national output and income concepts and methods
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8/3/2019 National Output and Income Concepts and Methods
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NATIONAL OUTPUT AND
INCOME
The end result of economic activity is the production of goods and services and thedistribution of those goods and services tothe members of the society. All the braches
of economics are concerned in one way or the other with output and income .
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Definitions of National IncomeMarshall: ³The labour and capital of acountry acting on its natural resources
produce annually a certain net aggregateof commodities,material and immaterial including services of all kinds´.
Pigou: ³ National income is that part of objective income of the community,including of course income derived fromabroad which can be measured in terms of
money ´.
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National income is the measure of
output and income which evaluatesthe performance of the economic
system in terms of
How rapidly it is growing.
How stable it is.How it allocates its productive resources.
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The most important pioneer in providingnational income data was prof. Simon
Kuznets , for the National Bureau of Economic Research, a private researchorganization of U.S.A. In the late 1930s andduring World War II, the official nationalincome estimates of the U.S. governmentwere developed in the Department of Commerce, which has continued to provide
annual and quarterly estimates since then. Inthe postwar period the development of systems of national income data has spreadfrom the industrial countries throughout theworld.
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THE CIRCULAR FLOW OFECONOMIC ACTIVITY
P roduction creates income and income in turn isused to purchase output.
Each of us has a dual role in the productiveprocess:
A s productive agents
A s consumers
T he business firms also stands in a dual capacity:
P aying out income to the factors of production
Selling of goods and services
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Product methodValue added methodFinal product method
Income method Expenditure method
As production leads to income and income
leads to expenditure National Income can be estimated through
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Product Method
Number of commodities *Their respective prices.
Ex:
No.of * price of cars.
No.of * price of computers.
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Expenditure MethodY = C + I + G + ( X-M)
Where, C = Consumption
I = Investment
G = Government Expenditure
X = Exports
& M = Imports
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Methods followed in India
India mainly follows a combination of Product and Income methods due to thedifficulties involved in the estimation of
National Income.National incomeStatistics in India are published in National Accounts statistics , a
publication of Central StatisticalOrganization, Ministry of Statistics andProgramme Implementation,
Government of India.
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Different Concepts of National
IncomeEach Analyses the Performance of theEconomy.
They are:GNP & GDPGNP & GDP - Market Prices & Factor CostGNP & GDP - Nominal & RealGNP & GDP - Potential & ActualGNP, NNP, NI, PI, DPI & PCIExchange rate conversion Vs PPP
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GNP & GDPGNP: The market value of all final goodsand services produced by a nationseconomy during the course of a year.
GDP: GNP ± Net Income from Abroad,i.e., the total production whatever is
produced with in the boundaries of acountry.
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Factor Cost =Market Prices-Indirect Taxes
Nominal & Real GNP is also called as GNP atCurrent and Constant Prices.
Nominal GNP = Current Production * CurrentPrices.
Real GNP = Current Production * ConstantPrices.
Potential is what can be produced and Actual iswhat is being produced. The difference
between the two explains the intensity of depression.
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NNP = GNP ± Depreciation
NI or NNP at Factor Cost = NNP ± Indirect Taxes = Rent + Wages + Interest+ ProfitPI = NI ± Retained Corporate Profits ± Profit Taxes ± Contributions to SocialInsurance + Transfer PaymentsDPI = PI ± Personal Taxes =Consumption + SavingPCI = NI / Population
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International Comparison of GDP:Exchange rate conversion Vs PPP
The Market Exchange Rate (MER) GDP is more useful for understanding the international economic purchasing power and thetotal value of tradable goods and services of different countries.To compare National income and related data across countries thedata must first be converted in to a common currency. Nominalexchange rates don't reflect international differences in relative
prices. Unlike conventional exchange rates, PPP rates of exchangeallow conversion to take account of price differences betweencountries. By eliminating differences in national price levels, themethod aids comparisons of real value for income, poverty,inequality and expenditure patterns.Using a PPP basis is arguably more useful when comparing
differences in living standards because PPP takes into account therelative cost of living and the inflation rates of the countries, rather than using just exchange rates which may distort the real differencesin income.
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GNI & PPP GNI in 2005
CountryGNI $
Billions RankGDP $ Per
Capita RankPPP GNI $
Billions RankPer CapitaPPP GNI $ Rank
USA 12,455,825 1 42,000 8 12,277,583 1 41,399 3
China 2234133 4 1,709 110 94123611 2 7,198 87
Japan 4,567,441 2 35,757 14 3,910,728 3 30,615 16
India 771,951 12 705 135 3,633,441 4 3,320 122
Germany 2,791,737 3 33,854 19 2,521,699 5 30,579 17
France 2,126,719 6 33,918 18 1,830,110 7 29,187 20
Pakistan 110,970 45 728 134 404,592 26 2,653 127
Norway 295,672 25 64,193 2 195,130 42 42,193 2
Luxembourg 36,531 63 80,288 1 31,759 92 69,800 1
Burundi 799 162 107 182 5,538 148 739 178