National Income

Aggregates
Basic terms Economic Activities
PRODUCTION: A general definition of
production is the provision of goods and
services. G&S are also called
commodities. Production consists of
following:
All goods and services which are sold in the
market with a view to earn profit
Goods and services not sold in the market,
but which are supplied free or at a nominal
price.
Basic terms Economic Activities..
Produced goods which fail to reach the
market and hence are not sold. These goods
are produced for own use.
Own-account production of fixed assets by
government, business enterprises and
households
Imputed rent of owner-occupied houses
Thus production is defined as any
activity, which produces commodities or
increases the value of the commodities
already produced.
Basic terms Economic Activities..
However, domestic services rendered
within the households by housewives (and
other family members) are excluded from
production.
All leisure-time activities (growing fruits,
flowers and vegetables in kitchen
gardens, painting the house, etc are also
excluded from the production.
Basic terms Economic Activities..
Production of goods is counted at the
point of production;
Production of services is counted when
they are rendered;
Trading services are counted at the point
of sale.
Production of government services is
counted when the costs are incurred by
the government to produce those
services.
Basic terms Economic Activities..
CONSUMPTION: Using up of goods and
services to satisfy human wants is defined
as consumption.
There is no time gap between the
production and consumption of services,
both take place simultaneously.
Consumption is counted at the point
when the commodities (goods and
services) are purchased for consumption.
Basic terms Economic Activities..
CAPITAL FORMATION: The surplus
of production over consumption in an
accounting year is defined as capital
formation. Capital formation consists
broadly of the following:
Construction of new assets like buildings,
roads, bridges and transport equipments
Production of machinery and equipment
Increase in stocks of raw materials, semi-
finished goods and finished goods during an
accounting year
Basic terms Type of goods
CONSUMER GOODS: Goods and
services purchased by households and
government for final consumption
INTERMEDIATE GOODS: Goods and
services used up for producing goods and
services
CAPITAL GOODS: All goods produced
for use in future productive processes.
Durable goods, stocks of raw materials,
semi-finished & finished goods
Basic terms Type of goods..
A car purchased by a consumer household is a
consumer good; a car purchased by the
government for military purpose is an
intermediate good; and a car purchased by a
taxi driver is a capital good
A refrigerator purchased by consumer
household is a consumer good; if purchased by
the government for military purpose it is an
intermediate good; and if purchased by a
shopkeeper for selling cold drinks is a capital
goods
Basic terms Type of goods..
Paper, pens, pencils, wheat, oils, soaps, etc,
purchased by consumer households are
consumer goods; the same commodities used by
producing enterprises (including the
government) are intermediate goods
Aero planes, helicopters and submarines used
by the government for military purpose are a
part of intermediate consumption and the
goods are intermediate goods. The same goods
purchased by air and sea transport companies
are capital goods
Basic terms Type of goods..
The services of doctors, lawyers, teachers, etc,
used by the consumer households are consumer
services; the same services used by the
enterprises for the production of goods and
services are a part of intermediate
consumption. The same is the case with regard
to government.
Introduction
Economic growth: Increasing production of goods & services
National Income: A measure of size of the economy
To find out growth of an economy, we have to look at
national income for number of years
Economy: Quantity/volume of goods & services produced
in an accounting year
Introduction
If national income (money value of final goods & services)
grows over a period, it means, economy is growing. ?
May or may not.
Price comes into picture.
Thus, Economic growth will occur only when national income
rises in real terms (constant prices)
Increase in real national income should improve
levels of living of people
Increase in real national income necessarily improves
levels of living of people?
May or may not.
Introduction
Population enters the picture.
If population increases faster than the rise
in real national income, what will happen?
Levels of living of people will not improve
Thus, growth in per capita real national income (real PCI)
is more realistic indicator of economic growth
with improved well being of people
Are you sure, this is the best indicator of economic growth
& improved well being of people of a country
Introduction
May be may not be.
Distribution of incremental income enters the picture
Thus, growth in real PCI along with improving
equity is better indicator
That is why; objective of economic policies in India is
Growth with equity
National Product/Income Aggregates
Gross Domestic Product at market price (GDP_MP)=
Market value of all final goods & services produced
in a country during an accounting year
Gross Domestic Product at factor cost (GDP_FC)=
GDP_MP Net Indirect taxes
Gross National Product at market price (GNP_MP)=
GDP_MP + Net Factor Income From Abroad
Gross National Product at factor cost (GNP_FC)=
GDP_FC + Net Factor Income From Abroad
Or
GDP_MP Net Indirect Taxes + Net Factor Income From Abroad
National Product/Income Aggregates
Net Domestic Product at market price (NDP_MP)=
GDP_MP Depreciation
Net Domestic Product at factor cost (NDP_FC)=
NDP_MP Net Indirect taxes
GDP_FC Depreciation
Net National Product at market price (NNP_MP)=
GNP_MP Depreciation
GDP_MP + Net factor Income from abroad Depreciation
Net National Product at factor cost (NNP_FC)=
NNP_MP Net Indirect Taxes
GNP_FC Depreciation
GNP_MP
NDP_MP
GNP_FC NNP_MP
GDP_MP
NNP_FC
NDP_FC
GDP_FC
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Some Important Points
Nominal value (at current prices) vs. real value (at
constant prices)
Output at market price vs. output at factor cost
Domestic output vs. National output
Gross output vs. Net output
Measurement of National Income
Accordingly, there are 3 methods of measuring
National Output / National Income
1. Value added method
2. Income method
3. Expenditure method
Production (output) gives rise to income; income gives rise to
Demand for goods & services; and demand in turn gives
Rise to expenditure; again, expenditure leads to further
Production.
The circular flow of output, income and expenditure
Represents 3 related phases, namely, production,
Distribution and disposition
Value added method
Identifying the producing enterprises &
classifying them into industrial sectors
Indian Economy divided into 3 sectors [primary,
secondary and tertiary/service sectors]
Estimating value added
Estimate Value of output
[Volume of physical output valued at market price]
Estimate Value of intermediate consumption
[Intermediate consumption valued at actual price paid by
the enterprises]
Product method
Deduct value of intermediate consumption from value
of output
We get value added by individual enterprises/sectors
Sum the value added by all enterprises/sectors
We get gross value added or GDP_MP
Deduct consumption of fixed capital (depreciation)
from GDP_MP
We get net value added or NDP_MP
Deduct Net Indirect Taxes (indirect taxes
minus subsidies)
We get NDP_FC
Add net factor income from abroad
We get NNP_FC (National Income)
Value added
Take care to include following:
Own-account production of fixed assets by
government, enterprises, households
Production for self-consumption
Imputed rent of owner-occupied houses
Do not include following:
Sale and purchase of second-hand goods
Commission & Brokerage included
Income method
Identifying the producing enterprises
which employ factor inputs
Classifying factor payments
Estimating factor payments
Compensation of employees
Rent
Interest
Profits
Mixed income of the self-employed
Income method.
Summing above, we get Domestic Factor
Income (DFI)
Add, net factor income from abroad
(NFIFA)
We get, National Income
Income method.
Precautions
Exclude transfer payments
Include value of production for self-consumption,
and imputed rent of owner-occupied houses
Exclude illegal incomes
Exclude windfall gains like lotteries
Include profits before corporation tax
Include compensation of employees including
income tax
Exclude death duties, gift tax, wealth tax, tax on
windfall gains
Exclude income from sale of second-hand goods
Exclude proceeds from sale of bonds and shares
Expenditure method
This method measures the disposal of
gross domestic product.
Private final consumption expenditure
Government final consumption expenditure
Gross fixed capital formation
Change in stocks
Net exports of goods & services (export
import)
We arrive at GDP at Market Price
Expenditure method.
Precautions
Exclude expenditure on second-hand goods
Exclude expenditure on purchase of bonds
and shares
Exclude government expenditure on transfer
payments such as old age pension, etc
Exclude expenditure on intermediate goods
and services
Reconciling the 3 methods
Production method Income method Expenditure method
Private final
consumption
expenditure
Gross Value added in
primary sector
Compensation of
employees
Govt. final
consumption
expenditure
Gross Value added in
secondary sector
Rent + interest + profit Gross capital formation
Gross Value added in
services sector
Mixed income of self-
employed
Net export of goods and
services
GDP_MP NDP_FC GDP_MP
Other Aggregates
PRIVATE INCOME
NDP_FC (Domestic Factor Income)
- Income from property and entrepreneurship
accruing to Government
- Saving of non-departmental enterprises of Govt
+ net factor income from abroad
+ national debt interest
+ current transfers from government
+ other current transfers from the rest of world
(net)
Other Aggregates
PERSONAL INCOME
Private income
- Saving of the private corporate sector net
of retained earnings of foreign companies
- Corporation taxes
Other Aggregates
Personal Disposable Income
Personal income
minus direct taxes paid by households
Transfer Payments
Unilateral payments against which there is no
flow of goods or services
Current transfers
Transfers made from current income of the
payer and added to the current income of the
recipient for consumption purposes
Capital transfers
Transfers in cash or kind which are used for
purpose of GCF or other forms of
accumulation, or long term expenditure of the
recipient, which are made out of the wealth or
saving of the donor
Current Transfers (within country) Examples
From To Particulars
Government Households Scholarship, gift, prizes, unemployment
allowances, old-age pensions, maintenance
grant to non-profit organizations
Government Enterprises Subsidies, any other gifts, prizes or
donations,
Enterprises Households Scholarship, gift, prizes
Enterprises Government Direct and indirect taxes
Households Government Direct taxes
Capital Transfers (within country) Examples
From To Particulars
Government Households Lump sum payments for damages like
demolition of house
Government Enterprises Investment grants under policy to develop
particular enterprises, or to develop
particular regions of country
Enterprises Government Taxes on capital gains or any other tax
which is not regularly imposed by Govt.
Households Government Death duties, inheritance tax, or any other
tax which is not regularly imposed by Govt
Examples of Transfers between countries
Current transfers between countries
Gifts at the time of natural calamities
Capital transfers between countries
War damages
economic aid
unilateral transfer of capital goods
Grants from one government to another to
finance deficit in the external trade