PDI =PI-Personal Taxes.

Disposable Income can either spent entirely or a part of the income can be saved; So, DPI= Consumption expenditure + Savings.

7.     Per capita Income:  Per Capita income is the average income of the people of a country.  It is the average income per head of population of a country. 

Per capita Income = National Income of a Country

                                 --------------------------------------

                                  Total Population

                              

    

Differences between Micro and Macro Economics

The following are the differences between Micro and Macro Economics.

1.      Scope:  Micro –Economics is concerned with study of Individual economic units such as a firm, a consumer etc.

Macro –Economics deals with large segments of the economy such as aggregate demand, general price level, national income etc.

2.      Method of study:  Micro- Economics studies the individual parts of the economy intensively (slicing Method).  Ex. Behaviour of a consumer.

Macro-Economics lumps up the individual units together into big lumps for the purpose of brief study.  Ex.  The study of national income.

3.     Different economic agents:  In micro-economics, each individual economic agent thinks about its own interest and welfare.  For example, Producers try to get maximum profit at minimum cost of production with the higher selling prices.

In Macro – economics, economic agents are different from the individual economic agents and their aim is to get maximum welfare of the country.  For example, the Government of India, one of the macro -economic decision maker in India has a goal to achieve economic welfare of India.

4.      Equilibrium Analysis:  Micro-Economics studies the partial equilibrium in the economy, such as consumer equilibrium, producer equilibrium etc.

Macro – economics studies the general equilibrium in the economy, such as equilibrium in the general price level etc.

5.     Domain:  Micro-economics comprises the theories such as theory of consumer’s behavior, the theory of production and cost, the theory of rent, wages, interest and Profits.

Macro-economics includes the theories like the theory of income, output and employment, consumption function, inflation etc.

6.     View:  Micro economics explains the different economic variables at micro level.  It is a detailed study giving Microscopic view.

Macro economics is a brief study of an economy as a whole.  So its study is defined as Birds eye view.

     In spite of various differences, both Micro and Macro economics are interdependent and complementary to each other.

BASIC PROBLEMS COMMON TO ALL ECONOMIES

An economy is a mechanism through which the scarce resources are prioritized and organized for the production of goods and services. 

Every economy faces fundamental problems due to multiplicity of human wants, scarcity of resources and alternative use of the scarce resources.

According to Prof. P.A. Samuelson, there are three basic and interdependent problems faced by every economy. They are:

1. What to Produce?  The Problem of what to produce is the problem of deciding as to:  a) What goods should be produced and b) How much of each of the goods should be produced?  It is the problem of allocation of the available resources for the production of different goods.  The problem becomes more difficult if the scarce resources are fully employed. 

In a free capitalist economy, the consumers through the prices which they are prepared to pay guide the production and quantity of goods.

In a socialist economy the central planning authority decides what goods and what quantity are to be produced.

In a mixed economy the central planning authority decides what to produce and how much to produce?  To some extent the consumers preference and price mechanism guide production.

2.  How to Produce?  The problem of how to produce means deciding the combination and technology to produce the goods.

b) The scale of production and c) the sector of production.

In a capitalist economy, goods are produced by the private sector.  In a socialist economy, goods are produced by the public sector and in the mixed economy strategic goods are produced by the public sector and consumer goods are produced by the private firms.

3.  for whom to produce?  The problem of “for whom to produce means deciding as to how the various goods produced in the country should be distributed among the different sections of the society.

In a capitalist economy, goods will be distributed among those who are capable of paying for them (price mechanism)

In a socialist economy the central planning authority decides and in the mixed economy this question is decided by the central planning authority and to certain extent by the consumer’s preference and the pricing system.

4.  The problem of economic efficiency:  every economy has to use its resources efficiently to avoid wastage of scarce resources.

5.  The problem of full employment of resources:  Since the resources are scarce the available resources have to be fully utilised.

6.  The problem of Economic growth:  Every economy has to increase its ability to produce more goods and services with available resources.