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National Income, (Concept and Measurement)
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National Income, • National income is the money, value of all the final goods and, services produced by a country, during a period of one year., National income consists, of a, collection, of different types of, goods and services of different, types., 2
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National Income
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National Income, • Since these goods are measured in different, physical units it is not possible to add them, together. Thus we cannot state national, income is so many millions of meters of cloth., Therefore, there is no way except to reduce, them to a common measure. This common, measure is money., , 4
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National Income
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Basic Concepts In National Income, • Gross domestic product, • Gross domestic product at constant, price and at current price, • Gross domestic product at factor, cost and Gross domestic product at, market price, , 6
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Basic Concepts In National Income, •, •, •, •, , Net domestic product, Gross national product, Net national Product, Net national product at factor cost, or national income, , 7
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Gross Domestic Product, • Gross domestic product is, the money value of all final, goods, and, services, produced in the domestic, territory of a country during, an accounting year., 8
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Gross Domestic Product
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Gross Domestic Product at Constant, price and Current price, • GDP can be estimated at current, prices and at constant prices. If the, domestic product is estimated on the, basis of the prevailing prices it is called, gross domestic product at current, prices., 10
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Gross Domestic Product at Constant, price and Current price, , • If GDP is measured on the basis of, some fixed price, that is price prevailing, at a point of time or in some base year it, is known as GDP at constant price or, real gross domestic product., , 11
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GDP at Factor cost and GDP at, Market price, • The contribution of each producing unit, to the current flow of goods and services, is known as the net value added., • GDP at factor cost is estimated as the, sum of net value added by the different, producing units and the consumption of, fixed capital., , 12
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GDP at Factor cost and GDP, at Market price, • Conceptually, the value of GDP whether, estimated at market price or factor cost, must be identical. This is because the, final value of goods and services must be, equal to the cost involved in their, production., • GDP F.C = GDP M.P – IT + S., , 13
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Net Domestic Product, • While calculating GDP no provision is, made for depreciation allowance, (also called capital consumption, allowance)., In such a situation, gross domestic product will not reveal, complete flow of goods and services, through various sectors., 14
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Net Domestic Product, • A part of is therefore, set aside in, the form of depreciation allowance., When depreciation allowance is, subtracted from gross domestic, product we get net domestic, product., • NDP = GDP – Depreciation., 15
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Net Domestic, Product
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Gross National Product, • Gross national product is defined as the sum, of the gross domestic product and net factor, incomes from abroad. Thus in order to, estimate the gross national product of India, we have to add net factor income from, abroad - income earned by non-resident in, India to form the gross domestic product of, India., • In brief GNP = GDP + NFIA., 17
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Gross National Product
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Gross National Product
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Net National Product, • It can be derived by subtracting, depreciation allowance from GNP. It, can also be found out by adding the, net factor income from abroad to the, net domestic product., • NNP = GNP - Depreciation, , 20
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Net National Product
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Net National Product, • If the net factor income from abroad is, positive then NNP will be more than, NDP, If the net factor income from, abroad is negative then NNP will be less, than NDP and it would be equal when, net factor income from abroad is zero., • NNP = NDP + NFIA, , 22
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NNP at factor cost or National, Income, • NNP at factor cost is the volume of, commodities and services turned out, during an accounting year, counted, without duplication. It can also be, defined as the net value added at, factor cost in an economy during an, accounting year., , 23
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NNP at factor cost or National Income, • NNP at factor cost or national income is, defined as the sum of domestic factor, incomes and net factor income from abroad., If NNP figure is available at market price we, will subtract indirect taxes and add subsidies to, the figure to get NNP at factor cost or national, income of the economy., , 24
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NNP at factor cost or National, Income, • NNP at FC =National Income = FID, + NFIA, • FID factor income, earned, in the, domestic territory of a country., • Net Factor Income from Abroad., , 25
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Personal Income And Disposable, Income, • Personal income and disposable, are two concepts, of, income, national income very commonly, used in advanced countries. Personal, income may be defined as the current, income of persons or households from, all services. Personal income is not a, measure of production., 26
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Personal Income And Disposable, Income
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Disposable Income, • All personal income is not at the, disposal to be spent on consumption., Individuals have to pay personal direct, taxes to the government. They are free to, spend only after the payment of taxes., • DPI = Personal, Direct taxes., , income, , – Personal, 20
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Disposable, Income
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Disposable Personal Outlay, • The disposable personal income may be, spent fully or individuals may save. What, remains after saving is called the personal, outlay. Disposable income is equal to, consumption and savings, • Disposable outlay = Disposable income –, Savings., 30
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Disposable Personal, Outlay
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Real Income, • Since national income does not reveal the, real state of the economy, the concepts of, real income has been used. To find out the, real income of the economy, a base year is, selected and the price level of that year is, assumed to be 100., • Real income=, , Money Income × 100, Price Index, 32
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Methods Of Measuring, National Income, • The national income of a country can be, measured in three alternative ways, • Census of production method, • As a flow of income, and, • As a flow of expenditure, • Added to this, there is yet another, method of estimating national income, i.e., Value added method., 33
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Product Method, • This method is popular in U.S.A. and is, called as Total Product method or Goods, Flow Method. In India, It is known as, inventory or Product method. In this method,, the economy, is classified in to three, transaction sector like industrial, services and, foreign transaction sector where international, payments are considered., 24
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Product Method, • We calculate the money value of all, final goods and services produced in, an economy during a year. The money, value of these goods and services is, calculated at market price. The sumtotal is called the GDP at market price, , 35
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Product Method
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Income Method, • We estimate the income earned by, various factor services engaged in, the process of production. The sum, of these Incomes provides us the, Measure of gross national, income at factor cost, 37
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Income Method, • GNP = wages and salaries + rent +, interest + Dividends + undistributed, corporate profits, + mixed incomes + direct taxes, + indirect taxes + depreciation, + net income from abroad., , 38
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Income Method
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Expenditure Method, • Prof. Samuelson calls this as “ Flow, of Product Approach”. In India, it is, known as Outlay method. GNP is the, sum of expenditure incurred on, goods and services during one year, in a country., • GNP = C + I + G + (x – m), , 40
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Expenditure Method, • We sum up the flow of expenditure, in an economy to arrive at national, income estimates, If we add the, value of expenditure on all these, items we get the value of gross, national expenditure at market prices, , 41
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Expenditure Method
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Value Added Method, • In order to, avoid double counting, value, added, at each, stage, of, production, should be calculated, to, arrive at GNP. The difference between the, value of output and input at each stage of, production is called the value added. By, summing such value added for all industries, in the economy, GNP can be found out., 43
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Value Added Method
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Circular Flow Of National Income, • Lipsey defined the circular flow of income, as “ the flow of payments from domestic, households to, domestic, firms and back again”., National, income, and expenditure, flow in a circular manner. In any, economy,, both commodities, and, factors of production are constantly, being exchanged for money., 45
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Circular Flow Of National Income, •, •, •, •, •, , Simple Economy, Two sector model = Y = C + I, Three Sector Model = Y = C + I + G, Four sector model = Y = C + I + G +(x – m), The concept of circular flow shows clearly, whether, the, economy, is, working, efficiently, or whether there is any, disequilibrium in its working. It also helps in, restoring equilibrium., 46
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Circular Flow Of National, Income
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Circular Flow Of National, Income
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Circular Flow Of National, Income
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Circular Flow Of National, Income
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Circular Flow Of National, Income
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Circular Flow Of National, Income
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Problems In Estimating National, Income
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Problems In Estimating, National Income, • Simon Kuznets national income is not limited, to the territorial boundaries of a country. We, must include income of all the residents of a, country even if they are abroad., • Another difficulty in estimating the national, income in UDC is the prevalence of nonmonetized sector., • Income earned through illegal activities is, not included, 33
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Problems In Estimating National, Income, • Services rendered free of charge are not included in GNP., By leaving out these service, national income will work out, to be less., • Transfer payments are not included in national income as, they do not contribute to national product., • Capital gains and losses are not included in GNP as they are, not the result of current economic activities, , 34
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Problems In Estimating National, Income, • In the calculation of national income leisure, foregone in the process of production is not, included., • In UDC due to illiteracy, most producer do no keep, regular accounts., • Another difficulty in the measurement, of, national, income, in underdeveloped, countries, is lack of adequate, statistical, data., 35
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Trends In India’s National Income, Growth And Structure, • Trend in NNP: The real national income of, India has increased at an annual average rate, of 4.4% during the 55 years of economic, planning. If we consider the last 14 years we, find that the rate of increase in the national, income has been, annum., Although, encouraging sign., , around, this, , 6%, is, , per, an, 57
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Trends In India’s National Income, Growth And Structure, • During the tenth five year plan they set, up the target of 8% growth rate but, achieved at 7.6%, this encouraged the, eleventh planners to set a target of 8.5%, per annum growth rate., , 58
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Trends In Per Capita Income, • India’s per capita net national product i.e., during, the last 55 years of planning has increased at a, rate of 2.3% per annum. It is to be noted that, during the last 14 years the rate of increase in per, capita national income is significant. It was, around 4.5 % per annum in this period as against, 1.25% per annum during the first 30 years of, economic planning., 59
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Importance of National, Income Analysis, • They provide as an index of economic, of economic, activity and an instrument, planning., • National income accounting indicates the growth, of the economy in terms of income and output., • National income statistics help the policy makers, to frame policies to achieve full, employment and rapid economic growth., 39
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Importance of National, Income Analysis
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Importance of National, Income Analysis, • A complete knowledge about the trends in, national income is essential in economic, planning., • Research scholar also make use of national, income data pertaining to input, output, saving,, consumption, investment and employment., • National income statistics it helps in solving the, remove inequalities in income distribution., 40
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Thanks…
