The Concept of National Income Accounting

The concept of national income accounting is a term we use to describe the total of all the wealth produced, distributed and consumed in an economy, over a specific period of time usually one year.

Equation for National Income

$$NationalIncomeAccounting=Consumer{s}^{\prime }Expenditure+InvestmentExpenditure+GovernmentExpenditure+NetExports$$
$$Y=C+I+G+X-M$$
Consumer Expenditre $\to$ Households/Consumers Investment Expenditre $\to$ Firms Government Expenditre $\to$ Government Imports and Exports $\to$ Foreign Trade Sector

The Economics Agents

They Include:

• Households
• Firms
• Government
• Foreign Trade

The Circular Flow of Income

Assumptions of the Circular Flow of Income

1. Households own all the factors of prouction (land, labour, capital, entrepreneur) - Whilst firms undertake the production of goods and services.
2. All Incomes earned are spent.
3. There are NO withdrawals (savings, taxation, imports)
4. There are NO injections (investment, government expenditure, exports)
   

• As shown, the circular flow of income is the flow of factor incomes (such as net wages, interest and prpfts) from firms to houeholds in return for factor services (such as land, labour, capital and entrepreneurship)
• The factor income, then flows back to firms as payment for goods and services that the households purchase.

N.B. The diagram is a simple circular flow of income for a 2-sector economy consisting of firms and households ONLY.

Limitations of the Circular Flow of Income

• THe model of the simple circular flow if income is very unrealistic because even the simplest economy, all the incomes received by households are NOT spent.
• Some of the invomes are saved and invested or even taced by the government.

Factor Services and Factor Incomes