National income is the final outcome of total economic activities of a nation. Economic activities generate two kinds of flow in a modern economy namely, product-flow and money-flow. Product-flow refers to flow of goods and services from producers to final consumers. Money flow refers to flow of money in exchange of goods and services. In this exchange of goods and services, money income is generated in the form of wages, rent, interest and profits, which is known as factor earning. Based on these two kinds of flows, national income is defined in terms of: Product flow Money flow National Income in Terms of Product Flow National income is the sum of money value of goods and services generated from total economic activities of a nation. Economic activities result into production of goods and services and make net addition to the national stock of capital. These together constitute the national income Continue reading
Economics Principles
The Baumol Model of Innovation
The main idea behind Baumols model is that Innovation is the motivating force behind the growth miracle of capitalism. In the neoclassical theory of the firm, firms compete based on price, but William Baumol argues that in a Capitalist economy innovation rather than price is the main competitive dimension and less innovative firms will find their markets shrinking as they lose business to their more innovative competitors. Thus, innovation is essential to the survival of firms in a capitalist economy. Baumol argues that innovation has replaced price as the most important factor that lies behind economic growth. He suggests that even though it has been recognized that important innovations stem from small firms, individuals or entrepreneurs, the bulk of innovative activity however is carried out by large oligopolistic firms. Baumol’s argument supports Schumpeter’s distinction between entrepreneurs led and routinized innovation. Schumpeter held that technological competition was the form of competition Continue reading
Circular Flow of Income in a Three-Sector Economy and National Income Calculation
There are three main sectors of economy consists of household sectors, business sectors and government sectors. Household sector provides the factors of the production such as land, labor and capital and enterprise that the producers require to produce goods and services. They also receive payments as in rent, wages, interest and profits from the business sector. It is also stated that in general, household sector consists of the greatest number of consumers among all sectors and satisfying the wants will cause consume of their climate aim. Business sector act as a part as in receiving economy resources from household sector and in exchange for consumer expenditure, they also provide household sectors goods and services. Business sector is also given money to buy scarce economic resources from the resource market. While they’re in the product market, business sector sells their products and services, which is also the way they receives their income. To complete Continue reading
The Principle of Opportunity Cost
Opportunity or economic cost is an initial part of the business process and plays a crucial role for stakeholders and investors. The opportunity cost calculation represents the distinction between the returns of investments of the declined and accepted option. When the management decides which direction will be the most successful for the company and bring a lot of profit, they have to consider all the possible outcomes. Choosing one opportunity over another always comes with some benefits and losses. The central task is to see all the possible opportunities and choose those that will bring more profit. The opportunity cost of a decision means the sacrifice of alternatives required by that decision. The concept of opportunity cost can be best understood with the help of a few illustrations, which are as follows: The opportunity cost of the funds employed in one’s own business is equal to the interest that could Continue reading
Keynesian and Classical Economists Views about Disequilibrium
Economists usually define general disequilibrium as the state in which contrasting market forces of supply and demand fail to reach a balance and there exist an intrinsic inclination for change. The main indicator of market disequilibrium is the continuation of shortages either in the demand or supply side of the economy. There are two main models that hold divergent views concerning disequilibrium namely the Keynesian and Classical Economists models. Generally, the major causes for disequilibrium in the markets if the deficiencies created either in the aggregate demand or aggregate supply side of the economy. This means that in such circumstances the market does not clear. Main causes of disequilibrium are understood in the light of the economic model s followed by scholars. For instance, the Keynesian theory’s causes differ from that of classical economists. For instance, following Keynesian’s view, disequilibrium arises when there are disparities between leakages and injections where Continue reading
Welfare Economics
“The greatest meliorator of the world is selfish, huckstering trade.” (R.W. Emerson, Work and Days) Welfare Economics is a normative branch of economics that is concerned with the way economic activity ought to be arranged so as to maximize economic welfare. The hallmark of welfare economics is that policies are assessed exclusively in terms of their effects on the well-being of individuals. Accordingly, whatever is relevant to individuals well-being is relevant under welfare economics, and whatever is unrelated to individuals well-being is excluded from consideration under welfare economics. Economists often use the term utility to refer to the well-being of an individual, and, when there is uncertainty about outcomes, economists use an ex ante measurement of well-being, so-called expected utility. Welfare economics employs value judgement s about what ought to be produced, how production should be organized, the way income and wealth ought to be distributed, both now and Continue reading