National Income (NI)

Human wants can be satisfied through consumption of goods and services only. (A good is a tangible or material object like pen, book, shoes, etc. which has economic value whereas service is intangible object like services of teacher, doctor, judge, etc.) Therefore, production of goods and services has been going on since the dawn of economic history to meet unending wants of a society. Thus broadly speaking national income is a measure of value of production activity of a conutry. How? Production generates income, how? Production of goods and services is the result of combined efforts of factors of production (land, labour, capital and enterprise). The net output emerging from production process gets distributed among factors of production in the form of money income (rent, wages, interest and profit). Thus production generates income. With this income factors of production (i.e., factor owners) purchase goods and services for final consumption and investment. Thus income creates expenditure. In short, production generates income, income creates expenditure and expenditure calls forth production. Hence national income can be defined (expressed) in three ways, i.e., in the form of final goods and services (Production Phase), generation of factor income (Income Phase) and consumption of final goods and services (Expenditure Phase) as shown below.

(i) From production point of view, "National income is the sum total of money value of net flow of all the final goods and services produced by normal residents of a country during a period of account." (National income is basically a measure of production activity.)

(ii) From income point of view CSO has defined, "National income is the sum total of factor incomes earned by normal residents of a country in the form of rent, wages, interest and profit in an accounting year."

(iii) From expenditure (disposition of national income) point of view, Simon Kuznets defines thus, "National product is the net output of commodities and services flowing during the year from the country's productive system into the hands of ultimate consumers or into the net addition to the country's capital goods".

In short, national income is cither money value of all the final goods and services produced or sum total of all factor incomes earned or sum total of final expenditure (consumption expenditure + investment expenditure) in a year.

Distinction between microeconomics and macroeconomics.

Simply put, microeconomics is the study of individual economic units of an economy such as individual households, individual firms or industries whereas macroeconomics is the study of an economy as a whole, i.e., study of broad economy-wide aggregates. For instance, when we study an individual car manufacturing firm (like Maruti), our study is micro analysis but if we study the entire car manufacturing sector of the economy, our analysis is macro analysis. Similarly, if we study production of a firm (or of an industry), our analysis is micro study but if we study problems of production of the whole economy, our analysis is macro study. The former (Micro) is like dealing with individual trees in the economic forest whereas the latter (Macro) is like analysing the economic forest. Still both microeconomics and macroeconomics are interdependent and complementary. However, the main differences between the two are as under :

Final Goods and Intermediate Goods    

Simply put, Goods purchased and used up in production process are intermediate goods. Goods purchased for consumption or for investment are final goods. The distinction is based on whether the good is purchased for final use or for use in further production.

(i)    Final goods. All goods which are meant either (i) for consumption by consumers or (ii) for investment by firms are called final goods. They are meant for final use and the final use of a product is only for consumption or investment. Thus they do not undergo any further transformation (change) in the production pracess nor are resold. In other words final goods are acquired for own use i.e. by consumers for statifaction of their wants and by producers for capital formation.

(ii)    Intermediate goods. All goods which are used (i) as raw material for further production of other goods, or (ii) for resale in the same year are known as intermediate goods. Such goods are purchased by one firm from the other for use as raw material or for resale.

It needs to be noted that no good is always final or intermediate because it is the use made of the good which makes it final or intermediate. Let us consider manufacturing of biscuits. Biscuits are final goods but flour, milk, sugar, salt, fuel, etc. used in making biscuits are intermediate goods. Similarly cloth purchased by the household for the daily use is a final good but acquired by dress makers for making dresses is an intermediate good. Likewise bread when purchased by a household is a final good but purchased by bakery for making pattis is an intermediate good.

Meaning of macroeconomics — Macroeconomics is the study of overall averages and aggregates covering the whole economy and examines the interrelationship among various aggregates. Simply put it is study of the economy as a whole. It is that part of economic theory which deals with the behavior of national aggregates. It studies not an individual economic units like a household or a firm or an industry (i.e. small group of firms) but deals with the study of broad economy-wide aggregates like total output, size of national income, level of employment, aggregate consumption, aggregate saving, aggregate investment, general price level, balance of payment, rate of inflation, size of poverty etc. It helps to solve the central problem of 'full employment of resources' in an economy.

Be it noted that macroeconomic theory is also called 'Theory of Income and Employment' because it tries to explain how level of income and employment is determined in an economy and how unemployment can be removed. Study of problem of unemployment in India or general price level is a macroeconomic study because they relate to Indian economy as a whole.

Let it be known that an English economist J.M. Keynes whose book titled 'General Theory of Employment, Interest and Money', published in 1936 brought about a revolution in economic thought is called the Father of Modem Macroeconomics