To have a glimpse in the working of the economy as a whole may be of use to a student of economics.
In every economy there are lots of households to supply labour and capital to firms that use them to produce goods and services. Firms provide incomes for households, who in turn1 use this money to purchase the goods and services produced by firms. This process is called the circular flow of payments2.
The gross domestic product (GDP) is the total money value of all final goods produced in the domestic economy over a one-year period. The GDP can be measured in three ways: (a) the sum of the value added3 in the production within a year, (b) the sum of incomes received from producing the years output, (c) the sum to spend on the years domestic output of goods and services.
The total money value of all final goods and services in an economy over a one-year period, that is the GDP, plus property income from abroad (interest, rent, dividends and profits) make the gross national product (GNP). The GNP is an important measure of a countrys economic well-being, while the GNP per head provides a measure of the average standard of living of the countrys people. However, this is only an average measure of what people get. The goods and services available to particular individuals depend on the income distribution within the economy.
We now recognize that assets wear out in the production process either physically or become obsolete. This process is known as depreciation. There has to be part of the economys gross output to replace existing capital, and this part of gross output is not available for consumption, investment, government spending, or exports. So we subtract depreciation from the GNP to arrive at national income.
National income measures the amount of money the economy has available for spending on goods and services after setting aside enough money4 to replace resources used up in the production process.
Since output is determined by demand, the aggregate demand or spending plans of households and firms determine the level of the output produced, which in turn makes up the income available to households and firms. Aggregate demand is the amount to be spent by firms and households on goods and services.
Governments also intervene in the circular flow of income and payments. They buy a considerable part of the total output of goods and services in an economy adding their demand to the demand of the private sector. Since government spending is a large component of aggregate demand, and since taxes affect the amount households and companies have for spending, government spending and taxation decisions, which are referred to as5 fiscal policy, have major effects on aggregate demand and output.
1 in turn
2 circular flow of payments ; circular flow of income . ( )
|
|
|
3 value added ; , . , .. , . .
4 after setting aside money ,
5 are referred to as
II. Circular Flow of Payments and National Income, .
:
The circular flow of income is the process when firms provide income for households, who in turn use this money to purchase goods and services produced by firms thus returning money to the firms.
The gross domestic product is the total money value of all final goods produced in the domestic economy within a year. The GDP plus property income from abroad make the gross national product. The GNP is an important measure of a countrys economic well-being.
Depreciation is the process when assets wear out in the production either physically or become obsolete. When we subtract depreciation from the GNP we arrive at national income.
