Fundamental of Economics

Definition of National Income: Traditional Approach: According to Marshall , “National income is the labor and capital of a country, acting on its natural resources; produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds.” According to Fisher, “The national income consists solely of services as received by ultimate consumers, whether from their material or from their human environments.” According to Pigou, “National income is that part of the objective income of the community, including income from abroad which can be measured in money.” Modern Approach: According to Siman Kuznets, “National income is the net output of commodities and services flowing during the year from the country’s productive system in the hands of ultimate customers.” According to Lipsey, “National income refers to the total market value of all goods and services produced in the economy during some specified period of time...

The consumption function or propensity to consume refers to income-consumption relationship. It is a functional relationship between two aggregates, i.e., total consumption and gross national income. Symbolically, the relationship is represented as: C = f(Y) Where, C = Consumption Y = Income f = Functional Relationship. Thus the consumption function indicates a functional relationship between C and Y, where C is the dependent and Y is independent variable, i.e., C is determined by Y. In fact, consumption function or propensity to consume is a schedule of the various amounts of consumption expenditure corresponding to different levels of income. Assumption of Consumption Function 1. It is assumed that habit of the people regarding spending does not change or that the propensity to consume remains the same. Normally, the propensity to consume does remain the same; it is more or less stable. This means that we assume that only income changes, whereas the o...

Public Finance deals with the question how the government raises its resources to meet its ever-rising expenditure. According to Dalton , “Public finance is concerned with the income and expenditure of public authorities and with the adjustment of one to the other.” Major Function of Public Finance: · Allocative Function: Allocative function deals with the question what are the sources of government revenue, i.e. how much amount government will earn from each earning source. · Distributive Function: Distributive function deals with the question what are the categories of government expenditure, i.e. how much amount government will spend for each common benefit for the people of the country. · Stabilization Function: Stabilization function deals with the fiscal policies which ought to be adopted to achieve certain objectives such as price stability, economic growth, more equal distribution of income. Importance of Public Finance or Reas...