National Income1 and ED

8/9/2019 National Income1 and ED

1/22


2/22

DefinitionsSamuelson NI is the total money value of the flow of finalproducts of a community

NI committeeNI estimate measures the volume of commodity and services turned outduring a given period and counted without duplication

According economist J.M. Keynes National income is the money value of all the finalgoods and services produced in a country during a year


3/22

Features1. Total income in money terms2. Expressed annually

3. It includes only those goods and services which areexchanged for money .

4. NI should avoid double counting .5. It is net aggregate hence depreciation value should

be deducted .6. It includes net income from abroad .


4/22

NI Concepts1. GNP: It refers to the aggregate market value of all final

goods and services produced in a country during a year

GNP= C+I+G+(X-M)-(R-P) .C= Consumption goodsI= Capital goods or gross invest .G= Govt. services

X= exports , M= ImportsR= Receipts from abroadP= Payment made abroad .It reflects actual production of a country .


5/22

2. GDP: It refers to the money value of goods andservices produced within geographically boundaries of the country or

It is money value of all final goods & services

produced by residents & non-residents within acountry s borders in a specified time periodIncome earned by Indians abroad has to be e xcluded to

get GDP.

GNP=GDP +NFIGDP=GNP-NFIGDP= C+ I + G + NX Where NX is Exports-Imports


6/22

3. NNP: it refers to market value of the net output of final goods and services produced in a country during

a year.NNP=GNP-Depreciation


7/22

Need for the Study of National

Income1.To measure the size of the economy and level of country s economicperformance .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 interms of various sectors and the periodical variations in them .4. To make projection about the future development trend of theeconomy .5. To help government formulate suitable development plans andpolicies to increase growth rates .6. To fix various development targets for different sectors of theeconomy 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 .


8/22

CIRCULAR FLOW OF INCOME

TWO SECTOR MO D EL OF CIR CULA R F LOW

THR EE SECTOR MO D EL OF CIR CULA R F LOW

FO UR SECTOR MO D EL OF CIR CULA R F LOW


9/22

The Circular-Flow of Incom e

A first, simple model that gives structure tomacroeconomic interaction which shows how money flows among households and firms.


10/22

B usiness Firms Households

R E AL FLOW

Factor Services L,L,C,O

MONEY FLOW

INCOME FLOW R,W,I,P

E XPENDITUR E FLOW

Goods and services

CIRCULAR FLOW OF INCOME


11/22


12/22

Contd:

There are two types of flow between these groups A real flow . Households own factor services which

they hire out to firms . Firms use these factor servicesto manufacture goods and services outer flow A money flow . Households receive payments for theirservices (income) and use this money to buy theoutput of firms ie consumption) inn er flow


13/22

2 . The Th ree Se ctor Mod e lThis model includes the Government sector :y Households are required to pay t axes ,either direct

(eg income ta x) and indirect (eg VA T)y Government receives ta xes which are used for building

roads, paying government servants etc i .e Governmentspending denoted by G


14/22

3 . The Four S e ctor Mod e l Op e n Economy

Wit h Int e rnational Trad e


15/22

M et o s o Ca cu ating NationaIncome

There are three different methods of calculating nationalincome .

They are1.Production or Output Method2. Income Method3. Expenditure Method


16/22


17/22

The major challenge of this method is the problemof d ouble-coun t i ng.

The following should not be included :i) sale of second-hand machines ( B rokerage and

commission earned by the dealers of second-

hand goods are a part of production and, hence,included while calculating the total value-added .)

ii) Services of housewives

iii) Value of intermediate goods


18/22

y 2. I ncome Method In the income method, the measures of GDP are calculatedby adding all the income earned by various factors of production which are

engaged in the production of output .

The various incomes included to compute the gross national income are:y Wages and salariesy Income of self-employedy Profits and dividends of business corporationsy Interesty

Renty Surplus of government enterprisesy Net flow of income from abroad

This method has the advantage of indicating the distribution of nationalincome among different income groups .


19/22

Incom e approac h

St eps i nvolve d :1. Identify the productive enterprises and classify them into

various industrial sectors2. Classify factor payments into compensation of employees,rent and royalty, interest, profits (dividends, undistributedProfits, etc)3. Measure factor payments . Income paid out by each enterprise

can be estimated by pr i ce pa i d ou t t o each factor multiplied by the number of units of each factor employed .4. Add up incomes paid out by all industrial sectors


20/22

3. Expenditure Method In the e xpenditure method, the measures of GDP arecalculated by adding all the e xpenditures made in the economy . The essentialcomponents of e xpenditure are:

C = consumption e xpendituresI = domestic investment or stock buildingG = government e xpenditures X = exports of goods and servicesM = imports of goods and services

The sum of all these aggregate e xpenditure provides us the measureof national income .GDP = E = C + I + G + (X-M)


21/22

All 3 methods will yield the same resultMarket value of goods and services produced in given

period = money spent by buyers = income received by seller is equal to spending by buyers .


22/22

Difficulties in Measuring N ational IncomeNon- availability of reliable statisticsThe services of housewives is not included in national

income because their service is not sold in the marketIndividuals don't keep correct account of theirconsumptionIlliteracy and ignorance

National Income1 and ED

Documents

Transcript of National Income1 and ED