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Essay on National Income
You may have already studied microeconomics, which looks at supply, demand and prices for individual goods. Macroeconomics looks at the bigger picture and involves the study of the economy as a whole.
Let us start by looking at a simple example — a ‘two sector’ economy made up of households (consumers) and firms (producers) —and use this to develop the idea of national income. To start with we will ignore the impact of government policy and overseas sectors. Households ultimately own the factors of production, e.g., labour, materials and capital, and supply these factors to firms who use them to produce goods and services. In return households earn rewards for supplying the firms with the factors of production e.g., wages and interest on capital. These rewards are in turn used to buy the goods that the firms have produced (Sargent).
there are three ways of measuring the amount of economic activity in the economy. These are:
- National product/output = the flow counted at this point represents the amount received by firms for their total production.
- National income = the flow counted at this point represents the total income received in return for factors of production.
- National expenditure = the flow counted at this point represents the total expenditure by households on goods and services.
If it is assumed that all income is spent, then whichever method is used the same measure of economic activity must be obtained.....
