NI and CFI

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ISC - Circular Flow of Income

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NATIONAL INCOME & CIRCULAR FLOW OF INCOME:

NATIONAL INCOME & CIRCULAR FLOW OF INCOME CLASS – XII

National Income:

It is regarded as the most comprehensive measure of the level of economic activity and index of economic growth of an economy. National Income

What is National Income?:

It is defined as the value of all final goods and services produced by the normal residents of a country, whether operating within the domestic territory of the country or outside, in a year. What is National Income?

Monetary Expression:

Money – Common Denominator We can assign monetary value in terms of market prices or in terms of factor costs . Monetary Expression

Final Goods & Services:

These are sold to the final users during the year. Finished goods for final consumption and investment. Final goods and services: Food items, refrigerators etc. – consumption Machines, buildings etc. - Investment Final Goods & Services

Intermediate Products:

These are used by the producers as input into a further stage of production. Resold after converting into final goods. Seeds, fertilizers, etc. Intermediate Products

To measure NI accurately…:

All goods and services produced during a year must be counted once, but not more than once. Intermediate products are excluded from NI. i.e. flour mills sell flour to bakeries, and bakeries use this flour in making breads which are sold to households… To measure NI accurately…

Flow:

NI is a flow concept. It is the flow of goods and services. A flow is a quantity which is measured over a period of time. It tells us how many rupees worth of goods and services are flowing in the economy per unit of time. Conventionally, NI is expressed over one year. Flow

Current Output:

NI measures the value of currently produced goods and services. Excludes ‘pure exchange transactions’, such as sale and purchase of second hand goods or used goods, purchase and sale of securities and transfer payments. Why? Because, nothing new is produced in the current year. Current Output

Current Output:

What to do with the value of the services of the commission agents involved in the second hand sales? Regarding sale and purchase of financial assets (both old and new) like bonds and shares? Services of the share brokers? Transfer payments like social security payments (pensions, etc.), donations and gifts (unilateral payments). Current Output

Normal Residents:

Those persons who ordinarily reside in a country which they live and whose economic interest lies in that country. May or may not be the citizens of that country, i.e. normal residents include national, as well as foreign nationals. They produce goods and services by selling their factor services to production units located within and outside the domestic territory of a country. Normal Residents

Domestic Territory:

Geographical or political boundary excluding foreign embassies and international institutions located within the geographical territory, and including the embassies of this country located outside its geographical territory. Domestic product: value o final goods and services + NFI received from abroad NI is not the sum total of personal incomes Domestic Territory

Circular Flow of Income:

Interaction and inter-dependence between various economic activities like production, exchange and consumption is called the circular flow of income. NI is a flow concept. Production give rise to Income which gives rise to Consumption/Expenditure and expenditure gives rise to income again. It goes on continuously and indefinitely in a circular way; it has neither any beginning nor any end. Circular Flow of Income

Circular Flow of Income:

Thus, CFI is defined as the flow of payments and receipts for goods and services and factor services between different sectors of the economy . Flows: Real Flows Flow of factor services Flow of goods and services Money Flows Circular Flow of Income

THREE PHASES OF CIRCULAR FLOW:

1. Production 2. Income 3. Expenditure THREE PHASES OF CIRCULAR FLOW

Involvement of Different Sectors in Circular Flow:

Involvement of Different Sectors in Circular Flow 1. The Producing Sector 2. The Household Sector 3. The Government Sector 4. Rest of the World Sector

Households / Resources (Factors of Production):

Households / Resources (Factors of Production) LAND LABOUR CAPITAL ENTREPRENEUR

Circular Flow Model in 2 Sector Economy (Closed Economy):

Producers/ Firms Households Circular Flow Model in 2 Sector Economy (Closed Economy) 1 Factor Services (Real Flow) 3 Goods & Services (Real Flow) 2 Factor Payments (Money Flow) 4 Consumption Expenditure (Money Flow)

2 Sector Model with Savings/Financial System:

Producers/ Firms Households 2 Sector Model with Savings/Financial System Goods & Services (Real Flow) Factor Services (Real Flow) Money / Finance Saving Borrowing for Investment Factor Payments (Money Flow) Consumption Expenditure (Money Flow)

The Circular Flow Model in 3 Sector Economy:

Producers Households The Circular Flow Model in 3 Sector Economy Money / Finance Saving Borrowing Transfer Payments Consumption Expenditure Government Taxes Expenditure on Goods & Services Taxes Borrowing Saving Saving Borrowing Subsidies Factor Payments

The Circular Flow Model in 4 Sector Economy (Open Economy):

Producers Households The Circular Flow Model in 4 Sector Economy ( Open Economy ) Money / Finance Saving Borrowing Government Borrowing Saving Govt. Consumption Expenditure Transfer Payments Taxes Transfer Payments Taxes Borrowing Saving Rest of the World Export Receipt Import Payment Net Transfer Payments Net Factor Payments

Leakages in the Circular Flow:

Flow Variables which have negative impact on the process of production in the economy. Leakages in the Circular Flow Savings [S] 1 Taxes [T] 2 Imports [M] 3

Injections in the Circular Flow:

Flow Variables which cause expansion in the process of production in the economy . Injections in the Circular Flow Investment [I] 1 Govt. Consumption Expenditure [G] 2 3 Exports [X]

PowerPoint Presentation:

Investment ( I ) Government expenditure ( G ) Export expenditure ( X ) BANKS, etc Net saving (S) GOV. Net taxes ( T ) ABROAD Import expenditure ( M ) The circular flow of income Leakages INJECTIONS Consumption of domestically produced goods & services (Cd) Factor Payments

Circularity Never Stops…:

2.Innovative Technology both in the areas of Production and Management Circularity Never Stops… 1. The discovery of new resources

Significance of the Study of Circular Flow of Income:

Knowledge of Interdependence Identification of Injections & Leakages Estimation of National Income Level and Structure of Economic Activity Significance of the Study of Circular Flow of Income

Its Quiz Time….:

Its Quiz Time…. State following sentences whether true of false Economy is broadly classified into two sectors Production refers to ‘Value Addition’ 2-sector model of economy is also known as Open Economy Triplet Identity in circular flow is; Production=Income=Expenditure Money flows are opposite to real flows in circular flow Circularity stops when leakages are there in system

Thank You:

Thank You

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