Semester II

Macro Economics for Business

Module I: Introduction
National Income - Concepts and Aggregates
NATIONAL INCOME

 National Income is the sum of all the incomes as a result of economic

activities i.e. it is the measure of income, output and expenditure in an
economy.
 It is the income earned by the country’s people including labour and capital
investments during a given period of time, generally one year.
 It is thus the final outcome of all economic activities of a nation valued in
terms of money.
 It is the most important economic variable and determinant of the business
level and economic status of the country. The level of National Income
determines the pattern of demand for goods and services.

Economic Activities
o Economic activities generate a large number of goods and services and make a
net addition to the National Stock of a Capital.
o These together constitute the National Income of a closed economy.
• Closed Economy: an economy which has no economic transactions with the
rest of the world.
o (The reverse is ‘open economy’)
o Economic Activities are of two types:
• Economic:
− These include all human activities which create goods and services that
can be valued at market prices.
− Like production by farmers, by firms in individual sectors, production of
goods and services by the government.
• Non – Economic:
− These include all those activities which produce goods and services that do
not have any market value.
− Like spiritual, psychological, social and political services.
− It also includes hobbies, services to self, services of a housewife and of a
member of the family towards the other member.
o Economic activities generate flow of goods and services on one hand; generate
flow of money on the other hand in the form of payments i.e. in the form of
wages, interests, rents, profits and earnings of self-employed.
o Thus, National Income may be estimated by adding the factor earnings and
adjusting the sum for indirect taxes and subsidiaries.
o The National Income thus obtained is known as National Income at Factor
Cost. It is related to money flow.

Factor Cost
o Now, since the production of goods and services is the result of the use of
primary factors of inputs namely, capital and labour along with raw materials,
the process automatically generates income.
o This income is in the form of return to capital and labour used in production
processes.
 • For eg. The total product originating in a firm making steel could be obtained
by adding the total production and deducting the intermediate product to obtain
the value added.
• The value added of this firm consists of the income occurred in the course of the
production, namely wages and salaries and operating surplus.
• Thus the product of the firm must be income to someone weather it is their
employees in the form of employment income or to the owners in the form of
operating surplus.
• Hence, the unduplicated production by the firm is equivalent to the income
which occurs to the factors of production.
o National Income is not simply an aggregate of all incomes.
o It includes only those incomes which are derived directly from current
production of goods and services called factor income.

Transfer Payments
o Other forms of income such as old age pensions, education grants,
unemployment benefits, gifts, etc, cannot be regarded as payments for current
services to production.
o They are paid out of Factor Income and are called Transfer Income.
o Payments for which no goods or services are received in return are Transfer
Payments.

 The National Income being the value of goods and services becoming available
cannot include both Factor Income and Transfer Payments.

Personal Income
o Personal Income is a measure of the actual current income receipt of persons
from all sources.
o It differs from Private Income, in that it excludes the undistributed profits which
occurred to Private Sector but are not received by persons.
o It also excludes the expenditure tax paid to government by Private Corporate
Sector.
o It is derived from the Private Income by subtracting the savings of the Private
Corporate Tax.

Personal Disposable Income

o Personal Disposal Income is derived from Personal Income by subtracting the
taxes paid by individual and other compulsory payment made to
government.
o It is a measure of amount of the money in the hands of the individuals and
available for their consumption or savings.

Economic Performance Indicators

INDICATORS INTERPRETATION
a. GDP Rate of Growth The performance of the economy.
b. GDP per Capita The level of Economic Development in
comparison to the other countries.
c. Compensation of Labour Cost
Employees / Workers
d. Compensation of Employers Income Share of Employees in GDP
/ Gross Value added
e. Operating Surplus / Gross Income Share of Capital in GDP
Value Added
f. Gross Fixed Capital Share of Investment in Capital goods in
Formation / GDP GDP
g. Saving / GDP Saving Rate of the Nation
h. Saving / Gross Fixed Capital Domestic Funding of Investment
Formation
i. Saving of an Institutional Contribution of each Sector to Total Saving
Sector / Total Saving
j. Saving of Household / Saving Rate of the Households
Disposal Income of
Household
Formulae:

1. Net National Product = Gross National Product – Consumer Consumption

Allowance
• NNP = GNP – CCA

2. National Income = GNP – [CCA + Indirect Business Taxes + Business

Transfer Payments + Current Surplus of Government Enterprises – Government
Subsidiaries]

3. Personal Income = National Income – [Undistributed Profits + Profit Tax +

Employee’s Contribution Towards Social
Insurance + Employer’s Contribution towards Social Insurance - Government
Transfer Payments - Business Transfer Payments – Net Interest Paid by
Government – Interest paid by the Consumers]

4. Disposable Personal Income = Personal Income – Personal Tax

5. Personal Outlays = Disposable Income – Personal Savings