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Macro Economics

Notes Introduction

You have learnt in the previous unit that the study of Macro Economics is concerned with the
determination of the economy's total output, the price level, the level of employment, interest
rates and other variables. A necessary step in understanding how these variables are determined
is "national income accounting". The national income accounts give us regular estimates of GNP
- the basic measure of the economy's performance in producing goods and services.
National income is the most comprehensive measure of the level of the aggregate economic
activity in an economy. It is the total income of a nation as against the income of an individual
but you must note that the term national income is not as simple and self-explanatory as the
concept of individual income maybe.

Example: you cannot include all the income received by individuals during a given
period in the national income, similarly not all the income that is generated in the process of
production in an economy during a given period is received by the individuals in the economy.

2.1 Meaning of National Income

We may define national income as the aggregate of money value of the annual flow of final
goods and services in the economy during a given period.
The well-known writer, Paul Studenski, writes: "National income is both a flow of goods and
services and a flow of money incomes. It is therefore called national product as often as national
income".
The flow of national income begins when production units combine capital and labour and turn
out goods and services. We call this Gross National Product GNP. It is the value of all final goods
and services produced by domestically owned factors of production within a given period.

Example: It includes the value of goods produced such as houses and food grains and the
value of services such as broker's services and economist's lectures. The output of each of these
is valued at its market price and the values are added together to give GNP.
At the same time, the production units which produce goods and services, distribute money
incomes to all who help in production in the form of wages, rent, interest and profit - we call this
as Gross National Income (GNI).
GNI comprises the total value produced within a country, together with its income received
from other countries less similar payments made to other countries.
It may be noted from above that:
National Income is an Aggregative Value Concept: It makes use of the value determined
by the measuring rod of money as the common denominator for the purpose of
aggregating the diverse output resulting from different types of economic activities.
National Income is a Flow Concept: It represents a given amount of aggregate production
per unit of time, conventionally represented by one year. Thus, national income usually
relates to a particular year and indicates the output during that year.

National income represents the aggregate value of final products rather than the total
value of all kinds of products produced in the economy. The insistence on final goods and
services is simply to make sure that we do not double count.

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