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Nationl Income

The money value of the human resources of a country combined with capital acting on its natural resources produced annually various quantities of goods and services is called national income of a country. The total market value of all final goods and services produced in a year is National Income.

Alternatively, National Income can be defined as:

NI=Rent+Wage+Interest+Profit.

United Nations defines national income in the following three ways:

Net National Product (NNP)

Net National Product is the aggregate of net value added in all branches of economic activity during a specified period, including net income from abroad.

Sum of the Distributive Shares (SDS)

National Income is the aggregate of income accrued to the factors of production in the form of wages, profits, interest and wage, etc. in specific period.

Net National Expenditure (NNE)

National Income is the aggregate of expenditure on final consumption of goods and services, plus domestic and foreign investment.

According to Pigou, "National dividend is that part of the objective income of the community, including of courses income derived from abroad, which can be measured in money."

In the view of modern economists, National Income is the flow of output, income and expenditure. These three flows are always equal per units of time i.e.

National Output=National Income=National Expenditure

Production Possibility Curve (PPC)

Production Possibility Curve is a graphical representation of alternative production possibilities facing an economy. A PPC is a graphical illustration of all combination of goods and services that can be produced in a given economy at a given time, if all the available resources in the economy are fully and efficiently employed.

As the total productive resources of the economy are limited the economy has to choose between different goods. The productive resource can be employed for the production of various alternative goods. It has therefore, to be decided which goods are to be produce more and which ones less.

Assumptions:
  1. Economy is produces two goods.
  2. Full employment of resources is assumed.
  3. Time period is given and constant.
  4. Factors of productions are given and constant.
  5. Production techniques is given and constant.

PPC Schedule

Production possibilities schedule shows the different combination of different goods with the given technology and factors of production. Let us assume that the economy is producing only two commodities: consumer goods and capital goods.

From the above table, if all the available resources are allocated to produce consumer goods, an economy can produce is 15 units at combination A with the limited resources, increase the capital goods production consumer goods will be sacrificed. Due to the increased opportunity cost of consumer goods an economy increase capital goods production rather than consumer goods. Lastly, if all the available resources are allocated to produce capital goods, an economy can produce 5 units at combination F.

If we join all these point of production possibilities a graphical representation of production possibility scale comes out in a curve then it is known as production possibility frontier.

PPC is a curve showing all possible combination of two goods that a country can produce within a specified time period with all its resources fully or efficiently employed. It is always concave to the origin.

The PPC also called transformation curve because in moving from one point to another on it, one good is 'transformed' into another not physically but by transferring resources from one use to the another.

Points Inside and Outside PPC

With the given resources being fully employed and utilized can lie anywhere on the PPC but not inside or outside of it.

For example, the combined output of two goods purchased can neither at G not at H. This is so because at point G the economy could not be utilizing its resources fully and the output of two goods represented by H given the productive resources would lie beyond the capacity of the economy to produce.

Outside Shift in PPC

If the productive resources expand or increase, the PPC will shift outward to the right showing that more of both goods can be produce than before. Technological progress by improving productive efficiency allows the society to produce more of the both goods with a given and fix amount of resources.

On PPC n'f', the economy can produce more goods than on curve AF. The PPC shift outward with the growth of the economy because of:

  1. The increase in the amount of capital.
  2. The increase in the amount of natural and human resources.
  3. Progress in technology.

Nature of Economics

Nature of EconomicsOrigin of Economics

An ancient times oriental philosopher Kautilya regrades economics as a science of state government. The word 'Economics' is derived from the Greek word 'Oeikonomicus'. In Greek word 'Oeiko' means 'households' and 'Nomicus' means 'study'. The word oeikonomics refers to the science of household management. Occidental Greek philosopher Aristotle divided economy into two parts:

  • Economy Proper
  • Science of Supply
As time passed, economics was developed by several economists with different vision. Generally, the development of economics is divided into:

  • Period (1776-1890)
  • Neo-Classical Period (1890-1932)
  • Modern Period (1932-onwards)

Classical Period (1776-1890)

The famous economists of this period were Adam Smith, T.R. Malthus, J.B. Say, Devid Ricardo, etc. These economists are pillar of the classical economics. The study of economics in and around wealth and its significance.

Neo-Classical Period (1890-1932)

The famous economists of this period were Alfred Marshall, A.C. Pigou, Carl Marx, etc. The study of economics as the satisfaction or welfare derived from the consumption of material goods.

Modern Period (1932-onwards)

The famous economists of this period were Leonel Robbins, J.M. Keynes, etc. The study of economics for changing the focus of the study are 'wealth and aspect' and 'material welfare' to 'scarcity and choice' and 'human development'.

Allocation of Resources in Economics

Allocation of Resources in EconomicsScientific management of resources in the line of production, distribution, exchange and consumption is called simply allocation of resources. The allocation of resources discussed principle of right sharing of resources among competing sectors. Whatever, the type of economy be it capitalist, socialist of mixed decision has to be made regarding allocation of resources. In a capitalist economy decision about the allocation of resources are made through the free market price mechanism. A capitalist of free market economy uses impersonal forces of demand and supply to decide what quantities and thereby determining the allocation of resources. The producers in a free market economy motivated as they are by profit consideration take decisions regarding what goods are to be produce and in what quantity by taking into account the relative prices of various goods.

  • What to produce?
The first concered is rated with What to produce? How much to produce? Because resources are scarce production of all goods and services needed by a society are beyond its capacity. It is simply not possible for any economy no how develop it might be. So, it has to select a set among various alternatives production must meet the maximum social need. The first priority goes to the basic needs. However, production is guided by profit and profit knows social justice. An economy should follow social efficiency while recollectiong resources. The social norms and values should guide to maximize social satisfaction so allocation is best which satisfies the most. The problem of what to produce and how much to produce depends on the necessity of the citizens of the country.

  • How much to produce?
The second question is concerned with the method of production. In some cases, labor may play a major role. It is called labor intensive technology. In others, capital may play a major role. It is called capital intensive. Labor intensive methods creats more jobs favouring more employment. It helps in mitigating unemployment problem. Capital intensive production goes for large volume of production. It commends rapid growth rate. The right decision on the current state of the economy.

  • For whom to produce?
Production for masses or production for profit are two major choices that every economy has to decide. Basic needs of common people cannot be ignored. Of course, the priority goes to wage goods production. In the quality is determined by the level of living standard, which is the outcome of the development level of the economy. Therefore, as the development level of goods, higher production of superior goods proceeds towards fetching super profits. This issue is also related with maintaining social justice. Meeting the basic requirements of all segments of population is the main criteria of resources allocation.

  • Promotion of Efficiency in Economy
How to run an economy efficiently is the first concern of resource allocation. Economics efficiency is measured in additional welfare achieved without worsening any result. It means that new reallocation of resource must not only be able to maintain the existing level but also achieving new heights. Alternatively, reallocation may be profitable somewhere but incurring losses elsewhere. The main objective is to increase aggregate profitability of the economy.

  • Balance in Economy
Another purpose of resource allocation is the maintainance of balance among different sectors of an economy. The balance between rural and urban sectors, between home consumption and export promotion, between consumer goods and capital goods and regional balance are the healthy signs of an economy. Investment in these different sectors are very important. How much to invest in what sector? This is the major question, which is studied in this topic.


Choice in Economics

Choice
An economy has to decide how to use its scarce resources to attain the maximum possible satisfaction of the member of the society. This is what, we meet our choice. The optimization objective of the economic actors (producer, consumer and government) necessicities making knowledgeable choice in the use of available resources. Choice is in economic activities at both consumption and production level.

In economics, we suppose that a decision maker is rational/knowledgeable economic rationality of decision maker implies the following:

Scarcity in Economics

Scarcity
The common meaning of scarcity refers to the unavailability of goods and services in the market of a certain commodity. The conceptual meaning of scarcity in economics is however different. A commodity is scarce because it commands value. It commands price. We have to pay for any goods and services we want to consume. In addition, the resources that we have are also limited. A commodity is scarce, in economic sense not because it is rare or unavailable in market but because the means to have it are limited of resources to satisfy them are always limited. Human wants are unlimited, but between limited resources and unlimited wants and the problem there in. Economic problem arise because the goods we need are scarce. These scarce goods have many uses. Again, these uses are tempting and competing with each other. There is a problem of choice between alternative uses. Therefore, scarcity and choice guide the whole course of economic activities.

Scarcity is not just an individual problem. It is a problem of national economy as well. Its dimension charges when it is applied to national economy. In other words, scarcity of resources gives birth to national economic problems.

Scarcity brings broad human problems into our notice. There is poverty and human misery because of scarcity of resources. A poor man is poor because the resources accessible to him are scarce. A country is poor because there is scarcity of resources. Scarcity is deeper sense, tells the story of human misery and unhappiness around the earth. To understand and analyze the problem of poverty of a man and a country and to eradicate it, proper understanding of the problem of scarcity is of utmost importance.