1. NATIONAL INCOME & CIRCULAR FLOW OF INCOME
CLASS – XII

2. National Income
It is regarded as the most comprehensive measure of the level of economic activity and index of economic growth of an economy.

3. What is National Income?
It is defined as the value of all final goods and services produced by the normal residents of a country, whether operating within the domestic territory of the country or outside, in a year.

4. Monetary Expression Money – Common Denominator
We can assign monetary value in terms of market prices or in terms of factor costs.

5. Final Goods & Services
These are sold to the final users during the year.
Finished goods for
final consumption and investment.
Final goods and services:
Food items, refrigerators etc. – consumption
Machines, buildings etc. - Investment

6. Intermediate Products
These are used by the producers as
input into a further stage of
production.
Resold after converting into final goods.
Seeds, fertilizers, etc.

7. To measure NI accurately…
All goods and services produced during a year must be counted once, but not more than once.
Intermediate products are excluded from NI. i.e. flour mills sell flour to bakeries, and bakeries use this flour in making breads which are sold to households…

8. Flow
NI is a flow concept. It is the flow of goods and services. A flow is a quantity which is measured over a period of time.
It tells us how many rupees worth of goods and services are flowing in the economy per unit of time.
Conventionally, NI is expressed over one year.

9. Current Output
NI measures the value of currently produced goods and services.
Excludes ‘pure exchange transactions’, such as sale and purchase of second hand goods or used goods, purchase and sale of securities and transfer payments. Why? Because, nothing new is produced in the current year.

10. Current Output
What to do with the value of the services of the commission agents involved in the second hand sales?
Regarding sale and purchase of financial assets (both old and new) like bonds and shares?
Services of the share brokers?
Transfer payments like social security payments (pensions, etc.), donations and gifts (unilateral payments).

11. Normal Residents
Those persons who ordinarily reside in a country which they live and whose economic interest lies in that country.
May or may not be the citizens of that country, i.e. normal residents include national, as well as foreign nationals.
They produce goods and services by selling their factor services to production units located within and outside the domestic territory of a country.

12. Domestic Territory
Geographical or political boundary excluding foreign embassies and international institutions located within the geographical territory, and including the embassies of this country located outside its geographical territory.
Domestic product: value o final goods and services + NFI received from abroad
NI is not the sum total of personal incomes

13. Circular Flow of Income
Interaction and inter-dependence between various economic activities like production, exchange and consumption is called the circular flow of income.
NI is a flow concept.
Production give rise to Income which gives rise to Consumption/Expenditure and expenditure gives rise to income again.
It goes on continuously and indefinitely in a circular way; it has neither any beginning nor any end.

14. Circular Flow of Income
Thus, CFI is defined as the flow of payments and receipts for goods and services and factor services between different sectors of the economy.
Flows:
Real Flows
Flow of factor services
Flow of goods and services
Money Flows

15. THREE PHASES OF CIRCULAR FLOW
2. Income
1. Production
3. Expenditure

16. Involvement of Different Sectors in Circular Flow
2. The Household Sector
1. The Producing Sector
4. Rest of the World Sector
3. The Government Sector

17. Households / Resources (Factors of Production)
LAND
LABOUR
ENTREPRENEUR
CAPITAL

18. Circular Flow Model in 2 Sector Economy (Closed Economy)4
Consumption Expenditure (Money Flow) 3
Goods & Services (Real Flow)
Households
Producers/ Firms 1
Factor Services (Real Flow) 2
Factor Payments (Money Flow)

19. 2 Sector Model with Savings/Financial System
Factor Payments (Money Flow)
Goods & Services (Real Flow)
Households
Producers/ Firms
Borrowing for Investment
Money / Finance
Saving
Consumption Expenditure (Money Flow)
Factor Services (Real Flow)

20. The Circular Flow Model in 3 Sector Economy
Taxes
Taxes
Government
Expenditure on Goods & Services
Transfer Payments
Subsidies
Borrowing
Saving
Households
Producers
Saving
Money / Finance
Saving
Borrowing
Borrowing
Consumption Expenditure
Factor Payments

21. The Circular Flow Model in 4 Sector Economy (Open Economy)
Rest of the World
Saving
Government
Net Transfer Payments
Taxes
Borrowing
Net Factor Payments
Transfer Payments
Export Receipt
Govt. Consumption Expenditure
Payments
Transfer
Import Payment
Taxes
Households
Producers
Money / Finance
Saving
Saving
Borrowing
Borrowing

22. Leakages in the Circular Flow
Flow Variables which have negative impact on the process of production in the economy.
Savings [S] 1
Taxes [T] 2
Imports [M] 3

23. Injections in the Circular Flow
Flow Variables which cause expansion in the process of production in the economy.
Investment [I] 1
Govt. Consumption
Expenditure [G] 2 3
Exports [X]

24. The circular flow of income
INJECTIONS
Export
expenditure (X)
Government
expenditure (G)
Investment (I)
Factor Payments
Consumption of domestically produced goods & services (Cd)
BANKS, etc
Net
saving (S)
ABROAD
Import
expenditure (M)
GOV.
Net
taxes (T)
Leakages

25. Circularity Never Stops…
1. The discovery of new resources
2.Innovative Technology both in the areas of Production and Management

26. Significance of the Study of Circular Flow of Income
Knowledge of Interdependence
Identification of Injections & Leakages
Estimation of National Income
Level and Structure of Economic Activity

27. Its Quiz Time…. State following sentences whether true of false
Economy is broadly classified into two sectors
Production refers to ‘Value Addition’
2-sector model of economy is also known as Open Economy
Triplet Identity in circular flow is; Production=Income=Expenditure
Money flows are opposite to real flows in circular flow
Circularity stops when leakages are there in system

28. Thank You