MACRO AGGREGATES

GROSS NATIONAL PRODUCT (GNP)

GNP IS THE SUM OF ALL FINAL GOODS AND SERVICES

PRODUCED DURING A SPECIFIED PERIOD OF TIME (1 Yr.)
WHICH CAN BE MEASURED AT MARKET VALUE (GNPmp) OR
AT FACTOR COST (GNPfc)
ARRIVING AT REAL GNP

NOMINAL GNP IS GROSS NATIONAL PRODUCT

EXPRESSED IN CURRENT Rs. Where as REAL GNP IS
DEFLATED FOR CHANGES IN THE PRICES OF ITEMS

REAL GNP (current period) =

NOMINAL GNP * GNP DEFLATOR (base period)
(current period) GNP DEFLATOR (current period)
PERSONAL DISPOSABLE = PERSONAL INCOME – PERSONAL
INCOME TAXES
PERSONAL INCOME = NNPfc – RETAINED EARNINGS -
CORPORATE TAXES + TRANSFER
PAYMENTS + NET INTEREST
AND DIVIDENDS
= WAGES + PROPRIETORS INCOME
+ NET INTEREST + DIVIDENDS +
TRANSFER PAYMENTS
PERSONAL SAVING = PERSONAL DISPOSABLE INCOME
- CONSUMPTION
NET EXPORTS = GNPmp - (C+I+G)
Where (C+I+G) is Domestic absorption
PRIVATE INCOME = INCOME FROM DOMESTIC PRODUCTION
ACCRUING TO THE PRIVATE SECTOR +
NET FACTOR INCOME FROM ABROAD+
CURRENT TRANSFER FROM GOVERNMENT +
NET TRANSFERS FROM ROW TO THE PRIVATE
SECTOR

PERSONAL INCOME = PRIVATE INCOME - RETAINED PROFITS -

CORPORATE PROFIT TAX

NET FACTOR INCOME

FROM ABROAD = FACTOR INCOMES PAID income generated
in domestic productive activity paid to foreigners(eg
repatriated profits, payment to consultants)- FACTOR
INCOMES RECEIVED(domestic residents earn
incomes abroad)
 SIMPLE ECONOMY

WAGES&PROFITS(Y)
Rs1000

Y=AD
PRODUCTIVE
Y=C
HOUSEHOLD
SECTOR SECTOR

PRIVATE
CONSUMPTION
Rs 1000 ( C)
 CLOSED ECONOMY

WAGES&PROFITS(Y)
Rs1000

Y=AD
PRODUCTIVE
Y=C+I
HOUSEHOLD
SECTOR S=I SECTOR

PRIVATE
CONSUMPTION
Rs 800 ( C)
SAVING
INVESTMENT
Rs 200
Rs 200
 OPEN ECONOMY

WAGES&PROFITS(Y)
Rs1000

Y=AD
PRODUCTIVE
Y=C+I+G+X
HOUSEHOLD
SECTOR Y =C+J SECTOR
W=J

PRIVATE
CONSUMPTION
Rs 800 ( C)
WITHDRAWALS(W)=(200)
INJECTIONS(J)=(Rs 200)
SAVINGS(S)=100
INVESTMENT(I)=80
IMPORTS(I)=50
Exports(E)=60
TAXES(T)=50
Expenditure(G)=60
 GDP at Market Price
Value at market prices of all goods and services during a specified
period
GDPmp = C+I+G+E-M
GDP at Factor Cost –
Income generated in the productive activities in an economy during a
year
GDPfc = W+INT+P+R
KEY TO FLOW CHART
NATIONAL PRODUCT –
DOMESTIC PRODUCT = NET INCOME FROM ABROAD (NIA)
GROSS VALUE – NET VALUE = DEPRECIATION
MARKET PRICE – FACTOR COST = INDIRECT TAXES +
SUBSIDIES
 GNPMP

-depreciation -net indirect taxes

-net income from Abroad

=NNPMP =GNPFC
GDPMP
-net indirect taxes

-depreciation

-net income from Abroad -depreciation -net income from Abroad

=NNPFC -net indirect taxes

= NDPMP GDPFC
-net income from Abroad

-net indirect taxes -depreciation

= NDPFC
 SUMMARY OF THE FLOW CHART
KEY RELATIONSHIPS

GNPmp-NET INDIRECT TAXES = GNPfc

GNPmp-NET INCOME FROM ABROAD = GDPmp

GNPmp – DEPRECIATION = NNPmp

GDPmp – DEPRECIATION = NDPmp

NNPmp – NET INCOME FROM ABROAD = NDPmp

(SAME RELATIONSHIPS HOLD FOR NATIONAL INCOME
VARIABLES MEASURED AT FACTOR COST)
CONCEPTUAL FRAMEWORK
STOCKS AND FLOWS
Stocks – Measured at a point of time eg. Total number of persons
employed at a time in India
Flows – Measured over a period of time eg. No. of persons who get new
jobs
Stocks Flows
MONEY SUPPLY INFLATION
CPI EXPORTS / IMPORTERS
FOREX RESERVES INVESTMENT
CAPITAL STOCK WAGES
UNEMPLOYMENT TAXES
 Measurement of national income
The Output (Value Added) Method refers to value of all final goods and
services produced during a year by different sectors of the economy or
aggregating values imparted to intermediate Products at each stage of
production
The agricultural and extractive industries 10

plus Manufacturing Industries 40

plus Services and construction 40
equals Gross Domestic Product at factor cost 90
plus Net factor income from abroad
(= Income received from abroad – income paid abroad) 10
equals Gross National Product at factor cost 100
less Capital consumption or depreciation -20
equals Net National Product at factor cost or National Income 80
 INCOME METHOD

MONEY PAYMENTS MADE TO ALL FACTORS OF

PRODUCTION FACTOR INCOMES FOR CURRENT SERVICES
TO PRODUCTION
Income from employment 80
Income from self employment 10
Gross trading profits of cos 10
Gross trading surplus of public cos 10
Rent 10
Total domestic income 120
Stock appreciation -30
GDPfc 90
NFIA 10
GNPfc 100
 EXPENDITURE METHOD
AGGREGATES ALL MONEY SPEND BY PRIVATE CITIZENS
FIRMS AND GOVERNMENT
Consumer Expenditure (C) 70
Govt.Expenditure (G) + 20
Gross Domestic Fixed
Capital Formation (GDFC) (I) + 20
Value of Physical increase in stocks + 10
Total domestic expenditure (mp) 120
Exports & factor income received + 20
Imports & factor income paid - 30
GNPmp 110
Indirect Taxes - 20
Subsidies +10
GNPfc 100
 DIFFICULTIES IN MEASUREMENT OF NI

Non Market production

Imputed values
Underground economy
Side effects and Economic Bads
Double counting

USE OF NI
ECONOMIC PLANNING
STANDARD OF LIVING
CHANGES IN COUNTRY’S ECONOMIC GROWTH
COMPARATIVE ANALYSIS FACILITATED
Yr Nominal GNP GNP deflator

1995-96 2500 120

1996-97 3200 145

Base yr GNP deflator 1994 -95 =100

What is real GNP of 1995-96

What is the real GNP of 1996-97

What is the growth rate of real GNP from 1995-96 to

1996-97?

What is the inflation rate in 1996-97 in relation to

1995-96 ?
Real GNP
2500 x 100/120 = 2083.33
3200 x 100/145 = 2207

Growth rate

Growth Rate = Real GNP 1996-97

Real GNP 1995-96

2207/2083.3 –1 = 0.059 = 5.9%

Inflation rate

GNP deflator (cp- 96-97) - GNP(BP95-96)

GNP def (1995-96)bp

145-120/120 x 100 = 20.83%

Following are the data relating to the national accounts Of an
economy for the year 1995 in mn units of currency

Capital consumption allowance 1000

Personal consumption spending 12500
Corporate income taxes 500
Undistributed corporate profits 250
Net exports 25
Dividends 750
Rent 1000
Interest 500
Indirect business taxes 1250
Gross private investment 550
Compensation to employees 8487.5
Government spending 912.5
Proprietors income 1250

Compute GNP using income method and expenditure method

(a) GNP – INCOME METHOD

INDIRECT BUSINESS TAXES 1250

COMPENSATION TO EMPLOYEES 8487.50
RENTS 1000.00
INTEREST 500.00
PROPRIETOR’S INCOME 1250.00
CORPORATE TAX 500.00
DIVIDENDS 750.00
UNDISTRIBUTED PROFITS 250.00
13987.50

(b) GNP =– EXPENDITURE METHOD

= C+I+G+X-M
= 12500+550+912.5+25
= 13987.5
From the following figures compute a) GDP at factor cost
b) National income c) Personal disposable income

GNP mp 5000
Personal income tax 1000
Corporate taxes 800
Subsidies 400
FIPA 800
FIRFA 900
Undistributed profit 200
Indirect taxes 450
Depreciation 350
GDP fc = GNP fc - NFIA

GNPfc = GNP mp - IT + subsidies

= 5000 - 450 + 400
= 4950

GDP fc = 4950 –(900-800)

= 4850

National income
NNPfc = GNP fc - Dep
4950 –350
4600

Personal disposable income = Personal income – Personal Taxes

Personal income = National income - Retained earning - Corp tax
4600 -200 – 800 = 3600
GDP mp 6000
Corporate income tax 1200
Personal income tax 900
Subsidies 475
Factor incomes received
from abroad 1500
Factor incomes paid 1200
abroad
Undistributed profits 225
Indirect taxes 900
Depreciation 600

Compute Personal Disposable income, national income and

GNP at market prices
GNPmp = GDPmp +NFIA
= 6000+1500 -1200
= 6300

National income = NNPfc

GNPfc = GNP mp + Subsidies - Indirect taxes
= 6300 + 475 -900
=5875

NNPfc = 5875- 600

5275

Personal disposable income = National income - Retained earnings

- Corporate taxes - Personal txes
5275 -225 -1200 -900
= 2950
 NATIONAL INCOME ACCOUNTING

INTRODUCTION
MODERN ECONOMY IS VERY COMPLEX IN NATURE –
INVOLVES A NUMBER OF TRANSACTIONS eg
HOUSEHOLDS CONSUME GOODS AND SERVICES AND PROVIDE
THEIR LABOUR SERVICES TO FIRMS
THEY PROVIDE SAVINGS TO Fis WHICH ACT AS
INTERMEDIARIES BETWEEN SAVERS AND INVESTORS
GOVERNMENT PLAYS A ROLE IN COLLECTING TAXES AND
PROVIDING PUBLIC SERVICES
TRANSFER OF PHYSICAL AND FINANCIAL ASSETS TAKE PLACE
WITH FOREIGNERS
NATIONAL INCOME ACCOUNTS – SUMMARY PICTURE OF
ALL TRANSACTIONS
NATIONAL ACCOUNTING INVOLVES A SUBSTANTIAL
AMOUNT OF AGGREGATION – HELPS IDENTIFY IMPORTANT
ECONOMIC RELATIONSHIPS

MAJOR TYPES OF ACCOUNTS – NATIONAL ECONOMY

NATIONAL INCOME ACCOUNTS - FLOW OF GOODS AND

SERVICES IN AN
ECONOMY DURING A
YEAR
INPUT OUTPUT ACCOUNT - FLOWS OF GOODS AND
SERVICES BETWEEN
PRODUCTIVE AND
HOUSEHOLD SECTORS
NATIONAL BALANCE SHEET - REFLECTS NATIONS
WEALTH AT A POINT
OF TIME
NATIONAL ACCOUNTS
SIMPLE ECONOMY – NUMBER OF HOUSEHOLDS
SINGLE FIRM (OWNED BY SOME
HOUSEHOLDS)
LABOUR IS THE ONLY SCARCE INPUT
PRODUCTION ACCOUNT
Dr. Cr.
Wages 90 --
Profits 10 --
Sales (to households) 100

100 100

HOUSEHOLD ACCOUNT
Wages 90
Profits 10
Consumption 100
Sales (to households) 100 100
CONSOLIDATED PRODUCTION ACCOUNT (WITH
BUSINESS SAVING & DEPRECIATION)

Dr. Cr.

Wages & Salaries 1340 --

Retained Profits 310 --
Depreciation 50
Sales 1200
Investment 500
1700 1700
 INVENTORY INVESTMENT
GNP IS NOT EQUAL TO GNI-ROLE OF SAVING & INVESTMENT
PRODUCTION A/C
Dr. Cr.
Wages & Profits 360 --
Sales Households 325
Investment 35
360 360
HOUSEHOLD A/C.
Wages & Profits 360
Sales to Households 325
Saving 35
360 360
SAVINGS A/C
Investment in inventories 35
Saving (Household) 35
35 35
(ROLE OF GOVERNMENT)-PR0DUCTION SECTOR

Wages and salaries 1000

Dividends 500
Retained profits 500
Corporate profit tax 1000
Sales to households 1000
Sales to Government 1000
Domestic investment 1000
3000 3000

GOVERNMENT SECTOR

Wages and salaries 500

Purchases 1000
Taxes collected 1500
1500 1500
 HOUSEHOLD A/C
Dr. Cr.
Wages & Salaries 1500
Dividends 500
Personal income tax 500
Consumption 1000
Personal Saving 500
2000 2000

SAVINGS & INVESTMENT

Dr. Cr.
Personal Saving 500
Business Saving 500
Domestic Investment 1000
1000 1000
INDIRECT TAXES AND SUBSIDIES-PR0DUCTION SECTOR
Wages and salaries 1000
Dividends 500
Retained profits 500
Corporate profit tax 500
Sales and excise taxes 300
Sales to households 1100
Sales to Government 1100
Domestic investment 1100
3300 3300

GOVERNMENT SECTOR

Wages and salaries 700

Purchases 1100
Taxes collected 1800
1800 1800
 HOUSEHOLD A/C
Dr. Cr.
Wages & Salaries 1700
Dividends 500
Personal income tax 500
Consumption 1100
Personal Saving 600
2200 2200

SAVINGS & INVESTMENT

Dr. Cr.
Personal Saving 800
Business Saving 500
Domestic Investment 1100
1100 1100
 A COMPLETE PICTURE
PRODUCTION A/C
Dr. Cr.

Factor Incomes 85 Sales to households 78

(a) Paid to domestic (80) Sales to Government 4

residents
(b) Paid to foreign (5) Domestic Investment 12
residents
Retained Profits 8 (a) Fixed Investment (10)

Corporate Profit tax 1 (b) Inventory (2)

Investment Exports
Indirect taxes 6 Subsidies from Govt. 3

Imports 5

105 105
 EXTERNAL A/C.
Dr. Cr.
Exports 8 Imports 5
Transfers from 3 Transfer to foreigners 6
foreigners
Incomes from 4 Income paid to 5
abroad foreigners
Deficit on current 1
a/c. 16 16
SAVINGS & INVESTMENT A/C
Dr. CR
Fixed Investment 10 Personal Saving 2
Inventory 2 Business Saving 8
Government Saving 1
Deficit on current a/c. 1
12 12
 HOUSEHOLD SECTOR
Dr. Cr.
Consumption 78 Incomes from domestic 86
production
Personal Income Tax 10 Income from abroad 4

Transfers to foreigners 5 Transfers from Govt. 2

Personal Saving 2 Transfers from foreigners 3
95 95

GOVERNMENT A/C.
Dr. Cr.
Wages & Salaries 5 Corporate profit tax 1
Purchases of goods & 4 Indirect Tax 6
services
Transfers abroad 1 Income Tax 10

Transfers to household 2

Subsidies to producers 3
Surplus 1
17 17
12
9.89.5
10 8.5 8.1
8 7
6 5.8 Outlook in April
6 5.3
4.5 4.5
Outlook in Oct
4
2
0
ia
a

a
e
n

re
or
d

na
hi

In

Ko
ap
C

et

ng

S.
Vi

Si
 A comparitive picture

s. Korea 4.2
4.4

India 7.1
7.7

Euro 0.9
1.3 GDP growth 2009

China 8.5 GDP growth 2008

9.8

Japan 0.9
1

US 1.3
1.6

0 5 10 15
 Budget deficit as a percentage of GDP

2.00% 1.50%
1.00% 0.60%
0.00%
-1.00% US UK S. India China Series1
-2.00% Korea
-3.00% -2.50%
-2.80%
-4.00% -3.40%
 Growth in industrial production

14.00% 12.80%
12.00%
10.00% 9.10%
8.00% 7.10%
6.00% Growth in
industrial
4.00% 2.40% production
2.00%
0.00%
-2.00%
-1.50%
a
na
.

a
ro
K

-1.70%
.S

di

re
U

Eu

-4.00%
hi
U

In

Ko
C

S.
(39)
The following is the information from the national income accounts for a hypothetical country :
GNP MP 2400
Gross Investment 400
Net Investment 150
Consumption 1500
Government purchases of goods and services 480
National Income 1925
Wages and Salaries 1460
Proprietor’s income + rental income of persons 160
Dividends 50
Government budget surplus 15
Interest 60
Transfer payments 260
Personal tax and non-tax payments 300
Required to compute :
(a) NNP at market prices (b) Net exports (c) Net indirect taxes
(d) Corporate profits (e) Taxes – Transfers (f) Personal income
(g) Disposable personal income (h) Personal saving
(39)

(a) NNP = GNP – Depreciation

= 2400-250
= 2150
Depreciation = Gross Investment – Net Investment
= 400-150
= 250
(g) Net Exports = GNP – (C+I+G)
= 2400-(1500+400+480)
= 20
(j) Net Indirect Profits = NNP – National Income
= 2150-1925
= 225
(a) Corporate Profits = NI – (Wages and Salaries + Proprietors Income + Rental Income
+ Net Interest)
= 1925-(1460+160+60)
= 1925-1680
= 245

(f) Taxes- Transfers = Gross Purchases + Budget Surplus

= 480+15
= 495

(j) Personal Income = National Income – Corporate Profits + Transfer Payments +

Dividends
= (1925-245) + 260+50
= Rs. 1990

(o) Personal Disposable =Personal Income – Personal Taxes and Non-Tax payments
Income = 1990-300
= Rs. 1690

(s) Personal Saving = Personal Disposal Income – Consumption

= 1690 – 1500
= Rs. 190
 1. Given below are the accounts of a hypothetical economy
PRODUCTION A/C
WAGES & SALARIES 100 GOVT. PURCHASE 30 PERSONAL SECTOR A/C.
PERSONAL SECTOR PURCHASES (BF) FACTOR INCOMES 160
DIVIDENDS( ) 20 PURCHASES TRANSFER
EXCISE TAX 20
20 EXPORTS 40 INCOME TAX 20 PAYMENT(GOVT) 30
SAVING 60
PROFIT TAX 10 FIXED INVESTMENT FIXEDINVESTMENT
20 20 20
RETAINED PROFIT 50 NET CHANGE IN I
IMPORTS (BF) __
-1MPORTS(BF) FOREIGN
10 SECTOR A/C
EXPORTS 40 IMPORTS
FACTOR INCOMES 20 FACTOR INCOMES 10
PAID
GOVERNMENT A/C. TRANSFERS TO
WAGES & SALARIES EXCISE TAX 20 ? ROW
TRANSFER to HH PERSONAL INCOME 20 SURPLUS (30)
TAX SAVING AND INVESTMENT A/C
TRANSFERS TO 10 PROFIT TAX FROM DOMESTIC 20 HOUSEHOLD 60
ROW BUSINESS 10 INVESTMENT SAVINGS
EXPENSES ON GOOD INVESTMENT IN BUSINESS SAVINGS
SAVINGS
INVENTORIES 10
TOTAL ? GOVT. SAVINGS
NET FOREIGN INVEST

Fill up the missing entries and compute

GDP & GNPfc
GDP & GNPmp
Personal Disposable Income
 1. Given below are the accounts of a hypothetical economy

PRODUCTION A/C
WAGES & SALARIES 100 GOVT. PURCHASE 30 PERSONAL SECTOR A/C.
PERSONAL SECTOR PURCHASES (BF) 110) FACTOR INCOMES 160
DIVIDENDS(10) 20 PURCHASES 110 TRANSFER
EXCISE TAX 20
20 EXPORTS 40 INCOME TAX 20 PAYMENT(GOVT) 30
SAVING 60
PROFIT TAX 10 FIXED INVESTMENT FIXEDINVESTMENT
20 20 20
RETAINED PROFIT 50 NET CHANGE IN I 10 FOREIGN SECTOR
IMPORTS (BF) __-10-1MPORTS(BF) 10
FACTOR INCOMES 20 FACTOR INCOMES 10
PAID
TRANSFERS TO
GOVERNMENT A/C. eXPORTS 40 ROW 10
WAGES & SALARIES 30 EXCISE TAX 20 SURPLUS 30
TRANSFER PAYMENT 30 PERSONAL INCOME 20
TAX SAVINGS AND INVESTMENT A/C
TRANSFERS TO 10 PROFIT TAX FROM DOMESTIC 20 HOUSEHOLD 60
ROW BUSINESS 10 INVESTMENT SAVINGS
PURCHASES(HS) 30 INVESTMENT IN BUSINESS SAVINGS
SAVINGS -50 INVENTORIES 10 50
TOTAL ? GOVT. SAVINGS -50
NET FOREIGN INVEST (-30)

Fill up the missing entries and compute

GDP & GNPfc
GDP & GNPmp
Personal Disposable Income
 (45)
The following are inter-industry transactions in an economy. (The figures represent money valued of output)

Industries X Y Z Total Output

X 50 80 30 200
Y 20 60 50 240
Z 30 40 60 160
Total Output 200 240 160

Calculate the National Income in the economy and value added in industry Y
(45)
The National Income in the Economy = Total final output in the Economy - Sales to household sector.
The sales to household sector by X, Y and Z industries are as follows :-
X = 200-(50+80+30) = 40
Y = 240-(20+60+50) = 110
Z = 160-(30+40+60) = 30
National Income =40+110+30= 180
Value added in Industry Y = Output of Y – Input from the industries
= 240-(80+60+40)
= 240-180
= 60
(14)
The following is the information from the national income accounts for a
country XXX

Rs. In Crore
National Income 3850
Government purchases 930
Consumption 3000
Net investment 300
Gross investment 800
GNP 4800
Personal Tax and non-tax payments 600
Transfer payments 510
Net interest 120
Government budget surplus 30
Dividends 100
Proprietors incme and rental income 320
of persons
W ages and salaries 2920

Required to compute :
b. Net Indirect Tax
c. Taxes – Transfers.
d. Personal Income
d. Net Exports
a. Net indirect taxes = NNP at market prices – National income (14)
OR
Indirect taxes = (GNP at Market price – Depreciation) – National Income
- Subsidies
= GNP at Market Price – (GI-NI) – National Income [where Gross
Investment (NI)
= Depreciation ]
= 4800-(800-300)-3850
= 4800-500-3850 = 450
b. Taxes – Transfers = Government purchases + Budget surplus
= 930+30=960
c. Personal Income = (Wages + Proprietor’s income + Net Interest + Dividends +
Transfer Payments)
= 2920+320+120+100+510
= 3970.
d. Net Exports = GNP – (C+I+G)
= 4800 – (3000+800+930)
= 70
(20)
The following is the information drawn from
the National Income Accounts for an economy
Item Amount
(Rs. In crore)
A. GNP 4850
B. Gross investment 854
C. Net investment 310
D. Consumption 3095
E. Government Spending 968
Calcutta the NNP and net export for the
economy.
 (20)
NNP = GNP – Depreciation (i.e. Gross Investment – Net Investment)
= 4850-544=4306
Net Exports = GNP – Domestic absorption (i.e. C+I+G)
= 4850-4917= -67

Note : While calculating Domestic Absorption we have to consider gross investment