NATIONAL INCOME

How do you convert Market Price (MP) aggregates to Factor Cost (FC) aggregates?

• Factor Cost = Market Price − Net Indirect Taxes
• Net Indirect Taxes = Indirect Taxes − Subsidies
• Subtract indirect taxes from Market Price.
• Add subsidies to Market Price.

How is National Product derived from Domestic Product?

• National Product = Domestic Product + Net Factor Income from Abroad (NFIA)
• NFIA = Factor Income Received from Abroad − Factor Income Paid Abroad
• If NFIA is negative, Domestic Product is greater than National Product.

What are the three components of Net Factor Income from Abroad (NFIA)?

• Net compensation of employees
• Net income from property and entrepreneurship
• Net retained earnings of resident companies abroad
• Mnemonic: CER (Compensation, Earnings, Retained)

What is the Expenditure Method formula for GNP at Market Price?

• GNP at Market Price = Consumption + Investment + Government Expenditure + Net Exports + NFIA
• Net Exports = Exports − Imports

True or False: Transfer Payments are included in National Income.

• False
• Transfer payments involve no factor services.
• Examples: Pension, Scholarship, Unemployment Allowance.
• They are excluded from National Income.

What is Mixed Income of Self-Employed?

• Income earned by self-employed persons.
• Includes wages, rent, interest and profit together.
• Individual factor incomes cannot be separated.

How do you calculate Personal Income?

• Personal Income = National Income
• Minus Undistributed Corporate Profits
• Minus Corporate Tax
• Minus Net Interest Paid by Households
• Plus Transfer Payments

What is Personal Disposable Income (PDI)?

• Income available for consumption and saving.
• PDI = Personal Income − Personal Direct Taxes − Non-tax Payments
• Also, PDI = Consumption + Saving

What is the GDP Deflator?

• GDP Deflator = (Nominal GDP ÷ Real GDP) × 100
• Measures overall price level.
• Compares current prices with base-year prices.

How is Gross Value Added (GVA) calculated?

• GVA = Value of Output − Intermediate Consumption
• Value of Output = Sales + Change in Stock
• Prevents double counting.

Are second-hand goods included in GDP?

• Value of second-hand goods is excluded.
• Brokerage or commission earned on their sale is included.

What is the Keynesian Consumption Function?

• Consumption = Autonomous Consumption + MPC × Disposable Income
• Autonomous Consumption occurs even when income is zero.
• MPC = Marginal Propensity to Consume

Differentiate between APC and MPC.

• APC = Total Consumption ÷ Total Income
• MPC = Change in Consumption ÷ Change in Income
• MPC lies between 0 and 1.
• APC may exceed 1 at low income levels.

What is the relationship between MPC and MPS?

• MPC + MPS = 1
• MPC = 1 − MPS
• MPS = 1 − MPC

What is the Saving Function?

• Saving = − Autonomous Consumption + MPS × Income
• Saving is negative when income is zero.
• MPS = Marginal Propensity to Save

What is the Investment Multiplier?

• Measures change in income due to change in investment.
• Multiplier = Change in Income ÷ Change in Investment
• Multiplier = 1 ÷ MPS
• Multiplier = 1 ÷ (1 − MPC)

How does MPC affect the Investment Multiplier?

• Higher MPC increases the Multiplier.
• Lower MPC decreases the Multiplier.
• Example:
• MPC = 0.8 → Multiplier = 5
• MPC = 0.9 → Multiplier = 10

What are the equilibrium conditions in a Two-Sector Economy?

• National Income = Consumption + Investment
• Saving = Investment

How does Marginal Propensity to Import affect the Multiplier?

• Imports are leakages.
• Higher Marginal Propensity to Import reduces the Multiplier.
• More spending goes to foreign goods.

Differentiate between Autonomous Investment and Induced Investment.

• Autonomous Investment does not depend on income.
• Induced Investment increases as income increases.
• Autonomous Investment is influenced by technology and policy.
• Induced Investment is influenced by profit expectations.

What happens when Aggregate Supply is greater than Aggregate Demand?

• Unsold inventories increase.
• Firms reduce production.
• Employment falls.
• Income falls until equilibrium is restored.

What happens when Aggregate Demand is greater than Aggregate Supply?

• Inventories decrease.
• Firms increase production.
• Employment rises.
• Income rises until equilibrium is reached.

What are the major leakages that reduce the Investment Multiplier?

• Savings
• Taxes
• Imports
• Debt repayment or retained earnings
• Mnemonic: STIR

True or False: Keynesian equilibrium always occurs at full employment.

• False
• Equilibrium occurs where Aggregate Demand equals Aggregate Supply.
• It may occur below full employment.

What does the 45-degree line represent in the Keynesian model?

• It represents points where Total Output equals Total Expenditure.
• It is the Aggregate Supply line.
• Its intersection with Aggregate Demand gives equilibrium income.