Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Economics
National Income
Concept of National Income
National Income is the money value of all the final goods and services produced by a country during a
period of one year
...

Since these goods are measured in different physical units it is not possible to add them together
...
Therefore, there is no way
except to reduce them to a common measure
...

National Income is also known as National Income at factor cost
...
Hence, the sum of the income received
by factors of production in the form of rent, wages, interest and profit is called National Income
...
M
...
and net income
due on account of foreign investments must be added in
...
”
Irving Fisher defined national income as
“The national dividend or income consists solely of services as received by the ultimate consumers,
whether from their material or from human environments
...
Only the services rendered to
me during this year by these things are income
...
”
While family income reflects the economic position of households, national income shows
the economic position of a nation
...

This is achieved by coordinating natural resources, human resources, capital, technology etc
...

National Product and National Income

The national product measures all goods and services arising out of economic activity while national
income is the sum of all incomes as a result of the economic activity
...

Since the production of goods and services is the result of the use of primary factors of inputs, namely,
capital and labour, along with the raw materials, the process automatically generates income
...
For example the total
product originating in a firm making steel could be obtained by adding the total product and then
deducting the intermediate product to obtain the value added
...

Thus the product of a firm must be income to someone whether it is their employees in the form of
employment income or to the owners in the form of operating surplus
...
In other words
national income of a country can also be viewed in terms of the money value of income flowing from
the producing units to factors of production
...
It includes only those incomes which are derived directly from the current production of
goods and services called factor incomes
...
, cannot be regarded as payments for current services to
production
...
Payments for which
no goods or services are received in return are transfer payments
...

The study of national income is given so much importance for the following reasons:
􀁺 To estimate economic development
...

􀁺 To know the contribution of various sectors to national income
...

Gross National Product (GNP)
GNP at market price is sum total of all the goods and services produced in a country during a year and
net income from abroad
...


While calculating GNP, the final goods and services of the following are considered:
(a) Consumer goods and services
...

(c) Goods and services produced by Government
...

Gross Domestic Product (GDP)
Gross Domestic Product is the market value of the final goods and services produced within the
domestic territory of a country during one year inclusive of depreciation
...

GDP at market price
GDP at Market Price is estimated by deducting the value of intermediate consumption from the value
of output produced by all the producers within the domestic territory of a country
...


Net National Product (NNP)
In the process of production of goods and services, there will be some depreciation of fixed capital
also called as consumption of fixed capital, if the value of depreciation is deducted from the value of
gross national product in a year, we obtain the value of net national product
...

Personal Income
Prof
...
” Total income received by the citizens of
a country from all sources before direct taxes in a year
...
Peterson defined Disposable Income as “the income remaining with individuals after deduction
of all taxes levied against their income and their property by the government
...
The
individual can dispose this income according to his wish, as it is derived after deducting direct taxes
...
First of all production units
are classified into primary, secondary and tertiary sectors
...
We estimate the goods and services produced in each of these sectors
...
The next step is to
find out the value of these products in terms of money
...
Now we get the gross national income
...

This method helps us to find out contributions of various sectors to national income
...
The income received by the factors of
production during a year can be obtained by adding rent to land, wages to labour, interest to capital
and profit to organisations
...
In other words, total income
is equal to the reward given to various factors of production
...

GNI = Rent + Wage + Interest + Profit + Income from abroad
...

Expenditure Method
National income can also be calculated by adding up the expenditure incurred for goods and services
...

The sum total of expenditure incurred in a country during a year will be equal to national income
...

This method will help us to identify the expenditure incurred by different agents
...


Production method = Income method = Expenditure method
...
Let us examine these
difficulties
...

The service of housewives is not included in the national income because this service is not sold in the
market
...

Illiteracy and ignorance
...


Theories of Employment
Keynesian theory of employment
...
Keynesian economics argues that private sector decisions
sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy
responses by the public sector, including monetary policy actions by the central bank and fiscal policy
actions by the government to stabilize output over the business cycle
...

Keynesian economics advocates a mixed economy—predominantly private sector, but with a large
role of government and public sector—and served as the economic model during the latter part of the
Great Depression, World War II, and the post-war Golden Age of Capitalism, 1945–1973, though it
lost some influence following the stagflation of the 1970s
...
The
advent of the global financial crisis in 2007 has caused a resurgence in Keynesian thought
...

OVERVIEW
In Keynes's theory, there are some micro-level actions of individuals and firms that can lead to
aggregate macroeconomic outcomes in which the economy operates below its potential output and
growth
...
Keynes contended that aggregate demand for
goods might be insufficient during economic downturns, leading to unnecessarily high unemployment
and losses of potential output
...


Keynes argued that the solution to depression was to stimulate the economy ("inducement to invest")
through some combination of two approaches: a reduction in interest rates and government investment
in infrastructure
...
The initial stimulation starts a cascade of events, whose total
increase in economic activity is a multiple of the original investment
...
This conclusion conflicts
with economic approaches that assume a general tendency towards equilibrium
...

More broadly, Keynes saw this as a general theory, in which utilization of resources could be high or
low, whereas previous economics focused on the particular case of full utilization
...

Some interpretations of Keynes have emphasized his stress on the international coordination of
Keynesian policies, the need for international economic institutions, and the ways in which economic
forces could lead to war or could promote peace
...
It was developed by John Maynard Keynes and detailed most famously in his book The
General Theory of Employment, Interest, and Money
...
It is made up of autonomous consumption that is not influenced by
current income and induced consumption that is influenced by the economy's income level
...


Autonomous consumption represents consumption when income is zero
...
The marginal propensity to consume (MPC), on the other hand measures the

rate at which consumption is changing when income is changing
...

The MPC is assumed to be positive
...
However,
Keynes mentioned that the increases (for income and consumption) are not equal
...
Criticism of this
assumption lead to the development of Milton Friedman's permanent income hypothesis and Franco
Modigliani's life cycle hypothesis
...
But other factors also enter into the model - not least the expected profitability of an
investment project
...

A fall in interest rates should decrease the cost of investment relative to the potential yield and as
result planned capital investment projects on the margin may become worthwhile
...

The inverse relationship between investment and the rate of interest can be shown in a diagram (see
below)
...
A fall in the rate of interest from R1 to R2 causes an expansion of planned
investment
...
For example a rise in the expected rates of
return on investment projects would cause an outward shift in the marginal efficiency of capital curve
...
Conversely a fall in business
confidence (perhaps because of fears of a recession) would cause a fall in expected rates of return on
capital investment projects
...


The Say’s law of markers
...
That is, economic forces would always be
generated so as to ensure that the demand for labour was always equal to its supply
...
At lower wage rate more workers will be employed
...
The supply curve of labour is upward sloping
because the higher the wage rate, the greater the supply of labour
...
The level of employment is OLo
...
It shows the short-run production function which is expressed as Q = f ( K, L ), where
Q is output, K is the fixed quantity of capital and L is the variable factor labour
...
According to classical economists this
equilibrium level of employment is the ‘full employment’ level
...
Any unemployment which existed at the equilibrium wage rate
(Wo) was due to frictions or restrictive practices in the economy in nature
...
In other words, they denied the possibility of under spending or overproduction
...

(a) Say’s Law: According to Say’s Law supply creates its own demand, i
...
, the very act of producing
goods and services generates an amount of income equal to the value of the goods produced
...
So, demand must be the same as supply
...
The circular flow of income model suggests this sort of relationship
...

(b) Saving-Investment Equality: There is a serious omission in Say’s Law
...
Consequently there would be unsold
goods, falling prices, reduction of production, unemployment and falling incomes
...
That is, investment would occur to fill any
consumption gap caused by savings leakage
...

(c) Saving-Investment Equality in the Money Market: The classical economists also argued that
capitalism contained a very special market – the money market – which would ensure saving
investment equality and thus would guarantee full employment
...
The demand for capital is investment and its
supply is saving
...
Any
imbalance between saving and investment would be corrected by the rate of interest
...
This will stimulate investment and the process will continue
until the equality is restored
...

(d) Price Flexibility: The classical economists further believed that even if the rate of interest fails to
equate saving and investment, any resulting decline in total spending would be neutralized by
proportionate decline in the price level
...
Therefore, if households saves more than firms would invest,
the resulting fall in spending would not lead to decline in real output, real income and the level of
employment provided product prices also fall in the same proportion
...
However, the wage rate would also
fall and competition among unemployed workers would force them to accept lower wages rather than
remain unemployed
...
So a new lower equilibrium wage rate will be established
...


Keyne’s Criticism of Classical Theory:
J
...
Keynes criticized the classical theory on the following grounds:
1
...
Thus, saving-investment equality through adjustment in interest rate is ruled out
...

2
...
Thus, wages are unlikely to be flexible
...
So a fall in demand (when S exceeds I) will lead to a fall in
production as well as a fall in employment
...
Keynes also argued that even if wages and prices were flexible a free enterprise economy would not
always be able to achieve automatic full employment
...
Money as a Medium of Exchange:
The function of money as a medium of exchange solves all the difficulties of barter system
...
The man with
cow who wants to purchase cloth need not seek a cloth seller who wants a cow
...

2
...
Money is like
the yard stick of cloth merchant, as yard-stick measures all varieties of cloth, money measures
the value of all varieties goods
...
Standard of Deferred Payment:
In a money economy the contracts are made for future payments terms of money instead of
goods and promise to repay the loan in money
...
This function stimulates all kinds of economic activities which depend on borrowed
money
...
Money as a Store of Value:
Goods cannot be stored because they are perishable
...
In this way, money is used to store value
of commodities
...

Quantity Theory of Money

The Quantity Theory was first developed by Irving Fisher in the inter-war years as is a basic
theoretical explanation for the link between money and the general price level
...
This is an
identity which relates total aggregate demand to the total value of output (GDP)
...

2
...

4
...
e
...

The velocity of circulation can be calculated by dividing the money value of national output by the
money supply
...
We also make a
working assumption that the real value of GDP is not influenced by monetary variables
...
We might therefore treat Y (real GDP) as a constant too
...
Monetarists believe that the direction of causation is from money
to prices (as we saw in the flow chart on the previous page)
...

During the 1980s it was found that direct and predictable links between the growth of the money
supply and the rate of inflation broke down
...
Instead they switched to
having exchange rate targets, and latterly they have become devotees of inflation targets as an anchor
for the direction of monetary policy
...
Over 99% of M0 is made up of notes and coins as cash is used mainly as a medium
of exchange for buying goods and services
...
At best M0 is
seen as a co-incident indicator of consumer spending and retail sales
...
M0 reflects changes in the economic cycle, but does not cause them
...
M4 includes deposits saved with
banks and building societies and also money created by lending in the form of loans and overdrafts
...

When a bank or another lender grants a loan to a customer, bank liabilities and assets raise by the same
amount and so does the money supply
...
The Bank takes M4 growth into account when assessing overall monetary
conditions, but it is not used as an intermediate target of monetary policy
...


Cambridge Approach of money
While Fisher was developing his quantity theory approach to the demand for money, a group of
classical economists in Cambridge, England, which included Alfred Marshall and A
...
Pigou, were
studying the same topic
...
Instead of studying the demand
for money by looking solely at the level of transactions and the institutions that affect the way people
conduct transactions as the Breitling Replica key determinants, the Cambridge economists asked how
much money individuals would want to hold, given a set of circumstances
...

Accordingly, the Cambridge approach did not rule out the effects of interest rates on the demand for
money
...

Because it is a medium of exchange, people can use money to carry out transactions
...

That money also functions as a store of wealth led the Cambridge economists to suggest that the level
of people's wealth also affects the demand for money
...
Because the Cambridge economists
believed that wealth in nominal terms is proportional to nominal income, they also believed that the
wealth component of money demand is proportional to nominal income
...

Because this equation looks just like Fisher's (Equation 3), it would seem that the Cambridge group
agreed with Fisher that interest rates play no role in the demand for money in the short run
...

Although the Cambridge economists often treated k as a constant and agreed with Fisher that nominal
income is determined by the quantity of money, their approach allowed Omega Replica individuals to
choose how much money they wished to hold
...
If these characteristics of other
assets changed, k might change too
...

To summarize, both Irving Fisher and the Cambridge economists developed a classical approach to the
demand for money in which the demand for money is proportional to income
...


Trade Cycle and Inflation
Trade Cycle is defined as the existence of fluctuations in National Income over a variable time
span
...


It is a cyclical process
...
The trade cycle come in the capitalistic economies
...
M
...
” This shows how economic growth can fluctuate within different phases,
for example:
1
...
Peak (top of trade cycle)
3
...
Recovery (upturn of economic growth)
A trade cycle is composed of periods of good trade a characterized by rising prices and low unemployment percentage
...
The course
of a trade cycle is generally traced through its various phases
...
In each phase the business face the different situation and pas through
different experience
...

Crisis
The causes of ‘Crisis’ was
-A sudden collapse of MEC and not primarily a rise in rates of interest (roi)
A ‘Crisis’ is analogous to a slump in the share markets
...
”
During the boom, “disillusion comes because doubts suddenly arise concerning the reliability of the
prospective yield
...
” This eventually results in a crisis
...
The level of economic activity periodically, increases and reaches a peak, shows a change in
trend, decreases and bottoms out and finally, changes trend towards increase
...
Trade cycle is a neoclassical concept of
macro economics which tries to explain the changes in the economic activities with respect to time
...
The different phases in the
trade cycle are named in relation to the full employment level
...
Inflation
2
...
Deflation
4
...
Depression, and
6
...
Inflation: When the economic activity increases after full employment level, it is called inflation
...
Increasing demand leads to increasing product
prices, increasing demand for factors, higher wages and then increasing demand again
...
Boom: Boom refers to the peak in the level of economic activity after full employment
...
The price level will be very high
...
Deflation: It is the downward trend in the economic activities after boom
...

4
...
The
level employment will decreases, the prices will decrease and the economic activity shrinks
...
Depression: This is the lowest level of economic activity
...
Large scale
unemployment will lead to poverty and suffering
...

6
...
The economic activity will increase towards full employment
...




---