04ca0national Income

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Amity International Business School

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NATIONAL INCOME


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MEASURING THE PRODUCTION , INCOME &SPENDING OF THE NATION

National Income Accounting represents the tools and methods bywhich economists and policy makers measure economic activity

and economic growth over time.

To assess the overall consumption and investment demandgenerated over a period of time and standard of living of thepopulation of a country, estimation of national income is pertinent.

National Income represents the total value of the final goods andservices produced by an economy over a period of time (normally

a year).


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Measurement of National Income

Value addedApproach

IncomeApproach

ExpenditureMethod

Value Added Approach (Net Product Approach)

Value Added by the Firm = Value of the output produced by the firm value ofintermediate products used by the firm

Value added in the economy= Sum total of value added by all the firms in theEconomy

Note: only current production of goods and services is taken into consideration.Sale of second hand goods is excluded.


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INCOME APPROACH or FACTOR INCOME METHOD

Sum total of the earnings that the factors of production ( land, labour, capitaland entrepreneur) receive in the form of rent, wages, interest and profits fromthe production of current goods and services.

Total Income = ( Wages + Rent+ Interest+ profit ) + mixed income of self

employed

Excluded:

Transfer receiptsIncome from sale of second-hand goods

Interest on loan for consumptionIncome from illegal activitiesIncome from capital gains


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Expenditure Method

Y= C+ I + G+ X MNational Income= Consumption exp. + Investment exp.+ Govt. exp+ NetExports

C :Spending by households on final goods and services

I :

(Business fixed investment + Residential fixed investment+ Inventories)

Depreciation

G:- Exp. on goods and services purchased by the Govt.Net Exports:- Exports Imports

Excluded:

Expenses in form of transfer paymentsExp. On second hand commoditiesExp. On Intermediate goods


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Useful relationships to understand the nature of different

aggregates of national income:

GROSS & NET:

Net Product = Gross product - Depreciation

DOMESTIC PRODUCT & NATIONAL PRODUCT:

National Product = Domestic Product + Net Factor Income fromAbroad

PRODUCT AT MARKET PRICES & PRODUCT AT FACTORCOST:

Product at Factor Cost = Product at Market Price Net IndirectTaxes


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STANDARD MEASURES OF INCOME AND OUTPUT

Gross National Product (GNP)

Gross Domestic Product (GDP)

Net National Product (NNP)

Net Domestic Product (NDP)

Per Capita Income (PCI) Personal Disposable Income (PDI)

In India, the Central Statistical Organization ( CSO )

regularly compiles and publishes the National AccountStatistics.


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Gross Domestic Product at Market Price GDPMP:

Sum total of the money value of all final good and services produced in theDomestic territory of a country during a year.

Gross National Product at Market Price GNPMP :

GNPMP = GDPMP + Factor Income earned by normal residents abroad factor income earned by non-residents in domestic territory

Net Domestic Product at Market Price:

NDPMP= GDPMP Depreciation

Net National Product at Market Price:

NNPMP= GNPMP Depreciation

Or NNPMP

= NDPMP

+ NFIA


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Gross Domestic Product at Factor Cost:

GDPFC= GDPMP- Indirect Taxes+ subsidies

Net Domestic Product at factor cost:

NDPFC= GDPFC - Depreciation


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Needs for the study of National Income :

To measure the size of the economy and level of countrys

economic performance

To trace the trend or speed of the economic growth inrelation to previous year(s) as well as to other countries

To know the structure and composition of the national

income in terms of various sectors and the periodical

variations in them

To make projection about the future development trend of

the economy


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Needs

To help Govt. to formulate suitable development plansand policies to increase growth rates.

To fix various development targets for different sectorsof economy on the basis of there performance.

To help business firms in forecasting future demand forthere products

To make international comparison of peoples livingstandards.


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Problems in calculating National Income

Black Money : It has created a parallel economy -unreported economy which is equivalent to the size ofofficially estimated size of the economy

Non-Monetization : In most of the rural economy,considerable portion of transactions occurs informally

Growing Service Sector : growing faster thanAgricultural and Industrial sectors value addition inlegal consultancy, health service ,financial and business

services is not based on accurate reporting.


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Problems

House Hold Services : It ignores domestic work andhouse keeping services

Social Services : It ignores volunteer and unpaid socialservices. (Mother Teresas social service)

Environment Cost : It does not distinguish betweenenvironmental-friendly and environmental-hazardousindustries cost of polluting industries is not included inthe estimate.

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04ca0national Income