ECN 002 Online Discussion and Quiz-7-12-2022 (Circular Flow and National Income)

2) national income is
the total amount of money earned within a country.
While national income accounting is the term that refers to measuring the health of an economy, the economic activity, and the forecasted growth and development during a particular time period.
3) product method
Income method
Expenditure method
1. Types of Goods and Services:
2. Problems of Double Counting:
3. Excluded Market Transactions:
4. Problem of Imputed Values:

1. The 2sector shows the circular flow when savings and investment is added. Some households income are used for consumption expenditure and reaches the product market directly. Other households income is directed to saving and this is a source of funds for firms to use in making investment expenditure. The income reaches the product market indirectly.
From households to firms , the flow of saving passes through a set of financial institutions that acts as intermediaries between households that saves funds and firms that borrow funds for investment expenditure.
In the 3sector economy, government is added which makes it more complicated. Government take in revenue from taxes levy on households, some of that revenue is immediately returned to the households in form of transfer payment.
Funds thus flows from households to government as a net taxes and then from government to product market as government purchases. If government purchases goods and services exceed net taxes, government may borrow the difference from the public through financial market.
4sector economy are expenditures made by consumers, firms and government but flow to foreign countries to pay for imports of goods and services. Some expenditure on domestic produced goods and services are made by foreigners, expenditure on export which passes from foreign country to domestic product market. If imports exceeds exports, the countries is set to run a trade deficit, deficit must be made good by borrowing from foreigner.
If exports exceeds import, the domestic economy is said to run a foreign trade surplus.
2. National income is the sum of all incomes earned by factors of production within the nation over a given period usually a year. While National income accounting is how to get the total sum of income earned by factors of production using the statistics to get the answers.
3. The challenges are double counting, definition of conceptual variables, statistical problems, owner-occupier properties, treating depreciation.

1)
a. Circular Flow of Income in a 3-sector
Let us start with a simplified model involving two sectors, namely, household sector and firm sector, assuming that there is no Government. We further assume that the economy is a closed one having no exports or imports. Similarly there is no saving by the households, who spend all what they earn; and no investment by the firms. Such an economy has two types of markets — Product market and Factor market.
Under these presumptions the firm sector hires factor services from households, who are owners of factors of production (land, labour, capital and enterprise), for producing goods and services and pays them remuneration or compensation in the form of money for rendering the productive services.
For the factors of production, these are factor incomes known as rent, wages, interest and profit which have been generated in the production process. Thus money income flows from firm sector to the households. With this money the households purchase from the firms, manufactured goods and services to satisfy their wants with the result, the same money flows back from households to the firm sector. Thus entire income of economy comes back to firms in the form of sales revenue. Clearly one man’s or sector’s expenditure is other man’s or sector’s income.

Circular flow of income with capital market (Financial System). We bring the role of capital market consisting of financial institutions.
Financial institutions are primary intermediaries between savers and investors (or lenders or borrowers). Households and Firms save part of their income and deposit in the capital market leading to money flows from households and firm to capital market. This constitute a leakage from the circular flow of money. Firms also borrow for purposes of investment.

Leakages and Injections. A leakage is the amount of money which is withdrawn from its flow of income. As against it, injections are the amount of money which is added to the flow of income in the economy. Thus seen,
(i) savings
(ii) taxes by households and firms and
(iii) imports constitute a leakage from the circular flow of income (money) whereas investment, government expenditure, and export payments are injections into the circular flow of income (money).

b. Circular flow of income in a 3-sector
We have to add the government sector to the 2-sector model of Household and Firm Sector. Government purchases goods from firms and labour services from households. It collects corporate taxes from firms and personal taxes (income tax, wealth tax) from households. Government makes transfer payments, Eg. like old age pension, scholarships to households and grants subsidies to firms.

c. Circular flow of income in 4-sector
Without introducing external sector (also called Rest of World — ROW), our model will remain incomplete. The domestic economy is connected with ROW through international trade (imports and exports) and capital flows. In case of imports, money flows to the ROW whereas in case of exports money flows in from ROW. Mind, imports are leakages and exports are injections into the circular flows of income in the economy.

Significance of circular flow of income
(i) It reflects structure of an economy.
(ii) It shows interdependence among different sectors.
(iii) It gives information about injections and leakages from flow of money.
(iv) It helps in estimation of national income and its related aggregates.

2)
a. National income means the value of goods and services produced by a country during a financial year. Thus, it is the net result of all economic activities of any country during a period of one year and is valued in terms of money. National income is an uncertain term and is often used interchangeably with the national dividend, national output, and national expenditure

b. National income accounting is a method of bookkeeping that a government uses to calculate the amount of economic activity over a given period of time. Accounting reports of this type provide data on total profits received by domestic corporations, salaries paid to foreign and domestic employees, and the amount expended on businesses and persons living in the country on sales and income taxes.

3)
The national income of a country can be measured by three alternative methods: (i) Product Method (ii) Income Method (iii) Expenditure Method.

i. Product Method:
In this method, national income is measured as a flow of goods and services. We calculate money value of all final goods and services produced in an economy during a year. Final goods here refer to those goods which are directly consumed and not used in further production process. Goods which are further used in production process are called intermediate goods. In the value of final goods, value of intermediate goods is already included therefore we do not count value of intermediate goods in national income otherwise there will be double counting of value of goods.

To avoid the problem of double counting we can use the value-addition method in which not the whole value of a commodity but value-addition (i.e. value of final good value of intermediate good) at each stage of production is calculated and these are summed up to arrive at GDP. The money value is calculated at market prices so sum-total is the GDP at market prices.

ii. Income Method:
Under this method, national income is measured as a flow of factor incomes. There are generally four factors of production labour, capital, land and entrepreneurship. Labour gets wages and salaries, capital gets interest, land gets rent and entrepreneurship gets profit as their remuneration.
Besides, there are some self-employed persons who employ their own labour and capital such as doctors, advocates, CAs, etc. Their income is called mixed income. The sum-total of all these factor incomes is called NDP at factor costs.

iii. Expenditure Method
In this method, national income is measured as a flow of expenditure. GDP is sum-total of private consumption expenditure. Government consumption expenditure, gross capital formation (Government and private) and net exports (Export-Import).

4)
i. Double Counting
ii. Excluded Market Transactions
iii. Problem of Imputed Values
iv. Inventory Adjustments
v. Depreciation

1.to understand the circular flow diagram is about the house hold and firms it’s called the simple economy or 2 sector economy 2 sector economy has no government in this economic it’s assume that all consumer sell their goods as soon as their income is received, all the consumption is earn by the business sector which consumes finished goods the circular diagram is all about the physical good and services flowing clockwise payment of good &services to anti clockwise . They are two market operating the household and firms 1. Product market which appears on top of the diagram this is the market that sells goods and services to the households e.g garri,water,car ,services for their direct consumption. 2.factor market which appears at the bottom this is the market in which the household sells the factor of product (land-rent,labour-wages,salary capital -interest,entrepreneurship-profit) to the firms for making of their own firms 2(I) national income is the value of goods and services produced by a country during a financial year 2(ii)national income accounting is an government bookkeeping system that measures a country’s economic activity 3(I) income method (ii)production(value added method )(iii) expenditure method 3b(1) production (value added method ): it is the same of the value added by each producing unit should be taken in the national income .3b(2) income method: in the income method , the national income is measuring by adding up the pretax income generated by the individuals and companies in the economy 3b(3). Expenditure method : in the expenditure method of calculating national income or gross domestic product takes into account the final goods and services produced in a country during a period of time. 4(I)the challenges of computing tha national income are income earned through illegal activities like smuggling,black marketing, gambling ,betting ,adulteration, bribery e.t.c. Hi sir Chinwendu

The three most common method are the value-added method the income method and expenditure method

The value-added method focuses on the value added to a product at each stage of its production. income method focuses on the income received on the factor of the production such as land and labourwhy expenditure method the expenditure method is a system of calculation gross domestic profit GDP that combine consumption,investment ,government spending ,
and net exports it is the most common war to estimate GDP.

in the above analysis the circular flow of income will assume that all income which the household receive they are spend into consumer goods and services

two sectors economy is a fundamental model consisting the consisting of only two sectors firm and household why the three sector of the three sector economy involved in the three sectors namely household ,business, and government .the addition of the government is an economic results in bringing two variables in an economy those variables are government expenditures acts as injection to income and taxation, act as leakage or withdrawal from income 4 sector economy it is the income received that is spent on goods and services produce thus in our two sector simple economics with neither government or foreign trade