GROSS DOMESTIC PRODUCT (GDP)

GDP is the money value of all goods and services produced in the domestic territory of a country during an accounting year.

GROSS NATIONAL INCOME (GNP)

GNP is the money value of all output produced by nationals within the country and outside the country.

GNP=GDP+ Net factor income from abroad

Net factor income abroad =Income earned abroad – income paid abroad.

NET NATIONAL PRODUCT

Net national product can be defined as the total value of  all final goods and services produced an economy in an year after providing for depreciation of capital assets.

NNP=GNP-Depreciation

NATIONAL INCOME

National income is the aggregate money value of all goods and service produced in a country during an accounting year.

Current market price. The phrase current market price refers to the nominal price prevailing in the market. These prices are not adjusted for inflation. This implies that increase in GDP,NI and Investment at current market price figures do not reflect a real change.

Reasons of measuring national income or Importance of national income estimation

  1. National income is of vital importance for the economy of a country. The following points indicates the importance of national income data
  2. N.I accounting shows, how the national income is shared among the various factors of production .
  3. National income statistics indicates the specific contribution of individual sectors and their growth over time
  4. N.I statistics shows show how the national income of a country is distributed among various sectors of the population
  5. It helps us to analyse the structural changes in the economy
  6. By comparing national income data of different countries, we can compare their standard of living ,and the level of economic growth achieved by them
  7. National income accounting provides the information for assessment of economy’s strength and failures.
  8. It is indispensible for the formulation of economic policy of government
  9. National income date show throw light on the volume of consumption, saving and investment in the economy

 

Q. Discuss how an increase in car production through the establishment of new plant might affect a country’s GDP.

An. The establishment of new plan will increase investment in the economy. This will lead to increase in employment, income and output. Thus, an increase in car production through the establishment of a new plant might increase country’s GDP. Moreover, the new plant pro will not only expand in car production but also trigger expansion in ancillary industries such as the tyre, spare parts etc which will help further increase a country’s GDP .Further more it might help to improve country’s balance of payments production. Also, it is likely that the establishment of a new plant enables economies of scale resulting higher profits for the car manufacturer, thus leading to greater tax revenues which might help government to increase its spending , reinforcing an increase in the county’s GNP.

Economic policy

”’Economic policy”’ refers to the actions that governments take in the economic file. It covers the systems for setting interest rates and government budget as well as the labour market, nationalization|national ownership]], and many other areas of government interventions into the economy.

Such policies are often influenced by international institutions like the International Monetary Fund or World Bank as well as political beliefs and the consequent policies of parties.

The aims of economic policy

  1. High and stable level of employment
  2. A relatively stable level of price
  3. A satisfactory balance of payments
  4. A rise in the standard of living
  5. A more equal distribution of income and wealth 

Instruments of the economic policy

These are methods or technique which are used by the government to try and achieve its economic aims; they are known as the instruments of the economic policy

Fiscal policy

Fiscal policy refers to the policy of the government relating to the public expenditure ,taxation and management of public debt.

The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:

  1. Aggregate demand and the level of economic activity;
  2. The pattern of resource allocation;
  3.  The distribution of income.
  4. Fiscal policy refers to the overall effect of the budget outcome on economic activity. The three possible ways of fiscal policy are neutral, expansionary, and contractionary:
  5. A neutral stance(way) of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue). Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.
  6. An expansionary stance of fiscal policy involves a net increase in government spending (G > T) through rises in government spending, a fall in taxation revenue.. This will lead to a larger budget deficit or a smaller budget surplus than the government previously had. Expansionary fiscal policy is usually associated with a budget deficit.
  7. A contractionary fiscal policy (G < T) occurs when net government spending is reduced either through higher taxation revenue, reduced government spending. This would lead to a lower budget deficit or a larger surplus than the government previously had. Contractionary fiscal policy is usually associated with a surplus.
  8. The idea of using fiscal policy to combat recessions was introduced by John Maynard Keynes in the 1930s, partly as a response to the Great Depression.

 

Monetary policy

The regulation of the money supply and interest rates by a central bank, such as the Federal Reserve Board in the U.S., in order to control inflation and stabilize currency. Monetary policy is one the two ways the government can impact the economy. By impacting the effective cost of money, the Federal Reserve can affect the amount of money that is spent by consumers and businesses.
 One policy may conflict with another

A major problem of economic management is the fact that one aim of economic policy may conflict with another aim.
For example, unemployment might be reduced by a large increase in the public spending without any increase in taxation. This increased public spending will increase income, so the demand for goods and services will increase, output will increase and unemployment will fall. But a large increase in public spending may have undesirable effects too:

• It might lead to inflation
• There would most certainly be an increase in imports which could in turn cause a balance of payments to be deficit.

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