private final consumption expenditure. 800 net current transfer from abroad -10 gross final consumption expenditure 300 net indirect tax 150 net domestic capital formation 200 current transfer from government 40 depreciation 100 net import 30 income approving to government 90 national dept. interest 60 calculate gross national product at market price evplain in detail
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Answer:
National Income Accounting
AIMS: By the end of this section, you should be able to
explain the circular flow of income,
define and explain various terms highlighted in red bold-face,
calculate national income using income, expenditure and output methods, and
distinguish gross from net, and national from domestic.
The circular flow of Income model is a simple model of the economy.
In the simplest model, the economy is divided into households and firms.
Diagram 1. The circular flow of income.
Households contribute factors of production to firms and factor payments (wages, rents, interests, dividends, and profit) flow from firms to the households.
Private expenditure or consumption flows from households to firms in exchange for (domestically produced) goods and services.
The inner flow of the red rectangle is the factors of production - goods flow which is also known as the real flow. The outer flow of the red rectangle is the income-expenditure stream which is also known as the monetary flow. Sloman calls this the inner flow.
In a more complicated model, we would introduce Banks which are financial intermediaries between households and firms, Government and possibilities to export (X) to and import (M) from abroad. Saving is the income that household chooses not to spend and in this model assumed to be saved in Bank. Net saving (S) is used in the model and net saving is the saving after deducting household borrowing and withdrawal from past savings. Banks in turn makes this money available to firms for investment in productive inputs (I). Government collects taxes but also transfer money back to households in the form of pensions, unemployment benefits, welfare support, and child support. Transfer payments are moneys transferred from one party to another without involving the production of good or service. Net taxes (T) is the taxes minus transfer payments. Government expenditure (G) is government purchase of goods and services from domestic firms.
Incomes of households or firms that are not passed on round the inner flow is called withdrawals (W) or leakages; W = S + T + M. That is the withdrawals of potential incomes from the income-expenditure stream between households and firms.
Injections (J) on the other hand is the extra potential incomes (for households and/or firms) into the income-expenditure stream. J = G + X + I.
These links (as in diagram 1 above) do not guarantee that S=I (no saving-investment gap), G=T (balanced budget from the government) , and M=X (balanced trade). Moreover, at any particular moment in time, withdrawals W may not in balance with injections J.
The level of national income/output that is consistent with J=W is called the equilibrium level of national income/output.
If the increase in inflows exceed that of outflows (J > W) then the national income will increase, i.e. flow of money in the system. If W > J, then the system is losing money thus national income will decline.
Let us assume that initially J = W and for some reasons import expenditure M increases from Mo to M1 and cetera paribus, this leads to
G + X + I < S + T + M1.
Let Y = C + S + T ; household's incomes are spent on consumption, saving, and paying taxes. Then
G + X + I < (Y- C) + M1
G + I + C + X - M1 < Y
Y1 < Y; where Y1 is the new national income after increasing spending on imports. The new national income Y1 is lower than before because money is lost through a leakage import expenditure M.
[Carry out the above procedure for an increase in injection and convince yourself that national income will increase.]
Calculating National Income.
The circular of flow model suggests that there are three ways to calculate national income. All these methods must yield the same result because
national product (output) ≡ national income ≡ national expenditure
.
Answer:
yes upper answer is right