Understanding the Quantity Theory of Money and National Income
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Quantity Theory of Money
It was first presented by Irving Fisher in 1911 in his book, 'Purchasing Power of Money'. It was given in the form of an equation of exchange. This depends upon the medium of exchange. 'Other things remaining constant, the general price in an economy moves in direct proportion to the changes in the supply of money'. Quantity of money ⬆ ➡ Money supply ⬆ ➡ Dg&s ⬆ ➡ Sg&s ➡ P ⬆ ➡ Vom...
Explanation
In an economy, there are two types of markets: 1) Product market, 2) Money market.
Product Market Equilibrium
Equilibrium occurs when the demand for goods and services becomes equal to the supply of goods and services.
Money Market Equilibrium
Equilibrium occurs when money demand is equal to money supply. General equilibrium in an economy occurs when both these markets are at equilibrium.
Money Supply
1) Quantity of money in circulation M. 2) Velocity of circulation of money, which is defined as the number of times each unit of money changes hands in one year V. Money supply = M.V
Money Demand
Demand for money depends upon the average price level and volume of transactions, which is defined as the number of goods and services transacted by using money in one year. Money demand = P.T. T = volume of transactions. P = average price level. 'Md = Ms, PT = M.V'
National Income
Gross Domestic Product (GDP)
The most important concept of national income is Gross Domestic Product. Gross domestic product is the money value of all final goods and services produced within the domestic territory of a country during a year.
Gross National Product (GNP)
Gross National Product is the total market value of all final goods and services produced annually in a country plus net factor income from abroad. Thus, GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in a country including net factor income from abroad. The GNP can be expressed as the following equation:
Net National Product (NNP)
Net National Product is the market value of all final goods and services after allowing for depreciation. It is also called National Income at market price. When charges for depreciation are deducted from the gross national product, we get it. Thus, NNP = GNP - Depreciation
National Income (NI)
National Income is also known as National Income at factor cost. National income at factor cost means the sum of all incomes earned by resource suppliers for their contribution of land, labor, capital, and organizational ability which go into the year's net production. Hence, the sum of the income received by factors of production in the form of rent, wages, interest, and profit is called National Income. Symbolically, NI = NNP + Subsidies - Interest Taxes
Personal Income (PI)
Personal Income is the total money income received by individuals and households of a country from all possible sources before direct taxes. Therefore, personal income can be expressed as follows: PI = NI - Corporate Income Taxes - Undistributed Corporate Profits - Social Security Contribution + Transfer Payments
Disposable Income (DI)
The income left after the payment of direct taxes from personal income is called Disposable Income. Disposable income means actual income which can be spent on consumption by individuals and families. Thus, it can be expressed as: DI = PI - Direct Taxes DI = Consumption Expenditure + Savings
Per Capita Income (PCI)
Per Capita Income of a country is derived by dividing the national income of the country by the total population of a country. Thus, PCI = Total National Income / Total National Population...