National Income Concepts and Methods

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Questions and Answers

What are the primary objectives of fiscal policy?

The primary objectives of fiscal policy are economic growth, inflation control, reduced income inequality, and full employment.

Explain how structural market changes can affect unemployment levels.

Structural market changes can lead to increased unemployment by causing decreased profits and production, which in turn may reduce the demand for labor.

Describe the phases of a trade cycle.

The phases of a trade cycle are recovery, boom, recession, and depression.

What is the focus of Keynesian Theory regarding employment?

<p>Keynesian Theory focuses on demand-side factors; it emphasizes that unemployment arises from insufficient aggregate demand and advocates for government intervention during downturns.</p> Signup and view all the answers

Identify two tools commonly used in fiscal policy.

<p>Two common tools of fiscal policy are tax policies and public expenditure.</p> Signup and view all the answers

What does Say's Law imply in the context of Classical Theory?

<p>Say's Law implies that supply creates its own demand, suggesting that production inherently generates the necessary market for goods.</p> Signup and view all the answers

How does monetary policy aim to achieve price stability?

<p>Monetary policy aims for price stability through central bank actions that control the money supply and set interest rates.</p> Signup and view all the answers

What role does quantitative easing play in monetary policy?

<p>Quantitative easing is a monetary policy instrument used to lower interest rates and increase money supply, aiming to stimulate economic activity.</p> Signup and view all the answers

What does GDP represent, and how is it measured using the product method?

<p>GDP represents the total market value of all goods and services produced within a country in a year, measured by summing the value added by industries.</p> Signup and view all the answers

How is GNP calculated, and what does it include that GDP does not?

<p>GNP is calculated as GDP plus net factor income from abroad (NFIA), which includes income earned by residents from overseas investments.</p> Signup and view all the answers

What is the difference between personal income and disposable personal income?

<p>Personal income is the total income received by individuals before taxes, while disposable personal income is the income available after personal taxes have been paid.</p> Signup and view all the answers

Explain the concept of real income and its significance.

<p>Real income is adjusted for inflation to reflect true purchasing power, calculated as (Money Income / Price Index) × 100.</p> Signup and view all the answers

What are the primary causes of demand-pull inflation?

<p>The primary causes of demand-pull inflation include an increase in money supply and rising demand for goods and services.</p> Signup and view all the answers

Define deflation and identify two of its primary causes.

<p>Deflation is a sustained decrease in general price levels typically due to reduced demand, caused by a reduced money supply and falling demand for goods and services.</p> Signup and view all the answers

Describe one method to control inflation and its intended effect.

<p>One method to control inflation is to increase taxes, which aims to reduce disposable income and consequently limit consumer spending.</p> Signup and view all the answers

What does the expenditure method of measuring national income entail?

<p>The expenditure method entails calculating national income by summing total spending on goods and services, represented by the equation National Income = C + I + G + (X - M).</p> Signup and view all the answers

Flashcards

What is GDP?

The total market value of all final goods and services produced within a country's borders in a year.

Product Method (GDP)

The value added by each industry in the production process is summed up to calculate GDP.

Income Method (GDP)

The total income earned by all factors of production (wages, rent, interest, profits) within a country is summed up.

Expenditure Method (GDP)

Total spending on goods and services in a country is added up to calculate GDP. It consists of consumption spending (C), investment spending (I), government spending (G), and net exports (X - M).

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Net Domestic Product (NDP)

GDP adjusted to account for depreciation (wear and tear on capital goods).

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What is Inflation?

A sustained increase in the general price level of goods and services in an economy over a period of time.

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Demand-Pull Inflation

Occurs when there is an excess of demand over supply, driving up prices.

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What is Deflation?

A sustained decrease in the general price level of goods and services in an economy over a period of time.

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What is Fiscal Policy?

Government strategies for taxation, spending, and borrowing to influence the economy.

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What is Monetary Policy?

Central bank's actions to control money supply and interest rates.

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What are Business Cycles?

Recurrent fluctuations in economic activities such as GDP, employment, and income.

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What is the Recovery Phase of a Business Cycle?

Period of increasing investment and demand, leading to higher employment.

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What is the Boom Phase of a Business Cycle?

Economy operates at full or over-full capacity, with high demand and low unemployment.

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What is the Recession Phase of a Business Cycle?

Decline in demand and investment, resulting in lower production and employment.

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What is the Depression Phase of a Business Cycle?

Prolonged downturn with low production, high unemployment, and weak economic activity.

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What is the Classical Theory of Employment?

Assumes full employment is the natural state and that unemployment results from wage or price rigidities.

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Study Notes

National Income: Concepts and Methods

  • Gross Domestic Product (GDP): Total market value of goods and services produced within a country annually. Measured via the product, income, and expenditure methods.
  • Net Domestic Product (NDP): GDP minus depreciation. NDP = GDP - Depreciation
  • Gross National Product (GNP): GDP plus net income from abroad. GNP = GDP + NFIA (Net Factor Income from Abroad)
  • Net National Product (NNP): GNP minus depreciation. NNP = GNP - Depreciation
  • Personal Income (PI): Total income received by individuals before taxes.
  • Disposable Personal Income (DPI): Income remaining after paying personal taxes. DPI = PI - Taxes
  • Real Income: Income adjusted for inflation to show true purchasing power. Real Income = (Money Income / Price Index) × 100

Methods of Measuring National Income

  • Product Method: Measures the total value of goods and services produced, focusing on value added by each industry. Net Value Added = Gross Value Added - Depreciation
  • Income Method: Sums all incomes earned in the economy, including wages, rent, interest, profits, taxes, depreciation, and net factor income from abroad. GNP = sum of incomes
  • Expenditure Method: Adds up total spending in the economy, i.e., C + I + G + (X - M) (consumption, investment, government spending, net exports).

Inflation and Deflation

Inflation

  • Definition: A persistent increase in the general price level.
  • Types: Demand-pull, cost-push, hyperinflation, creeping inflation, and profit-push inflation
  • Causes: Increased money supply, rising demand, higher production costs, and currency devaluation
  • Control Methods: Increased taxes, reduced government spending, import restrictions, and price controls

Deflation

  • Definition: A sustained decrease in the general price level, often from reduced demand
  • Causes: Reduced money supply, high productivity leading to surplus, and structural market shifts
  • Effects: Lower profits, increased unemployment, and reduced consumer spending.

Fiscal and Monetary Policy

Fiscal Policy

  • Definition: Government strategies using taxation, spending, and borrowing to influence the economy
  • Objectives: Economic growth, inflation control, income inequality reduction, and employment enhancement
  • Tools: Tax policies, public expenditure, and debt management

Monetary Policy

  • Definition: Actions by a central bank to influence the money supply and interest rates
  • Objectives: Price stability, economic growth, employment stability, and balance of payments equilibrium
  • Instruments: Quantitative (bank rate, open market operations, reserve ratios), and selective (credit targeting, sector-specific interest rates)

Trade Cycles and Business Cycles

  • Definition: Recurrent fluctuations in economic activity, including GDP, employment, and income
  • Phases: Recovery, boom, recession, and depression
  • Features: Cyclical, recurrent, and affect multiple sectors. Internationally interconnected through trade.

Theories of Employment

Classical Theory

  • Assumes full employment is the natural state, believing unemployment is from wage or price rigidities. Emphasizes Say's Law: supply creates demand.

Keynesian Theory

  • Emphasizes demand-side factors affecting employment. Advocates government intervention during downturns. Suggests unemployment from insufficient aggregate demand.

New Classical Theory

  • Focuses on rational expectations and market adjustments toward employment equilibrium without prolonged disequilibrium.

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