national income
DESCRIPTION
details of national incomeTRANSCRIPT
MacroeconomicsMacroeconomics
DefinitionDefinitionMacroeconomics is the study of the
behavior and performance of the economy as a whole.
According to P.A Samuelson , Macroeconomics is the study of the behavior of the economy as a whole. It examines the overall level of a nation’s output , employment, prices and money.
Importance of Importance of macroeconomics macroeconomics
1) Growing importance of macroeconomic issues
2) Persistence of macroeconomic problems
3) Growing complexity of economic system
4) Need for government intervention with the market system
5) Use of macroeconomics in business management
Macroeconomic issuesMacroeconomic issues1) Growth related issues2) Business cycles3) Inflation4) Unemployment and poverty5) Budgetary deficits6) International economic issue
Circular flow of incomeCircular flow of income
Circular flow of incomeCircular flow of income
National IncomeNational Income
According to Prof Pigou,” The national dividend is that part of the objective income of the community including income derived from abroad, which can be measured in money”
Rules of computing GDPRules of computing GDPTo compute the total value of different goods
and services, the national income accounts use market prices.
Used goods are not included in the calculation of GDP.
Some goods are not sold in the marketplace and therefore don’t have market prices. We must use their imputed value as an estimate of their value. For example, home ownership and government services.
Intermediate goods are not counted in GDP– only the value of final goods. Reason: the value of intermediate goods is already included in the market price. Value added of a firm equals the value of the firm’s output less the value of the intermediate goods the firm purchases.
National income measuresNational income measuresGross domestic productGross domestic productGross domestic product can be defined as
the sum of market value of all final goods and services produced in a country during a specific period of time , generally a year.
GDP includes income earned by the foreigners in the country and excludes income earned abroad by the residents.
GDP market price=GDPfc+IT-S
GDP at factor cost and GDP at factor cost and market pricemarket priceGDP at factor cost is calculated as the sum
of net value added by different producing units and the consumption of fixed asset.
( wages+interest+rent+profit+depreciation)GDPfc=GDPmp-IT+S
GDP at market price include indirect taxes and exclude the subsidies given by the government.
GDPmp=GDPfc+IT-S
Components of GDPComponents of GDP
Y=C+I+G+NXC= Consumption by household on
goods and servicesI=Investment includes capital
equipment, inventories and structuresG=Spending on goods and services by
the governmentNX=Export-Import
Gross national productGross national product
The concept of GNP includes the income of the residents nationals which are received abroad, and excludes the income generated locally but accruing to the non-nationals.
GNP=GDP+Net factor income from abroad
Net National productNet National product
The concept of GNP includes the output of final consumer and capital goods. However, a part of capital goods is used up or consumed in the process of production of these goods. This is called depreciation. NNP is obtained by subtracting depreciation from GNP
NNP=GNP-Depreciation
Net domestic productNet domestic product
When depreciation allowance is subtracted from GDP ,We get net domestic product.
NDP=GDP-depreciation
NNP at factor cost or NNP at factor cost or National incomeNational incomeNational income is the total of all
income payment received by the factor of production
National income=Net National product-Indirect Taxes+Subsidies-profits accruing to the government
Personal incomePersonal incomePersonal income is that income
which is actually received by the individuals during a year from all resources.
PI=NNP-(Undistributed company profits+Surplus of public undertaking+Rentals of public property)
Disposable personal Disposable personal incomeincomeDisposable income refers to personal
income of the income earners against which they do not have any legally enforceable payment obligations.
DPI=Personal income-personal direct taxes
DPI=Consumption+Saving
Nominal and real GNPNominal and real GNPGNP estimated at current prices
is called nominal GNP and GNP estimated at constant prices is called real income.
Economic survey 2007-08
At current prices
At constant prices(1999-2000prices)
1990-91 5,15,032 10,83,5722006-07 37,90,063 28,64,309
GNP DeflatorGNP DeflatorThe GNP deflator is a factor which is
used to convert nominal GNP into real GNP. The GNP deflator is the ratio of price index number(PIN) of a chosen year to the price index of the base year.
GNP deflator=PIN of the chosen year 100Real GNP=Nominal GNP/GNP
Deflator
CalculateCalculateFrom the following, compute i) real GNPii) GNP deflator
Year Nominal GNP Wholesale PIN
1993-94=100)
2002-03 2284614 166.82003-04 2531168 175.9
Methods of measuring Methods of measuring national incomenational incomeNet output or value added
method: Y=[sales+Self consumption+increase in
stocks]-[Value of intermediate products+depreciation]
Three Stages: 1) Estimating the gross value of domestic
output in the various branches of production(P.Q)
2.Determining the cost of material and services used and also the depreciation of physical asset.
3. Deducting these costs and depreciation from the gross value to obtain the net value of domestic output
Factor income methodFactor income methodNational income= Rent
+Wages+ Interest+ Profit+Depreciation
Total factor income is divided into :1. Labour incomes :
a) wages and salaries paid to the residents of the country including bonus and commission and social security payments
b) supplementary labour income including employer contribution to social
Factor income methodFactor income method Security and employee welfare funds
and direct pension payment to retired employees
c) supplementary labour incomes in kind free health and education, food and clothing.
2) Capital incomes: a. dividendsb. royaltiesc profits of government enterprises
methodmethodd) net interest paid out by commercial
bankse) net rent from land buildingf) undistributed before tax profits of
corporationg) Interest on bonds and saving deposits
3)Mixed income: farming enterprises , sole proprietorship, other profession including legal and medical practices, trading and transport etc.
Expenditure methodExpenditure methodWe obtain the gross national
product at market prices by adding up the personal expenditures, gross private domestic investment, net foreign investment and government purchases of goods and services.
Y=C+I+G+X-M
GNP break-up by different GNP break-up by different methodsmethodsValue added method
Expenditure method
Income method
Agriculture 250
Consumption exp 630
Wages and salaries 400Corporate profits 250
Industry 350
Gross investment 210
Rental income 80Interest income 100
Service sector 400
Govt purchase 160
NY 830Add:Indirect taxes less subsidies 90Add:Capital consumption 80
1000
1000
1000
National income statisticsNational income statisticsYear 2007-
082008-09 2009-10 2010-11 2011-12
GDP(Market prices)
4987090
5630063 6457352 7674148 8912178
Growth Rate (%)
16.1 12.9 14.7 18.8 16.1
GDP(factor cost 2004-05 prices)
3896636
4158676 4507637 4885954 5222027
Growth rate
9.3 6.7 8.4 8.4 6.9
Per capita net national income(factor cost)
35825 40775 46117 53331 60972
Sectoral distribution of Sectoral distribution of India’s NIIndia’s NI
Agriculture Industry Service
1950-51 53.1 16.6 30.3
1990-91 29.6 27.7 42.7
2010-11 14.5 27.8 57.7
2011-12 13.9 27.0 59.0
Household consumption exp
550 billion
Govt consumption exp 250 billionGross fixed capital formation 100 billionDepreciation 150 billionIndirect taxes 160 billionSubsidies 40 billionExports 200 billionImports 250 billionNet Income from abroad 150 billion
Computei) GDP at market priceii)GDP at factor priceiii)GNP