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Discuss national income and Gross domestic product effect on national income.




Discuss national income and Gross domestic product effect on national income.

Before we start to explain let’s take a look on closed and open economy In a closed economy, all output is sold domestically, and expenditure is divided into three components: consumption, investment, and government purchases. Y = C + I + G In this equation Y is the total output, C is the total consumption, I is the total investment and G is the total government expenditure. In an open economy, some output is sold domestically and some are exported abroad.
                                                                  Y = C + I + G + NX
In the above equation each word stands for is following:
Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX)
Consumption : The spending by households on goods and services, with the exception of purchases of new housing.
Investment: The spending on capital equipment, inventories, and structures, including new housing.
Government Purchases: The spending on goods and services by local, state, and federal governments.
Does not include transfer payments because they are not made in exchange for currently produced goods or services.
Net Exports (NX): Exports minus imports.
National income (NI) is the total income earned by the citizens of the national economy resulting from their ownership of resources used in the production of final goods and services during a given period of time, usually one year. Gross domestic product (GDP) is the total market value of all final goods and services produced within the country during a given period of time, usually a year. Although national income is generated by the production of gross domestic product, the value of production does not entirely result in earned income. In other words, national income can be derived from gross domestic product. So the elements discussed above can effect the national income of the country.
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