Macroeconomics

The Average Propensity to Consume is the ratio of total consumption expenditure (C) to total disposable income (Y). It represents the proportion of income that is spent on consumption.

Marginal Propensity to Consume (MPC):

The Marginal Propensity to Consume is the ratio of the change in consumption expenditure ( ) to the change in disposable income ( ). It represents the proportion of an additional unit of income that is consumed.

Relationship between APC and MPC:

The relationship between APC and MPC can be established with the help of a schedule and a diagram. Let’s assume a linear consumption function: , where 100 is autonomous consumption and 0.75 is the MPC.

Example with a Schedule:

Observations from the schedule:

1. APC falls as income increases. At low income levels, consumption can be higher than income (APC > 1), financed by savings. As income rises, the proportion of income consumed falls.
2. MPC is constant for a linear consumption function (0.75 in this case). This means that for every additional 0.75 is consumed.
3. APC is always greater than MPC. This is because APC includes autonomous consumption (consumption at zero income), which is averaged over the entire income. MPC, on the other hand, only relates to the change in income.

Explanation with a Diagram:

• The MPC is the slope of the consumption curve (C). For a straight-line consumption curve, the slope is constant.

• The APC at any point on the consumption curve is the slope of a line drawn from the origin to that point. In the diagram, the slope of the line OA gives the APC at point A. The slope of the line OB gives the APC at point B.

• As income increases from Y1 to Y2, the slope of the line from the origin to the consumption curve decreases (the line becomes flatter). This shows that APC falls as income rises.

• Visually, the consumption curve (C) is flatter than the lines drawn from the origin to points on the curve (like OA). This confirms that APC > MPC

National Income is the total money value of all final goods and services produced by the normal residents of a country in a financial year. It is the sum total of factor incomes (rent, wages, interest, and profit) earned by the normal residents of a country during an accounting year. National Income is represented by Net National Product at Factor Cost (NNPFC). It is a key indicator of a country’s economic performance and health.

Production Method (or Value Added Method):

The production method measures national income by calculating the total value added at each stage of production. It involves summing up the Gross Value Added (GVA) by all producing enterprises within the domestic territory of a country during a year. This sum gives the Gross Domestic Product at Market Price (GDPMP).

Steps for Estimation:

1. Identify and Classify Production Units: All producing enterprises are classified into three main sectors:
   • Primary Sector: Agriculture, forestry, fishing, mining.
   • Secondary Sector: Manufacturing, construction, electricity, gas, and water supply.
   • Tertiary Sector: Services like trade, transport, banking, and public administration.
2. Calculate Gross Value Added (GVA): For each sector, GVA is calculated by subtracting the value of intermediate consumption from the value of output.

Where, .

1. Calculate Gross Domestic Product at Market Price (GDPMP): The GVA of all three sectors is summed up to get GDPMP.

1. Calculate National Income (NNPFC): To arrive at National Income, we make the following adjustments to GDPMP:

Where, .

Precautions:

• Avoid Double Counting: The value of intermediate goods should not be included; only the value of final goods or the value added at each stage should be considered.
• Inclusion of Self-Consumption: Production of goods for self-consumption should be included in the estimation.
• Exclusion of Second-Hand Goods: The sale and purchase of second-hand goods are not included as they were part of the production in a previous year. However, any commission earned on such sales is included.
• Imputed Value: The imputed rent of owner-occupied houses should be included.

National income and economic welfare are closely related, but they are not synonymous.

- National Income (NI): It represents the total value of all goods and services produced within a country over a specific period. It includes income generated from production, including wages, profits, and rents.

- Economic Welfare: Economic welfare refers to the well-being of individuals in the economy, which is determined by factors such as income distribution, availability of goods and services, and quality of life. The relationship between national income and economic welfare can be understood as follows:

- Positive Relationship: As national income increases, the economy can afford to improve public services, infrastructure, and healthcare, which can improve overall welfare.

- Limitations: However, an increase in national income does not automatically lead to better welfare. The distribution of income is also important. For example, if the income is concentrated in the hands of a few, it may not improve the welfare of the majority.

Meaning: National Income is the money value of all final goods and services produced by the residents of a country during an accounting year; equivalently, it is the sum of factor incomes (wages, rent, interest, profit) accruing to residents—i.e., Net National Income at factor cost/National Income.
Difficulties (underdeveloped economies):

(i) Large non-monetized sector—subsistence farming, barter, and home production are hard to value.

(ii) Informality and multiple occupations—poor records and overlap of activities.

(iii) Data deficiencies—weak statistical machinery, infrequent surveys, and underreporting.

(iv) Quality/price issues—lack of reliable price indices, regional price dispersion.

(v) Valuation problems—imputing rents for owner-occupied housing and services of self-employed.

(vi) Double counting risk—distinguishing intermediate from final output.

(vii) Illegal/unreported activity and political/administrative constraints. These factors lead to understatement and delays in national income estimates.

Concept: Gross Value Added at market price (GVA ) for a sector is Value of Output Intermediate Consumption. Economy-wide GVA sums sectoral GVAs.
Sectoral calculations:
Primary: lakh.
Secondary: lakh.
Tertiary: lakh.
Total GVA : .
Notes: We assume all figures are at market price and produced during the accounting year; double counting is avoided by subtracting intermediate inputs. If one needed GDP at market price, and if there were only these three domestic sectors with no net product taxes/subsidies adjustments given, the total GVA would equal GDP . If data were at basic prices, we would add product taxes less subsidies to reach market prices.