Introduction to National Income

Introduction to National Income

For understanding the concept of national income, it is necessary to know how an economy works. In any economy, its people are engaged in on productive activity or the other, whereby they earn income and spend their income on goods and services to satisfy their wants. The health and progress of an economy are to be judged from how much they are able to produce arid spend i.e. Country’s total output, income and expenditure. Those aggregates of the economy are but different aspects of its national, income.

Circular Flow: The Wheel of the Wealth

In every economy there are households on the one hand and productive enterprises or firms on the other. The function of house holds is to consume holds and services for the satisfaction of their wants. Thus the household is the basic consuming unit in the economy. The function of productive enterprises (forms) is to produce goods and services for the satisfaction of the wants of households and thus the firm or productive enterprise is the basic producing unit in the economy. The household here may be family unit while producing unit (firm) may be grocery shop, factory etc. Besides, Government is another sector which occupies an important Position. It like households, purchases goods and services arid since it runs many public enterprises it act as, producing unit. Thus households, firms and government are the main components of the entire economic organization of a country which is know as an economy. Economy is the sum total of the operations of the households, firms and government.

In every economy there is always a circular flow (movement) of resource services (i.e. services of land, labour capital and enterprise) from the household to firms and the reverse movement of goods and services from the firms to the households. This is depicted in the diagram given below.
The inner circuit shows the real flows would take place only in barter economy where goods and services are exchanged for goods and services. But in the modern economy where use of money as medium of exchange is widely adopted

Households supply the resource services or factors to firms and receive in return payments in terms of money for goods and services they want. The firms sell goods and services for money and use the money so received to pay the households for their supply of resource services. Thus labour gets Wages; capita1 gets interest land gets rent and enterprise gets profits all in terms of money, this circular flow of money also known as Wheel of Wealth. This flow of money is not continuously at steady level. It may contract or expand when depression and prosperity occur, respectively in an economy. The diagram explains circular flow of closed economy where savings and role of Govt. is totally absent.

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