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Transcript of National income
National Income
Developing Nations
Poor / Least
Developed Nations
Rich / Developed
nations
World
How do we measure the performance of an economy?
A country’s economic performance is measured by indicators of National Income ( GDP or GNP).
Performance of an economy is the level of production (of goods and services) or total economic activity.
It estimate’s the total value of production in an economy.
Definition of National Income
“National income is a measure of the total market value of the
goods and services (output) produced by an economy over a
period of time (normally a year)”.
1) It is a Monetary Measure
2) Goods and Services to be counted only once
( Final goods and not intermediate goods)
Need for the Study of National Income
A national income measure serves various purposes regardingeconomy, production, trade, consumption, policy formulation, etc.
1. To measure the size of the economy and level of country’s economic performance.
2. To trace the trend or speed of the economic growth in relation to previous year(s) as well as to other countries.
3. To know the structure and composition of the national income in terms of various sectors and the periodical variations in them.
4. To make projection about the future development trend of the economy.
5. To help government formulate suitable development plans and policies to increase growth rates.
6. To fix various development targets for different sectors of the economy on the basis of the earlier performance.
7. To help business firms in forecasting future demand for their products.
8. To make international comparison of people’s living standards.
However it has its own “Limitations”……….
3 Interpretation of National Income
National Income = National Product = National Expenditure
The sum of values of all goods and services produced
( Production).
The sum of all incomes, in cash and kind, accruing to factors of
productions in a year (Distribution).
The sum of consumers, investment and government expenditure (Expenditure).
Circular Flow of Income
Modern Economy is a monetary economy
Money act a medium of Exchange
A circular flow of money or income exist
Each money flow is in opposite direction to real flow
Flow of money income will not always remain constant
Economy
Household Sector
Firms or Business Sector
Government Sector
Foreign Sector
Two Sector Model of Income Distribution
Business Firms Households
Factor PaymentsRent, Wages, Interest, profits
Economic Resources Land, Labour, Capital, Enterprise
Consumption Expenditure
Goods and Services
Assumptions
No savings from household or business firms Government has no role in the national economy It’s a closed economy
Three Sector Model of Income Distribution
What if household save?
The expenditure on goods and services decline Savings reduces the flow of money expenditure to the business firms Firms hire fewer workers / reduce factor payments
Causes a fall in Economy's Total Income.
Hence savings a “leakage” from the money expenditure flow
Savings = Investments
Investment is injection of money in circular flow of income
Three Sector Model of Income Distribution
Business Firms Households
Factor Payments
Consumption Expenditure
Financial MarketSav
ings
Borrowing
for investments
What if Investment ≠ Savings?
Investment < Savings
Stocks of goods will Increase Demand reduces Production falls Investment in capital goods will fall Income , output and employment Falls Flow of money contracts
Which leads to Rate of interest falls Leads to increase in investment
HenceSavings = Investments
What if Investment ≠ Savings?
Investment > Savings
Stocks of goods will falls Demand rises Production rises Investment in capital goods will rise Income , output and employment increases Flow of money expand
Which leads to Rate of interest rise Leads to increase in savings
HenceSavings = Investments
Why are poor countries poor?
Economic Wealth : Man-made resources (road, factories, machines, communication
system) Human Resources ( Hard and education) Technological Resources ( High tech machinery)
Poor countries should grow rich by investing money in physical resources and developing human and technological resources.
Poor countries should grow faster as new investments have the biggest rewards.
Rich countries don’t gain much from further investments:
“ law of diminishing returns”
Why are poor countries poor?
So what should they do? They should improve there education, technology and infrastructure. Since the Returns for investors are high, there should be no
shortage of Investment. Countries should take loan from banks for reconstruction and
development. Countries can take foreign aids from rich countries.
This didn’t happen? WHY? Except for countries like Taiwan, South Korea, China, India,
Singapore
Money Flows with Government Sector
Government absorbs a good part of the incomes earned by Households.
Government purchases goods and services from firms Government spends on capital goods, infrastructure, defence,
education and health etc. Household and firms pay taxes to Government. Government also finance their expenditure by borrowing from the
financial market Hence the Government
Intervenes and take preventive and corrective action to stabilise an Economy
Three Sector Model of Income Distribution
Business Firms Households
Financial Market
Government
Borrowing
Factor Payments
Consumption Expenditure
Total Expenditure (E) = C + I + GConsumption Expenditure (C)Investment Expenditure (I)Government Expenditure (G)
Total Income (Y) = C + S + TConsumption ( C)Savings (S)Taxes ( T )
E = YC + I + G = C + S + T
I + G = S + TG – T= S – I
G> T (Budget deficit) Government borrows from the financial market
Four Sector Model of Income Distribution
Business Firms Households
Financial Market
Government
Borrowing
Factor Payments
Consumption Expenditure
Foreign Sector
Four Sector Model of Income Distribution
Balance of Trade Export (X) = Import (M)
National Income = C + I+ G+ Xn ( X-M)
C + I + G + Xn = C + S+ T
India’ GDP growth rate
05-06 : 9.2%06-07 : 9.4%
07-08 : 9%
Economic Development Phase 1 : Pre-1991
Policy tended towards protectionism, with a strong emphasis on import substitution, industrialisation, state intervention in labour and financial markets, a large public sector, business regulation, and central planning.
Faced crises like Wars – China (61) & Pakistan (65, 71) Oil crisis (73, 79) Severe Draughts (65-67)
Economic Development Phase 2 : Post-1991
Late 80’s Policy changes
Eased restrictions on capacity expansion for incumbents, Removed price controls and Reduced corporate taxes.
This increased the rate of growth, But led to high fiscal deficits and a worsening current account.
Balance-of-payment crisis The collapse of the Soviet Union, which was India's major
trading partner. Gulf War, which caused a spike in oil prices.
Concepts of National Income
The basic concepts…
GNP vs GDP Market Price Vs Factor costs Gross Vs Net Nominal Vs Real
PI ( Personnel Income) Disposable Income Per capita
Gross Domestic Product (GDP)
GDP = C + I + G + (X-M)
“sum total of values of goods & services produced in the country, in a given year”
GDP vs GNP
GDP vs GNP
Gross National Product (GNP)
GNP = GDP + net factor income from abroad
“sum total of values of goods & services produced by the nationals of a country, in a given year”
Net factor income from abroad:
Is the difference between
income received from abroad by the normal residents of India for rendering services in other countries and
the income paid to the foreign residents for the services rendered by them in India.
GDP vs GNP
Gross National Product (GNP)
GNPMP = GDPMP + net factor income from abroad
GNP = C + I +G + (X-M) + (R-P)
R = Income receipts from abroad
P = Income paid abroad
Requirements for Calculating GNP
It measures the market value of annual output It’s a Monetary measure GNP accounts for goods that are traded through official market
i.e free of cost are not included All good and services must be counted once Income earned through illegal activities are not included
GDP Vs GNP
GDP Used when the purpose is to measure the product generated in a
country. i.e. whatever is produced in India, will go to constitute GDP, no
matter even if foreigners have contributed towards it
GNP Used when the purpose is to measure the product that accrues
to the citizens of a country. i.e. whatever is produced by Indian nationals whether inside or
outside the country will form GNP of India
Market Prices Vs Factor Costs
The GNP / GDP can be estimated at Market Prices Factor Cost
The Market Prices is a resultant of Indirect Taxes; and Subsidies
Factor Cost = Market Price – Indirect Taxes + Subsidies
Hence Factor Cost estimates are more ‘real’.
Gross Vs Net
In the process of creating national product – there is erosion of total productive assets
Net estimates account for this erosion (called Depreciation)
Net = Gross - Depreciation
Nominal Vs Real
The price trend does not remain constant, it can rise or fall.
Hence the estimates in terms of money value will increase as price of commodities have risen even if their physical output hasn’t.
Economic Growth implies increase in real or physical output than the rise in money value of output.
Adjustment of the National Income figures for the change in prices needs to be done. – Deflating the NI
‘Real’ estimates account for this increase in prices
Nominal Vs Real
Increase in Price : Is denoted by Price Index
Price Index
Selection of Base year : (Current base year 1999-2000)
Price Index for Base year is taken to be 100
Price Index for the current year Current Year Prices / Base Year Prices X 100
So if Price index is 145 – then prices as compared to Base year have increased by 45%
Nominal Vs Real
Nominal Estimates Real estimates = ---------------------------- X 100
Price Index
Hence Nominal = Estimates at current prices Real = Estimates at fixed prices
The Estimates
Estimate Definition
GDP C + I + G + (X-M)
GNP GDP + NFIA
GDPFC GDPMP – Indirect Taxes + Subsidies
NDP GDP - Depreciation
Real GDP Nominal GDP/ Price Index * 100
GNI GNP
NNP GNP - Depreciation
NI NNPFC
National income (NI) or National Income at
Factor Cost (NNPFC)
It refers to the sum of all incomes earned by factor owners for their contribution of factor services namely land, labour, capital and enterprises in the form of rent, wages, interest and profit.
NI = NNPFC = NNP MP - Indirect Taxes + Subsidies
Personal Income (PI) It is the sum of all incomes received by all individual or households during a given year.
PI = National Income + Transfer payments – (Social security +
Corporate Income tax + Undistributed Profits)
Transfer Payments = Incomes which are not earned but received
( Old- age pensions, unemployment compensation, relief payments)
Disposable Income (DI)
DI= Personal Income – Personal Taxes
Or
Disposable income can either be consumed or saved
DI= Consumption ( C) + Savings (S)
DI includes Transfer payments
It is the total income earned and unearned of individuals minus direct taxes.
Per Capita Income (PCI)
Per capita income (or) output per person is an indicator to show
the living standards of people in a country.
If real PCI increases, it is considered to be an improvement in the overall living standard of people.
National Income
PCI = ---------------------------
Population
The EstimatesEstimate Definition
GDP C + I + G + (X-M)
GNP GDP + FIFA
GDPFC GDPMP – Indirect Taxes + Subsidies
NDP GDP - Depreciation
Real GDP Nominal GDP/ Price Index * 100
GNI GNP
NNP GNP - Depreciation
NI NNPFC
PI NI + Transfer Payments – (Social Security + Corporate Income Tax + Undistributed profits)
DI C + S or PI – Personal Taxes
PCI NI/ Population
Examples…
GNP 500 ( Rs Cr)
Capital Consumption Allowance - 50
Net National Product (NNP) 450
Indirect Taxes - 60
Subsidies 10
National Income ( NI ) 400
Corporate Profits - 70
Dividends 15
Government Transfer payments 25
Personal Income 370
Personal Indirect Taxes - 70
Disposable Personal Income (DPI) 300
Personal Consumption expenditure - 275
Personal Savings 25
Exercise
Q1. Find the Personal Disposable Income (PDI)
Rs. Trillion
National Income = 20
Undistributed Profits = 1.00
Corporate Taxes = 2.00
Personal Taxes = 1.50
Ans.
Exercise
Q2. Find the NIFA
Rs. crores
GDPFC = 7,00,000
NNPFC = 8,00,000
Depreciation = 7,000
Subsidies = 1,000
Indirect Taxes = 1,00,000
Ans.
Exercise
Q3. Find the GNPMP and NNPMP
Rs. crores
GDPFC = 10,000
NFIA = 500
Indirect Taxes = 1,000
Subsidies = 500
Depreciation = 1,000
Ans.
Exercise
Q4. Find the GNPMP , NNPFC and PDI
Rs. Lakh crore
GNPFC = 15.00
Indirect Taxes = 2.00
Subsidies = 1.00
Depreciation = 1.2
Undistributed Profits = 0.5
Corporate Taxes = 3.00
Personal Taxes = 1.50
Ans.
Exercise
Q5. Find the GNPMP , GDPMP, NNIMP, NDPMP and PDI
Rs. crore
GDPFC = 30,000
Indirect Taxes = 4,000
Subsidies = 2,000
Depreciation = 2,000
Undistributed Profits = 1,250
Corporate Taxes = 6,000
Personal Taxes = 4,000
Factor Income received from abroad = 7,500
Factor income paid abroad = 9,000
Ans.
Q6. A) Find the real national income or national income at constant price. B) Find the real annual growth in NI for various years
Year NI AT
Current Prices (Rs 000’ crores)
Wholesale Price Index Number
(Base 1993-94=100)
1994-95 854.1 112.6
1995-96 941.8 121.6
1996-97 1093.9 127.2
1997-98 1376.8 132.8
1998-99 1583.1 140.7
1999-00 1740.2 145.3
2000-01 1878.4 155.7
2001-02 2060.6 161.3
Methods of EstimatingNational Income
A quick recap…
NI = NNPFC
NNPFC = NDPFC + NFIFA
NDPFC = GDPMP – D + S – T
We will now estimate NDPFC by the 3 methods
3 Interpretation of NI
National Income = National Product = National Expenditure
Y= O=E
The sum of values of all goods and services produced ( Production).
The sum of all incomes, in cash and kind, accruing to factors of productions in a year (Distribution).
The sum of consumers, investment and government expenditure (Expenditure).
Sectors used for Estimates
3 Methods of estimating NI
1. Value Added Method
2. Income Method
3. Expenditure Method
1. Value Added Method
Called as Output or Production method
Value added is the difference between a firm’s sales and its purchase of raw materials and services from other firms.
The economy is divided into different industrial sectors:
Agriculture, fishing, mining, manufacturing, construction,trade, transport, communication ..............
Contribution of each enterprise to the generation of flow is measured
1. Value Added Method
ObjectiveEstimate
Total Output/ Production
Method of Estimation
Value Add
Value AddOutput
PriceInput Cost
Source of Data
Enterprises
The Process
Classification into industrial sectors
Calculate Net Output for each enterprise
Subtract – Input cost
Subtract – Depreciation & Indirect Tax
= Value Add of each enterprise
Collate for all enterprises in a sector
Collate for all sectors
Total units produced X MRP
O - I = P (production)
P – D + S – T
Sector contribution
NDPFC
Precautions
To be Included in NI
1. Rent of self- occupied
houses
2. Value of production for self
consumption
Not to be included in NI
1. Sale and purchase of second hand goods
2. Value of intermediate goods
3. Value of services of Housewives
2. Income Method
It approaches NI from distribution side
To produce goods and services we require the factors of production
The owners of these factors participate in the production for which they receive INCOME – Wages, rent, interest and profit.
It identifies the productive enterprises and classify them into various sectors
It’s the sum of incomes of all individuals of a country
2. Income Method
ObjectiveEstimate
Total Income
Income
Wages, Rents,
Interests,Profits.
Difficulties in differentiating
earnings
land vs capitallabour vs entrepreneurial
function
Source of Data
Enterprises
Income Classification
LabourCapital Mixed
The Process
Classification into industrial sectors
Classify factor payments
Measure Labour Payments
Measure Capital Payouts
Measure Mixed Income(Salaries cum Profits)
Collate for all enterprises in a sector
Collate for all sectors
Labour, Capital, Fixed
Wages & Salaries
Dividends, Undistributed ProfitsInterest, Royalties, Rent
Sector contribution
NDPFC
Self-employed
Why have we not accounted for
1. Depreciation & Indirect Taxes2. Rent/ Interest income received by Individuals
3. Exports/ Imports
Precautions
To be Included in NI
1.Imputed rent of self- occupied
houses
2. Value of production for self
consumption
Not to be included in NI
1. Transfer Payments
2. Illegal Money
3. Windfall gains- prizes, lotteries
4. Corporate profit Tax
5. Sale of second- hand goods
3. Expenditure Method
ObjectiveEstimate
Total Expenditure
Nature of Expenditure
Individuals or Households
Government Enterprises
Expenditure by foreigners on Exports – Expenditure
on buying Imports
The Process
Final private consumption expenditure
Government’s final consumption expenditure
Gross domestic capital formation(Fixed capital + Addition to stocks)
Net Exports
Summation = Total Expenditure
Subtract : Depreciation
C (individuals/ households)
G
I (enterprises)
C + G + I + (X-M) = GDPMP
GDPMP – D = NDPMP
X - M
Subtract : Indirect taxes NDPMP – (S-T) = NDPFC
Precautions
Not to be included in NI
1. Sale and purchase of second hand goods
2. Expenditure on intermediate goods
3. Expenditure on Transfer Payments
4. Purchase of shares and Bonds as they do not add to NI.
In Sum
Value Added NI = (P-D) + (S-T) + (X-M) + (R-P)
Income NI = (w + r + i + n) + (X-M) + (R-P)
Expenditure NI = (C + I + G) + (X-M) + (R-P)
Choice of Method
Choice of Method depends upon
i) The purpose of national income analysis
ii) Availability of necessary data
The task of estimating NI in India is with CSO ( Central statistical organization)
CSO uses output and Income method Output Method – Agriculture and Manufacturing Income Method - Services
Difficulties in calculating NI 1. Non- Monetized Transactions
2. Black Money
3. Double Counting
4. Transfer Incomes
5. Growing Service Sector
6. Household Services
7. Social Services
8. Environmental Cost
9. Government Incomes
10. Capital Gains
Difficulties in India
1. Reliable data is not available
2. Large regional diversity
3. Illiteracy
4. Lack of differentiation of economic functions
5. Presence of unorganized sectors
6. Presence of large non- monetized transactions