12. national income

8/8/2019 12. National Income

1/44

1


2/44

` It is the money value of the flow of goods and

services available in an economy in a year

` National income measures the total value ofgoods and services produced within the economy

over a period of time

2


3/44

` National Income Committee of India 1951, defines

National Income as follows: A national income estimate measures the volume of

commodities and services turned out during a given periodcounted without duplication.

` Marshalls Definition: The labour and capital resources of a country acting on its

natural resources produce annually a certain net aggregateof commodities, material and immaterial including services

of all kinds. This is the true net annual income or

revenue of the country or the national dividend.

3


4/44

` Help us to know the performance of an economyduring one year and over a period of years.

` National income figures for various countriesprovides us the rates of growth in differenteconomies.

` Changes to average living standards of thepopulation

` Looking at the distribution of national income (i.e.

measuring income and wealth inequalities)

4


5/44

` National Income refers to-

The income of a country to a specified period of time, say a year

includes all types of goods and services which have an exchange value

counting each one of them only once

It differs from NNP by excluding indirect business taxes

(such as sales taxes) and including business subsidies.

5


6/44

` If steel has been evaluated in industrial

production, it should not be included while

calculating the value of steel products, viz,machines and motor cars.

` To avoid double counting or multiple counting, two

methods are usedFinal products method

Value added method

6


7/44

` Final Products method: Adding the value of final products only

` Value added method: Go on adding the values created at each stage in the

manufacture of a commodity

Then all such values created are added up together to

arrive at the national income of the country

7


8/44

MARKETS FORFACTORS OF

PRODUCTION

MARKETS FOR

GOODSAND

SERVICES

FIRMS HOUSEHOLDS

Good andservices

bought

Good and

services sold

Revenue(=GDP)

Spending(=GDP)

Inputs for

Production

Land, laborand capital

Wages, rent,interest andprofit (=GDP)

Flow of goods & services

Flow of money

Income (=GDP)

THE CIRCULAR FLOW DIAGRAM


9/44

` The following are the concepts of national income Gross National Product GNP

Net National Product NNP

Personal Income PI

Per capita Income PCI

9


10/44

10

GDP (Y) is the sum of the following: Consumption (C)

Investment (I)

Government Purchases (G)

Net Exports (NX) = X - M

Y= C + I + G + NX


11/44

Consumption68 %

Government

Purchases

18%

Investment

16%


12/44

` GDP is the sum of the final incomes earnedthrough the production of goods and services

` The main factor incomes are as follows: Income from employment and self-employment

Profits of commercial companies Rental income from the ownership of property


13/44

` GNP is most frequently used national income concept

` It is statistically a simpler concept as it takes no

account of depreciation and replacement problems

` The money value of this total output is known as Gross National

Product GNP

` Limitation only measures current production.

Transfer payments (retirement benefits, unemployment

benefits, scholarships, and donations) and transactions

involving goods produced in other periods are not included

in the calculation ofGNP

13


14/44

` Gross National Product

Example:

If A,B,C,D, are goods and services and

If a,b,c,d,are their prices respectivelyThe GNP is calculated as follows

GNP= Axa+Bxb+Cxc+Dxd.

14


15/44

15


16/44

` GDP = Consumption + Investment + Govt.

Spending + (Export Import)

` GNP = GDP + Capital gain from investments

made abroad Income earned by foreign

nationals in that country

16


17/44

17

Gross Domestic Product GDP 4,022,700

Net Factor Income from the Rest

of the Worl

d

NFIRW 267,500

Gross National Product GNP 4,290,200


18/44

` CPI = [Base year basket quantities multiplied by

current year prices / Base year basket quantities

multiplied by base year prices] * 100

18

1

1

Inflation Ratet t

t

CPI CPI

CPI

!


19/44

` Nominal GDP is GDP evaluated at current market

prices. Nominal GDP will include all of the changes

in market prices that have occurred during thecurrent year due to inflation ordeflation

` Real GDP is GDP evaluated at the market prices of

some base year. if 1990 were chosen as the base year, then real GDP for

1995 is calculated by taking the quantities of all goods and

services purchased in 1995 and multiplying them by their

1990 prices.

19


20/44

` refers to the net production of goods and services

in a country during a year

` NNP is also called National Income at Market

Prices` We get NNP, by deducting the depreciation from

GNP

` Therefore NNP = GNP - Depreciation

20


21/44

21


22/44

` Income earned by all the individuals and

institutions during a year in a country

` The entire national income does not reachindividuals and institutions A part of it goes by way of corporate taxes

Undistributed profits

Social security contributions

22


23/44

` People sometimes get incomes without any

productive activity Transfer Payments Example: Unemployment benefits, old age pensions etc.

`

Such transfer payments are not included in theNational Income

` However they are added to Personal Income

23


24/44

PI is computed by using the following formula

PI = National Income (Corporate taxes +

undistributed profits + social securitycontributions) + Transfer Payments

24


25/44

` represents the income that households are freeto spend or save.

` It excludes the components of national incomethat do not accrue directly to households.

` It also includes a few items that are not part ofnational income but nonetheless influence theamount of income that households can spend.


26/44

` If the national income is divided by the total

population, we get per capital income

` PCI may be expressed either in money terms or in

real terms

PCI = NI/Population

26


27/44

` Three methods to measure the national income

` They are- Production method or Census method

Income method Expenditure method

27


28/44

` The total products produced in the economy are

calculated for the year and the value is added

without double counting

` The economy is classified into sectors Primary,Secondary and Tertiary.

` In each sector, we can find the value of final goods

and services

GNI = Money value of total goods and services +Income from abroad.

28


29/44

` In the international transactions, net foreign

income is calculated by subtracting the totalimports from the total exports and added to the

national income

Net Foreign Income = (Exports Imports)

` The results of these sectors, when combined,gives the national income or national product

` The census or product method can be expressed

through the formula

O = C + I Where O stands for output,

C stands for consumption of goods

I stands for investment goods

29


30/44

30

GoodGood Price perPrice perunitunit

Q soldQ sold ExpenditureExpenditure

RiceRice 2020 10001000 20,00020,000

NINI 20,00020,000


31/44

` Net incomes of individuals and business housesduring a year are added to know the national

income

` Only those incomes earned and received for

producing goods and for rendering services are tobe counted

` Transfer payments should not be counted as these

are the incomes received without contributing to the

production

GNI = Rent + Wage + Interest + Profit + Income from

abroad.

31


32/44


33/44

33

SalesSales P 20,000P 20,000

Expenses:Expenses:

WagesWages 80008000

RentRent 40004000

InterestInterest 20002000

TotalTotal 14,00014,000

ProfitProfit 6,0006,000

GDP=Sum ofPayments toGDP=Sum ofPayments tofactorsfactors

20,00020,000 P 20,000P 20,000


34/44

` One mans income is another mans expenditure

` Therefore national income can be arrived at by

adding the total expenditure of individual and

business firms during a year` adding up the expenditure incurred for goods and

services.

34


35/44


36/44

` The formula for this method is

` GNI = Individual Expenditure + Government

Expenditure.

36


37/44


38/44

` NI estimates are very helpful to the Finance

Minister. It guides him to make proper and right

decisions in regard to taxation and budgets

`

It is useful to compare the prosperity of a countryat different times

` It provides an instrument of economic planning

` It indicates the trends of inflation and deflation.

Proper corrective action can be taken againstthem

38


39/44

` It helps to know the progress of various sectors in

the economy. Imbalanced growth, if any, can be

solved

`

It helps in forecasting the economic future andpreplanning is possible

` It indicates the economic status of a country

among the nations of the world

39


40/44

` High growth rate of population

` Excessive dependence on agriculture 66% ofpopulation engaged in agriculture which contributes 34% to GDP

` Occupational Structure underemployment

`

Low level of technology and poor adoption` Poor Industrial Development failed to maintain a

consistent and sustainable growth

` Poor development of Infrastructural Facilities causes hurdles in path of development

` Poor rate of savings and investment

` Socio Political Conditions caste system, illiteracy,unstable political scenario

40


41/44

` Development of Agricultural Sector

` Development of Industrial Sector

` Raising the rate of savings and investments

` Development of infrastructure` Utilization of natural resources

` Containing growth of population

` Balanced growth

` Higher growth of foreign trade

` Economic liberalization

` Removal of inequality progressive rates of taxation,welfare and poverty eradication programs

41


42/44

Year Primary Secondary Tertiary Total GDP

1950-51 59 13 28 100

1980-81 42 22 36 100

2002-03 24 24 52 100

42


43/44

Sector 1950-1980 1980-2005

GDP Total 3.5 5.6

GDP Per capita 1.4 3.6

43


44/44

44

12. national income

Documents