Circular flow of income in differentsectors Household sector: Households provide factor services to firms, government and foreign sector. In return it receives factor payments. Households also receive transfer payments from the government and the foreign sector, households spend their income on payment for goods and services purchased from firms, tax payments to government and payments for imports. Firms: Firms receive revenue from households, government and the foreign sector for sale of their goods and services. Firms also receive subsidies from the government. Firm makes payments for factor services to households, taxes to the government and imports to the foreign sector. Government: Government receives revenues from firms, households and the foreign countries for sale of goods and services, taxes, etc. Government makes factor payments to households and also spends money on transfer payments and subsidies. Ø Foreign sector: Foreign sector receives revenue from firms, households and government for export of goods and services. It makes payments for import of goods and services from firms and the government. It also makes payment for the factor services to the households. Measurement of National Income National Income can be measured by three methods: Output or Production Method Income Method Expenditure Method Output Method or Production Method This method approaches national income from the output side. This method is also called the value added method. Under this method, the economy is divided into different sectors such as agriculture, fishing, mining, construction, manufacturing ,trade and commerce, transport, communication and other services. Which is the combined value of the new and final output produced in all sectors of the economy. Income Method This method approaches national income from the distribution side. According to this methods, national income is obtained by summing up of the incomes of all individuals in the country. Thus national income is calculated by adding up the rent of land, wages and salaries of employees, interest on capital and profits of entrepreneurs and income of self employed people. Expenditure Method This method arrives at national income by adding up all the expenditure made on goods and services during a year. Thus the national income is found by adding up the following types of expenditure by households, private business enterprises and the government. GDP= C+I+G+(X-M) Expenditure on consumer goods and services by individuals and households denoted by (C) Expenditure by private business enterprises on capital goods and services on making addition to inventories denoted by (I) Government expenditure on goods and services i.e. government purchases denoted by (G) Expenditure made by foreigners on goods and services of the national economy denoted by (X –M). Difficulties of measurement of NI Following are some of the notable difficulties in measuring NI in India. Non monetized sector: In india, the bulk of goods ad services produced do not come to market for sale, these are either consumed by the producers themselves or exchanges through barter system. That is goods and services are exchanged for money. Lack of distinct differentiation: A large number of workers are engaged in many activities simultaneously. That is many small farmers of india are also engaged in cottage and small industries. Black Money: It is defined as the money generated activities which are kept secret and are not reported to the fiscal authorities that is taxes are not paid on this money. To evade income tax, income of different sources are under reported. So the estimates of NI become wrong. Non availability of data about certain incomes: Data about income of small producers and household enterprises is not available. Similarly there is no correct estimation of value added from agriculture, horticulture etc. It is made only on the basis of guesswork. Fluctuation in Price level: When prices are rising, the NI figures are rising even though the production might have go down. On the other hand, when prices are falling, the NI figures are falling, even though the production might have gone up. Inflation In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Inflation is a process of rising price. Money buys less when the price level rises. The value of money varies inversely with the price level. Prof. coulborn has defined inflation as “ too much money chasing too few goods”. An increase in the price to pay for goods. It is the general increase in prices and fall in the purchasing value of money. It means your money cannot buy as much as it would and make it difficult for the consumers to afford even the basic commodities in our life. E,g Food, housing, gas, automobiles etc. Inflation is monitored by the government usually yearly. Features of Inflation It is a process of the rising prices. It is initiated by some changes which make it impossible to meet the whole of the demand at the existing prices. It is propagated by the reaction of the buyers.