methods of calculating national income 2.income method-ii...nation’s output. however, while...

2.Income method-II

Macro Economics: Part-10

12th class ECONOMICS

CHANAKYA GROUP OF ECONOMICS

Methods of calculating National income

Calculation of N.I by usingIncome method

Classification of FACTOR INCOME

2.Operating surplus

3. Mixed Income

1.Compensation of Employee

which includes i. Wages,

ii.salaries, both in cash and kind,

iii. employers’ contribution to social security schemes.

iv.Pension on retirement.

ii. Rent and also royalty, if any.

iii. Interest.iv. Profits:

Profits are divided into three sub-groups:(i) Dividends(ii) Undistributed profits(iii) Corporate income tax

v. Mixed income of the self-employed:

HOME-WORK

3.Expenditure Method-I

Macro Economics: Part-11

12th class ECONOMICS

CHANAKYA GROUP OF ECONOMICS

Methods of calculating National income

Calculation of N.I by usingExpenditure method

From the expenditure side national income is calculated by adding up the flows of expenditure needed to purchase the

nation’s output.

However, while estimating the value of national product by the expenditure method we must only record final expenditures.

We have to exclude all the expenditure on intermediate goods and services.

While measuring national income total final expenditure (TFE) is

divided into four broad categories: Consumption(C), investment(I), government expenditure(G) (spending), exports and imports(X-M).

National Income = C (household consumption) + G (government expenditure) + I (investment expense) + X-M (net exports).

Expenditure method measures final expenditure on ‘Gross Domestic Product at market price (GDP at MP) during a period of account.

Classification of FACTOR INCOME

2.Operating surplus

3. Mixed Income

1.Compensation of Employee

which includes i. Wages,

ii.salaries, both in cash and kind,

iii. employers’ contribution to social security schemes.

iv.Pension on retirement.

ii. Rent and also royalty, if any.

iii. Interest.iv. Profits:

Profits are divided into three sub-groups:(i) Dividends(ii) Undistributed profits(iii) Corporate income tax

v. Mixed income of the self-employed:

1. Private Final Consumption Expenditure (PFCE):It refers to expenditure incurred by households and private non-

profit institutions serving households on all types of consumer goods, i.e. durable , semi-durable, non-durable goods and

services.

i. PFCE = Household Final Consumption Expenditure + Private

Non-Profit Institutions Serving Households Final Consumption Expenditure

2. Government Final Consumption Expenditure (GFCE):It refers to the expenditure incurred by general government on

various administrative services like defense, law and order, education etc. Government produces goods and services with the

aim of social welfare without any intention of earning profits.

3. Gross Domestic Capital Formation (GDCF) or Gross

Investment:It refers to the addition to capital stock of the economy. It

represents the expenditure incurred on acquiring goods for investment by the production units located within the domestic territory

There are two components of GDCF:

(i) Gross Fixed Capital Formation:It refers to the expenditure incurred on purchase of fixed assets.

This expenditure is generally divided into three sub-categories:

(a) Gross Business Fixed Investment: It includes expenditure on purchase new plants and machinery.

(b) Gross Residential Construction Investment:It includes expenditure on purchase or construction of new

houses by the households.

(c) Gross Public Investment:It includes expenditure on construction of flyovers, roads, bridges etc. by the government.

(ii) Inventory Investment (Change in Stock):It refers to the physical change in the stock of raw material, semi-

finished goods and finished goods lying, with the producers.

It is calculated as the difference between the closing stock and the opening stock of the year.

It means,GDCF = Gross Fixed Capital Formation + Inventory Investment;

orGDCF = Gross Business Fixed Investment + Gross Residential

Construction Investment + Gross Public Investment + Inventory Investment.

It is important to understand that purchase of shares and debentures, either old or new, is not included in investment.

4. Net Exports (X – M):

It refers to the difference between exports and imports of a country during a period of one year.

1. Exports (X) refer to expenditure by foreigners on purchase of domestic products. The exported goods have been produced within the country’s domestic territory So; they are included in

output of an economy.

2. Imports (M) is the expenditure by residents on foreign products. Imports are deducted to obtain domestic product as

they are not produced within the domestic territory.

3. Instead of treating exports and imports separately, the difference between the two is taken and is termed as Net Exports.

The steps involved in calculating National Income by Expenditure Method are:

Step 1: Identify the Economic Units incurring Final

Expenditure:

All the economic units, which incur final expenditure within the domestic territory, are classified under 4 groups:

(i) Household sector; (ii) Government sector;

(iii) Producing sector; (iv) Rest of the world sector.

Steps of Expenditure Method:

Step 2: Classification of Final Expenditure:

1. Private Final Consumption Expenditure (PFCE)2. Government Final Consumption Expenditure (GFCE)

3.Gross Domestic Capital Formation (GDCF)4. Net .Exports (X-M).The sum total of four components of final expenditure gives

Gross Domestic Product at Market Price (GDPMP), i.e.

GDPMP = PFCE + GFCE + GDCF + (X-M)

Step 3: Calculate Domestic Income (NDPFC)

By subtracting the amount of depreciation and net indirect taxes from GDPMP, we get domestic income, i.e.

Step 4: Estimate net factor income from abroad (NFIA) to arrive at National Income:In the final step, NFIA is added to domestic income to arrive at

National Income.

NDPFC = GDPMP – Depreciation – Net Indirect Taxes.

National Income (NNPFC) = NDPFC+ NFIA

3.Expenditure Method-II

Macro Economics: Part-12

12th class ECONOMICS

CHANAKYA GROUP OF ECONOMICS

Methods of calculating National income

Calculation of N.I by usingExpenditure method

3.Expenditure Method-II

Macro Economics: Part-12

12th class ECONOMICS

CHANAKYA GROUP OF ECONOMICS

Methods of calculating National income

Precautions & Calculation of N.I by usingExpenditure method

Precautions of Expenditure Method:

1. Expenditure on Intermediate Goods will not be included in the national income as it is already included in the value of final

expenditure. If it is included again, it will lead to double counting of expenditures.

2. Transfer Payments are not included as such payments are not connected with any productive activity and there is no value

addition.

3. Purchase of second-hand goods will not be included as such expenditure has already been included when they were originally purchased. Such goods do not affect the current flow of goods and

services. However, any commission or brokerage on such goods is included as it is a payment made for productive service.

4. Purchase of financial assets (shares, debentures, bonds etc.) will not be included as such transactions do not contribute to current

flow of goods and services. These financial assets are mere paper claims and involve a change of title only.

However, any commission or brokerage on such financial assets is included as it is a productive service.

5. Expenditure on own account production (like production for

self-consumption, imputed value of owner occupied houses, will be included in the national income since these are productive services.

GDPMP = PFCE + GFCE + GDCF + (X-M)

National IncomeNumericals

Macro Economics: Part-13

12th class ECONOMICS

CHANAKYA GROUP OF ECONOMICS

Methods of calculating National income

Calculation of N.I by usingValue added, Income & Expenditure method

Calculate-1. GNPmp2. Depreciation.3. Factor income to abroad.

Calculate-Gross fixed capital formation.

Home-work

MONEY & SUPPLY OF MONEY

Macro Economics: Part-14

12th class ECONOMICS

CHANAKYA GROUP OF ECONOMICS

MEANING ,FORMS OF MONEY & BARTER SYSTEM OF EXCHANGE