Determination of Equilibrium Level of National Equilibrium in Open Economy
At equilibrium, total withdrawals =total injections in an open economy.
I+ C+X= S+T+M
J (Injections) =W (withdrawals)
Equilibrium location is E, where withdrawal function (W) crosses injection (I).
Methods of Measuring National Income (NI)
Each time a commodity is produced and sold we can say that
1. The value of the commodity = purchasers expenditure on it
2. Producers will receive the same money as income
3. The value of the product is equal to the value-added in its successive stages.
Basis of Measuring National Income
Income method - In this methodology, we consider the total of all incomes earned by labor in an economy. We can therefore easily estimate national income by considering all incomes of a population in a given period. Incomes range from personal income to gross trading profits of companies to informal sector incomes.
Measurement by the product or value-added approach – It is essential to consider the value addition in each stage of production which should be equal to the final price of the final good in an ideal situation.
Expenditure method of measurement approach - If we assume that all incomes earned are spent in the economy-we assume no savings, no taxes, and no other deductions .Thus we can say that by estimating total expenditure in the economy will give us the national income.
What problems would you envisage when estimating national income using each of the three methods?
Circular Flow of Income and Expenditure
It depicts the movement of resources between producers and consumers. On one side of the circle, we have firms, and on the other, we have households. Households give labor services to firms so as to produce goods. They also offer most of their income to firms when they buy goods and services.
On the other hand, households receive goods and services manufactured by firms, and they also receive money flows when they lend services to firms. We can say that there are four flows in the circle. But it is not as perfect as it flows. We have leakages of incomes earned-savings, taxes- and we have injections in the flow-investments, government expenditure, and exports.
Draw a diagram of the circular flow and illustrate the four flows in such a way that the circle is informed.
Gross Domestic Product (GDP)
Per capita income
Standard of living
The health of a nation
The equilibrium level of national income
Marginal propensity to consume
Applying Economic Concepts
1. Explain why GDP goes down when you quit your job to pursue college studies?
2. Describe how GDP is measured
1. In what situations may a country benefit from low GDP?
1. What is Gross Domestic Product (GDP)?
2. The state equilibrium level of national income?
3. Define marginal propensity to consume?
4. Discuss the circular flow?
5. Discuss the measurement of national income by the product or value-added approach?