s2m national income accounting 1

7/23/2019 S2M National Income Accounting 1

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Measuring Macroeconomic Activities

1. National Output(Q) or Income (Y) or Expenditure(E)

2. Price Levels(P) or Inflation ()

3. Unemployment (U) and Poverty

National Accounting(NA)

National Accountingis the method by which consistent estimates of

economic activity are produced.

1665: William Petty,English Economists, first introduced concept of

national income accounting.

1696: Georgory Kingimproved the Petty estimate by using three

separate ways of measuring domestic product(income,

production and expenditure).

1823: Joseph Lowe, a Scottish journalist and political economist,

used inflation figures to deflate national income.

1931: Simon Kuzentsattempted National Income Accounting for

US at NBER,Father of Modern National Income Accounting

1936: James Meade and Richard Stone creates National Income

and Expenditure for UK

1936: Wassily W. Leontief, developed Input out Analysis, an

interindustry relationship

National Accounting: History


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In1876Dadabhai Narojimadethefirstcrudeestimatesofnational

incomeforIndiafortheyear186768.

In1934,VKRVRao published,anessayonIndiasNationalIncome,

19251929.firstauthenticacademicexercise,

FatherofIndianNationalIncomeAccounting

In1949,GovtofIndia,NationalIncomeAccountingCommittee

Prof. PCMahalnobis chairmen,FounderofISI

Prof. DRGadgil,founderofGIPEPune

DrVKRVRao,founderofDSEand IEGDelhi; ISEC,Bangalore

OutcomeNAS,MOS&PI,GovtofIndia

NSSOfoundedin 1950:UsesNationalSamplesurvey,

CSO:foundedMay1951,coordinationofstatisticsamong

ministries

CC: foundedin1967Statisticalworkwithcomputercentre

1956Fistnationalincomedatabothconstantandcurrent

pricespublishedwith194849baseyear

National Accounting: History of India

NSS:Round

1st Oct1950march

1951: 1833sample

2nd AprilJune1951:

1160Sample

3rd Aug Nov 1951: 920

village and 490 urban

Now 12 000 to 14 000

villages at All India

Level

Indicator of Level of Economic Dev of a country

Formulate Economic Policy

Evaluate Development Program

Compare national and international economic

development

Wage negotiations and structural changes of the

economy

Information about poverty and inequality

National Accounting: Why?


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National OutputConcept and Measurement

Q

Measuring the Production, Income, and Spending of Nations

NAS, MOSPI

NSSO

CSO

CC

National Output: Concepts & Measurement

1 GDP: GDPM,and GDPF

2 NDP: NDPM,and NGPF

3 GNP: GNPM,and GNPF

4 NNP : NNPM,and NNPF(= National Income)

5 Private Income

6 Personal Income

7 Personal Disposable Income

All Output expresses with current and constant prices.

Output at Current Price is called Nominal Output

Output at Constant Price is called Real Output.

MP is what consumer pays

FC is what producer receives after

tax and subsidies


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National Output:Current Prices( Nominal) and Constant Price(Real)

Current Prices=>

( Nominal term)

Constant Prices=>

( Real Term)

1.1.The Gross Domestic Product (GDP)

Gross Domestic Product(GDP) is the total market value of all final

goods and services produced within countrys borders irrespective of

ownership of resources during a given period of time (generally a year).

Ex. Phillips produces tube light with in India is GDP of India

TATA produces car in UK is GDP of UK but GNP of India.

GDP =piqi

Does not include:

Goods produced in the past Goods produced outside India by Indians Intermediate goods, Ex. Intel chips, wheat Non-market production

Black market: hawkers selling coconut

Underground economy: drugs, prostitution,

Household production: self consumption item, not sold in market


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1.1.The Measurement of GDP (GDP)

GDP is the Market Value . . .

Output is valued at market prices.

. . . Of All. . .

Includes all items produced in the economy and legally sold in markets

. . . Final . . .

It records only the value of final goods, not intermediate goods (the value is

counted only once).

. . . Goods and Services . . .

It includes both tangible goods (food, clothing, cars) and intangible services

(haircuts, housecleaning, doctor visits).

. . . Produced . . .

It includes goods and services currently produced, not transactions involving

goods produced in the past.

. . . Within a Country . . .

It measures the value of production within the geographic confines of a country.

. . . In a Given Period of Time.

It measures the value of production that takes place within a specific interval of

time, usually a year or a quarter (three months).

1.1. GDP: ( GDPF and GDPM)

Govt. Intervention in Production: Yes or No

a. GDP at Market Prices(GDPM

): When the output of all final goods and services are

valued at market prices and the values thus obtained are added is known as GDPM. It

includes net of Indirect Taxes (Ti) and Subsidies (S)

b. GDP at Factor Costs/Prices(GDPF

):

Ex1. Let cigarettes: market price =Rs. 24

Let Indirect business tax = Rs. 4

so, GDP at market price = Rs. 24

GDP at factor cost = Rs.24 Rs.4

= Rs. 20

= total value-added

Ex.. 2: Education in an university

Lets total value-added in university =Rs.140

Out of which , subsidy = Rs. 20

School fee = Rs.120

So, GDP at market price = Rs. 120

GDP at factor cost = Rs120 + Rs.20 = Rs. 140

= total value-added

GDPF with Constant Price: Real GDP

GDPF with Current Price: Nominal GDP

GDPM

=GDPF

+ (Ti-S)

GDPF

=GDPM

- (Ti-S)


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1.2 GNP :Gross National Product (GNP):

Gross National Product(GNP) is the market value of all final goods and

services produced domestically irrespective of ownership plus net factor

income from aboard during a given year.

GNP= piqi +NFA

Net Factor Income from Abroad (NFAI) : Income received from abroad by the

normal residents of a country for rendering factor services minus income paid for

the factor services rendered by non-residents within the domestic territory.

a. Net compensation of employees(COE) ex. Visiting prof salary, compensation to Indian

people working at American Embassy in India, interest income received by Indianinvested in UK, or US Bonds, salary of Indian working at IMF, WB.

b. Net income from property and entrepreneurship ( interest, rent , profit and dividend)

Ex. Tata motors at UK, profits of SBI at London

c. Net retained earnings(undistributed profits) of residents companies abroad.

Ex Infosys at UK

GNP= GDP + Net Factor Income from Abroad

1.2 GNP : GNPM and GNPF

A) GNP at Market Price (GNPM

): When the output of all final goods and

services are valued at market prices (current price) and the values thus

obtained are added is known as GNPM.

It includes Indirect Taxes (Ti) and net of Subsidies (S)

GNPM

= GNPF

+Ti-S

B) GNP at Factor Cost (GNPF):

GNPF

= GNPM

Ti+S

For National Income identity purpose we use the following identity

GNPF C + I +G+X-M

Hence GNP GNI GNE


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1.2. Net Product: NDP Vs NNP

Net Product (NP) Domestic or National : represents output ( income)after taking into account any future needs

It is calculated as total value of final goods and services

produced in the economy during a year minus depreciation.

NDPF=GDPF- depreciation

NDPM=GDPM- depreciation

NNPF=GNPF-depreciation

NNPM=GNPM-depreciation

NNPF is known asNational Income

1.4. How is GDP and GNP Related????

GNP=GDP+NetIncomefromabroad.

=>GDP=GNPGDP+NetIncomefromabroad

Similarly,

1. GNPF=GDPF+Netincomefromabroad

GNPM=GDPM+Netincomefromabroad

2. GDPF=GNPFNet

income

from

abroad

GDPM=GNPMNetincomefromabroad

GrossDomesticProduct(GDP)isoneofthemeasuresofeconomicgrowthfor

acountry'seconomy.

GrossNationalProduct(GNP)isoneofthemeasuresofnationalincomefora

givencountry'seconomy

GDPPercapita isthebestmeasuresforthelevelofeconomicdevelopmentin

comparisontoothercountries.


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1.5 Private Sectors Income

a.Private Income: Income earned by households

Pvt.I = NNPF IAD END + NDI + TAD + OTA

b. Personal Income: Income received by households:

PI = Pvt.I RE CT

c. Personal Disposal Income: Income available for dispose

PDI = PI HDT MAD

IAD- Income from entrepreneurship and property accruing to govt

administrative deps ex. Railways

END- earnings of Govt. non departmental enterprises (PSUs)

NDI- National Debt Interest

TAD- Current Transfer from Govt. administration Dept.

OTA- Other net current transfer from abroad

RE- retained earnings of nations private corporate sector

CT- corporate tax

HDT- Household direct tax

MAD- Miscellaneous receipts of Govt. administrative dept. ex. Fines, fees


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Problems and Solutions

Q. Mr. Moody, a barber works in his Saloon everyday . In one day he collectsRs.500 from haircuts, over this day his equipment's depreciates in value by

Rs.50. Of the remaining Rs.450, he pays sales tax worth Rs.30, takes home

Rs.200 and retains Rs.220 for improvement and buying of new equipment. He

further pays Rs.20 as income tax from his home. Based on this information,

estimate Mr Moody contributions to the following measures of income(a) GDP,

(b) NNP at MP,(c) NNP at FC, (d) Personnel Income, (e) Personnel Disposable

Income.Ans.

GDP=Rs. 500

NNPat MP= GDPDepreciation = 50050= Rs.450

NNP at FC=NNPSales Tax= 45030=Rs.420

PI= NNP at FCretained Earning= 420220= Rs.200

PDI= PIIncome Tax= 20020=Rs.180.

Mary spends on a final good, cosmetics, Rs.100

which is equivalent to its market value of Rs.100,

which is equivalent to the income to factor of

production Rs.100.

So for an economy as a whole during a given year,

Output Income Expenditure

because:

All output produced is for transaction purpose

Every transaction has a buyer and a seller.

Every rupee of spending by some buyer is a

rupee of income for some seller.

National Income(Output): Estimation


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a. Product Methods (GNP): GNP is the value added by the variousindustries and activities of the economy ( or in each stage ofproduction) in a particular year.

Q=f(La,L,K,O)=piqi

b. Income Methods (GNI): It is equal to sum of the income generated

by production in the country or income earned by the owners of

factors of productions in a particular year

Y = (R

La)+(w

L) + (i

K) + (profit

E)

c. Expenditure Methods (GNE): it is equal to total expenditures for allfinal goods and services produced within the country or the finalexpenditure of all residents (eco agents) in a country.

Z= (C+I+G+XM)

National Income Identity:QYZ


Sectoral Composition

A. Primary

(i) Agriculture + (ii) forestry and Fishing + (iii) Mining and Quarrying

B. Secondary

(i) Manufacturing + (ii) Electricity, gas and water supply + (iii )Construction

C. Tertiary (Services)

Trade, hotels and restaurant

Transport, storage and communication

Banking and insurance

Real estate , dwelling and business services

Public administration and defense

Other services



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2.1. Product Methods: GDPF = piqi +Ti-S

pi= Price of final good i

qi= Output of final good i

A. Primary

(i) Agriculture + (ii) forestry and Fishing + (iii) Mining and Quarrying

It is equal to the sum of the monetary value of all the final

goods and services produced within a country plus taxes

less subsidies on products.

The estimates of GDP in respect of agriculture, forestry, fishing, mining and

quarrying, registered manufacturing (establishments registered under

Factories Act, 1948) and construction are based on production approach

2.1. Net Product Methods: Value Added Approach


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2.1. Net Product Methods: Value Added Approach

2.2. Income Approach: GDPF= (FPi)+D

A. Compensation of Employee (COE):

B. Operating surplusrent (r)interest (i)royalty(Ry)profits and dividends (Profit)

C. Mixed Income(self employed) i.e. r+w+i+profit

Wages and salaries in cash Ex. Basic pay, DA Compensation in kind ex. Free housing, medical

facilities

Employees contributions to social security schemes ex.PPF

Transfer payments, illegal income, old age pensions, second

hand sales etc. are not included income method

GDPisthesumofdomesticfactorincomesreceivedbyallfactorofproductionsforproducinggoodsandservicesand

fixedcapitalconsumption(ordepreciation).


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It measure the sum of income for the factors of productionsdistributed by the recently productions units.

Itappliesforbothsecondaryandtertiarysectorwhichincludes unregisteredmanufacturingproducts(establishmentsnotregistered

underFactoriesAct), electricity,gasandwatersupply, trade,hotelsandrestaurants, transport,storage,communication, bankingandinsurance, realestate,ownershipofdwellings, businessservices, publicadministration anddefenceandotherservices.

IncludedorNotIncluded

Scholarshipstostudents:Included

Commissionreceivedbystockbrokers:Included

Insurancecompensationtoinjuredworkers:Not

Giftchequetoabride:Not


Example:WithIncomeMethodcalculateNDPFC,NNPFC,NNPMP,GDPMPwiththeinformationgivenbelow.AllinRs.crore

1 COE 2000 6 MixedIncome 1000

2 Rent 20 7 NFIA 3

3 Interest 30 8 IndirectTaxes 500

4 Profit 50 9 Subsidies 400

5 Royality 40 10 Depreciations 260

Ans:

NDPFC=COE+OperatingSurplus+MixedIncome

=2000+(20+30+40+50)+1000

=3140cr.

NNPFC=NDPFC +NFIA

=3140(3)

=3137cr.

NNPMP=NNPFC+IndirectTaxesSubsidies

=3137+500400

=3237cr.

GDPMP=NDPFC+Depreciations+ Net

IndirectTaxes

=3140+260+100

=3500cr.


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2.3. Expenditure Approach: GDPM= C+I+G+X-M

It is equal to the total expenditures (Domestic + Foreign )

domestically made for all final goods and services produced

within the country.

A. Private Final Consumption (C):

B. Investments (I) = GDCF + K( inventories)

( I=Govt Fixed Invest +Pvt Fixed Invest+ Residential Invest)

C. Government Final Expenditure (G)

D. Exports (X)- Imports (M) =NX

GDPM is estimated by expenditure methods


A. PrivateFinalConsumption(C):

Householdsconsumption(eg:goods&servicessuchasfood,clothes,laundryetc.),included

Commissionearnedonsaleofsecondhandgoods.Ex.Stockshares,included

Secondhandsalesandillegalgoods/servicesnotincluded.

Spendingonsecondhandgoodsnotincluded.

B. Investments(I)=GDCF+K(inventories)

Investmentfromfirmstoincreaseproductivecapacity(e.g.purchasingland,machines,

officebuildings,commission,legalchargesetc.

Italsoincludesunsoldgoodsintheinventoryoffirms.

C. GovernmentFinalExpenditure(G)

SpendingfromGovernment(e.g.tobuildhospitals,schools,infrastructure,paymentwages

respectiveofproductivity, etc.)included

TransferPayment/Publicassistanceexcluded

D. Exports(X)Imports(M)

Measuredbynetexportsi.e.subtractingthevalueofimportsfromthevalueofexportsof

goodsandservices.


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Ex. Investmnet =GDCF+K

(i)GrossDomesticCapitalFormation:GDCF

Ex1.AninvestorspentR.10Lakhtobuy10newprintingmachinesandspent

RS.10000torepairtheoldprintingmachines.

GDCF=Netdomesticfixedcapitalformation(Rs.10Lakh)+

depreciation(Rs.10000)

(ii)ChangeinStock(Inventories)

Ex.2 OutputValueofMoserbearsCDs=Rs.10000Sales=Rs.8000

Stock=+Rs.2000

GDP=C+I+G+(XM)=

=+Rs.8000+Rs.2000+0+(00)

Example:WithExpenditureMethodscalculateNNPMP,NDPMP,NetDomesticIncome,NIwith theinformationgivenbelow.AllinRs.crore

1 PvtFinalConsExp. 200 6 NVAinstock 40

2 Govt FinalConsExp. 100 7 Depreciations 140

3 IndirectTaxes 120 8 Exports 90

4 Subsidies 60 9 Imports 20

5Fixed CapitalFormation 50 10 NFIA 300

Ans:

NNPMP=1+2+5+6+(89)(7)+10

=200+100+50+40+(9020)140+300

=620cr.

NDPMP=NNPMPNFIA

=620300

=320cr.


NetDomesticIncome

=NDPMPNetIndirectTaxes

=320120+60

=260cr.

NI=NetDomesticIncome+NFIA

=260+300=560cr.


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GDP and its components

In each of the following cases, determine how much GDP and

each of its components is affected (if at all).

A. Pinky spends Rs.200 to buy her husband an ice-cream at a

hotel in Gurgaon.

B. Sarah spends Rs.1800 on a new laptop to use in her

publishing business. The laptop was built in China.

C. Jane spends Rs.1200 on a computer to use in her editing

business. She got last years model on sale for a great pricefrom a local manufacturer.

D. Tata Motors builds Rs.500 million worth of cars, butconsumers only bought Rs.470 million worth of them.


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Answers

A. Pinky spends Rs.200 to buy her husband ice-

cream at a hotel in Gurgaon..

Consumption and GDP rise by Rs.200.

B. Sarah spends Rs.1800 on a new laptop to use in

her publishing business. The laptop was built in

China.

Investment rises by Rs.1800, net exports fallby Rs.1800, GDP is unchanged.

Answers

C. Jane spends Rs.1200 on a computer to use in her

editing business. She got last years model on

sale for a great price from a local manufacturer.

Current GDP and investment do not change,

because the computer was built last year.

D. Tata Motors builds Rs.500 million worth of cars,

but consumers only bought Rs.470 million of

them.

Consumption rises by Rs.470 million,

inventory investment rises by Rs.30 million,

and GDP rises by Rs.500 million.


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GDP Application

A. The GDP Deflator

GDP deflator =Nominal GDP

Real GDP100

t

t

t


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-6

-4

-2

0

2

4

6

8

10

12

GDPFC Constant Prices Linear (GDPFC Constant Prices)

B. Growth Rates (GDP)

Growth rate: (GDPt-GDPt-1)/GDPt-1*100

Real GDP Growth Rate i.e. GDP at FC (constant price) base year (2004-05)

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

GDPFC NDPFC GNPFC NNPFC

Real Growth Rate:

National Accounts Concepts

(constant price) base year (2004-05)


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Sectoral Growth Rate:(GDP FC constant price) base year (2004-05)

-15

-10

-5

0

5

10

15

20

1951-52

1954-55

1957-58

1960-61

1963-64

1966-67

1969-70

1972-73

1975-76

1978-79

1981-82

1984-85

1987-88

1990-91

1993-94

1996-97

1999-00

2002-03

2005-06

2008-09

2011-12

Agriculture

-4

-2

0

2

4

6

8

10

12

14

1951-52

1954-55

1957-58

1960-61

1963-64

1966-67

1969-70

1972-73

1975-76

1978-79

1981-82

1984-85

1987-88

1990-91

1993-94

1996-97

1999-00

2002-03

2005-06

2008-09

2011-12

Industry

0

2

4

6

8

10

12

Services


of GDP at FC at Const Price (%) 2004-05 base year

0

10

20

30

40

50

60

70

80

Agl & Allied Industry Services


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of GDP at FC at Const Price (%) 2004-05 base year

C. Is GDP A Good Measure Of Economic Well-being?

Real GDP per capita is the main indicator of the average persons standard of living.

But GDP is not a perfect measure of well-being.

Some things that contribute to well-being are not included in GDP.

The value of Leisure

The value of a clean environment.

The value of almost all activity that takes place outside of markets, such as the

value of the time parents spend with their children and the value of volunteer

work.

GDP Measures the Size of the Pie but Not How the Pie Is Divided Up

Having a large GDP enables a country to afford better schools, a cleaner

environment, health care, etc.

Many indicatoRs.of the quality of life are positively correlated with GDP.

Then Why Do We Care About GDP?


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Did World War II Bring Prosperity?

GDP and the Quality of Life


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India GDP Estimates

Annual Series(1950-51)

Quarterly Series (since 1997 Q1)

No Series Less than Quarterly is available

IIP used as proxy for GDP

Base

year

No of Items in IIP

1937 15

1946 35

1951 88

1956 201

1960 312 (for monthly)

124 ( for annual)

1970 352

1980-81 352( new included old deleted)

1993-94 543

2004-05 682

India uses Laspeyers Methods to calculate IIP

Weights are based on value added methods

IndexofIndustrialProductions

200405 Weight

61 14. 16%

6 20 7 5.35 %

1 10.32

682* 100%

*clubbedin399itemgroups:Mining1,

Manufacturing 397,Electricity 1


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IndexofIndustrialProductions

Represents the status of productions in industrial sector for a

given period of time

Sometime used as a proxy for measuring economic activities in

place of GDP.

Complied by Ministry of Commerce and Industry

IIP started compiling since 1937 covering 15 important

industries output comprising 90% of total productions

Since 1951, CSO is calculating IIP

Index is calculated by using simple arithmetic mean of

productions relatives calculated by Laspeyres formula: I=WiRi/Wi, Where I is the index, Ri is the productions relatives of the

ith item for the month in question and Wi is the weight alloted

to it

Weights are alloted on the basis of Gross Valued Added

Implications for Managers

Movement in national Income helps the manager to figure out the state of

the economy

Component of the national income helps to determine the production ,

distribution, demand structure etc. of the economy.

Expenditure pattern indicates the role of govt in economic activity

Role of govt enhances private competitions

Pattern of govt finances thorough direct and indirect axes affects the

disposable income of the households thereby their consumption pattern

Level of imports and exports provides information to the managers about

the demand pattern and the potential customers.in the international

markets


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References

N G Mankiw : Macroeconomics (2012 ed) Ch 2.

Blanchard O: Macroeconomics ( 4th ed) Ch2

D N Dwivedi : Macroeconomics Theory and Policy 3 ed. Ch 4

Handout supplied to you

Thank You All

s2m national income accounting 1

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