national income (2013-14).ppt

8/12/2019 National Income (2013-14).Ppt

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National Income

Aggregates


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Basic terms Economic Activities

PRODUCTION: A general definition ofproduction is the provision of goods and

services. G&S are also called

commodities. Production consists of

following:

All goods and services which are sold in the

market with a view to earn profit

Goods and services not sold in the market,

but which are supplied free or at a nominal

price.


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Basic terms Economic Activities..

Produced goods which fail to reach themarket and hence are not sold. These goods

are produced for own use.

Own-account production of fixed assets by

government, business enterprises andhouseholds

Imputed rent of owner-occupied houses

Thus production is defined as anyactivity, which produces commodities or

increases the value of the commodities

already produced.


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However, domestic services renderedwithin the households by housewives (and

other family members) are excluded from

production.

All leisure-time activities (growing fruits,

flowers and vegetables in kitchen

gardens, painting the house, etc are also

excluded from the production.


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Production of goods is counted at thepoint of production;

Production of services is counted when

they are rendered; Trading services are counted at the point

of sale.

Production of government services iscounted when the costs are incurred by

the government to produce those

services.


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CONSUMPTION: Using up of goods andservices to satisfy human wants is defined

as consumption.

There is no time gap between theproduction and consumption of services,

both take place simultaneously.

Consumption is counted at the pointwhen the commodities (goods and

services) are purchased for consumption.


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CAPITAL FORMATION: The surplusof production over consumption in an

accounting year is defined as capital

formation. Capital formation consists

broadly of the following:

Construction of new assets like buildings,

roads, bridges and transport equipments

Production of machinery and equipment

Increase in stocks of raw materials, semi-

finished goods and finished goods during an

accounting year


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Basic terms Type of goods

CONSUMER GOODS: Goods andservices purchased by households and

government for final consumption

INTERMEDIATE GOODS: Goods andservices used up for producing goods and

services

CAPITAL GOODS: All goods producedfor use in future productive processes.

Durable goods, stocks of raw materials,

semi-finished & finished goods


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Basic terms Type of goods..

A car purchased by a consumer household is aconsumer good; a car purchased by the

government for military purpose is an

intermediate good; and a car purchased by a

taxi driver is a capital good A refrigerator purchased by consumer

household is a consumer good; if purchased by

the government for military purpose it is an

intermediate good; and if purchased by a

shopkeeper for selling cold drinks is a capital

goods


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Paper, pens, pencils, wheat, oils, soaps, etc,purchased by consumer households are

consumer goods; the same commodities used by

producing enterprises (including the

government) are intermediate goods Aero planes, helicopters and submarines used

by the government for military purpose are a

part of intermediate consumption and the

goods are intermediate goods. The same goods

purchased by air and sea transport companies

are capital goods


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The services of doctors, lawyers, teachers, etc,used by the consumer households are consumer

services; the same services used by the

enterprises for the production of goods and

services are a part of intermediateconsumption. The same is the case with regard

to government.


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Introduction

Economic growth: Increasing production of goods & services

National Income: A measure of size of the economy

To find out growth of an economy, we have to look at

national income for number of years

Economy: Quantity/volume of goods & services produced

in an accounting year


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Introduction

If national income (money value of final goods & services)

grows over a period, it means, economy is growing. ?

May or may not.

Price comes into picture.

Thus, Economic growth will occur only when national incomerises in real terms (constant prices)

Increase in real national income should improve

levels of living of people

Increase in real national income necessarily improves

levels of living of people?

May or may not.


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Introduction

Population enters the picture.

If population increases faster than the rise

in real national income, what will happen?

Levels of living of people will not improve

Thus, growth in per capita real national income (real PCI)

is more realistic indicator of economic growth

with improved well being of people

Are you sure, this is the best indicator of economic growth

& improved well being of people of a country


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Introduction

May be may not be.

Distribution of incremental income enters the picture

Thus, growth in real PCI along with improving

equity is better indicator

That is why; objective of economic policies in India is

Growth with equity


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National Product/Income Aggregates

Gross Domestic Product at market price (GDP_MP)=

Market value of all final goods & services producedin a country during an accounting year

Gross Domestic Product at factor cost (GDP_FC)=

GDP_MP

Net Indirect taxes

Gross National Product at market price (GNP_MP)=

GDP_MP + Net Factor Income From Abroad

Gross National Product at factor cost (GNP_FC)=

GDP_FC + Net Factor Income From Abroad

Or

GDP_MP

Net Indirect Taxes + Net Factor Income From Abroad


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National Product/Income Aggregates

Net Domestic Product at market price (NDP_MP)=GDP_MPDepreciation

Net Domestic Product at factor cost (NDP_FC)=

NDP_MPNet Indirect taxes

GDP_FCDepreciation

Net National Product at market price (NNP_MP)=

GNP_MPDepreciation

GDP_MP + Net factor Income from abroad

Depreciation

Net National Product at factor cost (NNP_FC)=

NNP_MPNet Indirect Taxes

GNP_FCDepreciation


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GNP_MP

NDP_MP

GNP_FCNNP_MP GDP_MP

NNP_FC

NDP_FC

GDP_FC

-depre

.-NIT

-

NF

IFA

-

NFIFA

-NIT-

depre.

-

NFIFA-NIT

-dep

re.

-

NFIFA

-dep

re.

-NIT


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Some Important Points

Nominal value (at current prices) vs. real value (at

constant prices)

Output at market price vs. output at factor cost

Domestic output vs. National output

Gross output vs. Net output


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Measurement of National Income

Accordingly, there are 3 methods of measuringNational Output / National Income

1. Value added method

2. Income method

3. Expenditure method

Production (output) gives rise to income; income gives rise toDemand for goods & services; and demand in turn gives

Rise to expenditure; again, expenditure leads to further

Production.

The circular flow of output, income and expenditure

Represents 3 related phases, namely, production,

Distribution and disposition


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Value added method

Identifying the producing enterprises &

classifying them into industrial sectors

Indian Economy divided into 3 sectors [primary,

secondary and tertiary/service sectors]

Estimating value added Estimate Value of output

[Volume of physical output valued at market price]

Estimate Value of intermediate consumption

[Intermediate consumption valued at actual price paid by

the enterprises]


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Product method

Deduct value of intermediate consumption from value

of output

We get value added by individual enterprises/sectors

Sum the value added by all enterprises/sectors

We get gross value added or GDP_MP

Deduct consumption of fixed capital (depreciation)

from GDP_MP

We get net value added or NDP_MP

Deduct Net Indirect Taxes (indirect taxes

minus subsidies)

We get NDP_FC

Add net factor income from abroad

We get NNP_FC (National Income)


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Value added

Take care to include following:Own-account production of fixed assets by

government, enterprises, households

Production for self-consumption

Imputed rent of owner-occupied houses

Do not include following:

Sale and purchase of second-hand goods

Commission & Brokerage included


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Income method

Identifying the producing enterpriseswhich employ factor inputs

Classifying factor payments

Estimating factor paymentsCompensation of employees

Rent

InterestProfits

Mixed income of the self-employed


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Income method.

Summing above, we get Domestic FactorIncome (DFI)

Add, net factor income from abroad

(NFIFA)

We get, National Income


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Income method.

Precautions

Exclude transfer payments

Include value of production for self-consumption,and imputed rent of owner-occupied houses

Exclude illegal incomes

Exclude windfall gains like lotteries

Include profits before corporation tax

Include compensation of employees includingincome tax

Exclude death duties, gift tax, wealth tax, tax onwindfall gains

Exclude income from sale of second-hand goods

Exclude proceeds from sale of bonds and shares


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Expenditure method

This method measures the disposal ofgross domestic product.

Private final consumption expenditure

Government final consumption expenditure

Gross fixed capital formation

Change in stocks

Net exports of goods & services (export import)

We arrive at GDP at Market Price


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Expenditure method.

PrecautionsExclude expenditure on second-hand goods

Exclude expenditure on purchase of bonds

and shares

Exclude government expenditure on transfer

payments such as old age pension, etc

Exclude expenditure on intermediate goods

and services


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Reconciling the 3 methods

Production method Income method Expenditure method

Private final

consumption

expenditure

Gross Value added in

primary sector

Compensation of

employees

Govt. final

consumption

expenditure


secondary sector

Rent + interest + profit Gross capital formation


services sector

Mixed income of self-

employed

Net export of goods and

services

GDP_MP NDP_FC GDP_MP


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Other Aggregates

PRIVATE INCOME

NDP_FC (Domestic Factor Income)

- Income from property and entrepreneurship

accruing to Government

- Saving of non-departmental enterprises of Govt

+net factor income from abroad

+national debt interest

+current transfers from government

+other current transfers from the rest of world

(net)


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Other Aggregates

PERSONAL INCOMEPrivate income

- Saving of the private corporate sector net

of retained earnings of foreign companies- Corporation taxes


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Other Aggregates

Personal Disposable IncomePersonal income

minusdirect taxes paid by households


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Transfer Payments

Unilateral payments against which there is no

flow of goods or servicesCurrent transfers

Transfers made from current income of the

payer and added to the current income of the

recipient for consumption purposes

Capital transfers

Transfers in cash or kind which are used for

purpose of GCF or other forms ofaccumulation, or long term expenditure of the

recipient, which are made out of the wealth or

saving of the donor


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Current Transfers (within country) Examples

From To Particulars

Government Households Scholarship, gift, prizes, unemployment

allowances, old-age pensions, maintenance

grant to non-profit organizations

Government Enterprises Subsidies, any other gifts, prizes or

donations,

Enterprises Households Scholarship, gift, prizes

Enterprises Government Direct and indirect taxes

Households Government Direct taxes


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Capital Transfers (within country) Examples

From To Particulars

Government Households Lump sum payments for damages like

demolition of house

Government Enterprises Investment grants under policy to develop

particular enterprises, or to develop

particular regions of country

Enterprises Government Taxes on capital gains or any other tax

which is not regularly imposed by Govt.

Households Government Death duties, inheritance tax, or any other

tax which is not regularly imposed by Govt


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Examples of Transfers between countries

Current transfers between countriesGifts at the time of natural calamities

Capital transfers between countries War damages

economic aid

unilateral transfer of capital goods

Grants from one government to another to

finance deficit in the external trade

national income (2013-14).ppt

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