MACRO AGGREGATESGROSS 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 INCOMEFROM 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)

WAGES&PROFITS(Y)Rs1000

HOUSEHOLD SECTOR

PRODUCTIVESECTOR

PRIVATECONSUMPTION

Rs 1000 ( C)

Y=ADY=C

SIMPLE ECONOMY

WAGES&PROFITS(Y)Rs1000

HOUSEHOLD SECTOR

PRODUCTIVESECTOR

PRIVATECONSUMPTION

Rs 800 ( C)

Y=ADY=C+IS=I

CLOSED ECONOMY

INVESTMENTRs 200

SAVINGRs 200

WAGES&PROFITS(Y)Rs1000

HOUSEHOLD SECTOR

PRODUCTIVESECTOR

PRIVATECONSUMPTION

Rs 800 ( C)

Y=ADY=C+I+G+XY =C+J W=J

OPEN ECONOMY

WITHDRAWALS(W)=(200)SAVINGS(S)=100IMPORTS(I)=50TAXES(T)=50

INJECTIONS(J)=(Rs 200)INVESTMENT(I)=80 Exports(E)=60Expenditure(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

=GNPFC=NNPMP

GDPMP

-net indirect taxes

-depreciation

-net income from Abroad

= NDPMP

=NNPFC

GDPFC

= NDPFC

-net income from Abroad

-net income from Abroad -depreciation

-depreciation -net indirect taxes

-net indirect taxes

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

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

Measurement of national income

INCOME METHOD

MONEY PAYMENTS MADE TO ALL FACTORS OF PRODUCTION FACTOR INCOMES FOR CURRENT SERVICES TO PRODUCTION

Income from employment 80Income from self employment 10Gross trading profits of cos 10Gross trading surplus of public cos 10Rent 10Total domestic income 120Stock appreciation -30GDPfc 90NFIA 10GNPfc 100

EXPENDITURE METHOD

AGGREGATES ALL MONEY SPEND BY PRIVATE CITIZENS FIRMS AND GOVERNMENT

Consumer Expenditure (C) 70Govt.Expenditure (G) + 20Gross Domestic Fixed Capital Formation (GDFC) (I) + 20Value of Physical increase in stocks + 10Total domestic expenditure (mp) 120Exports & factor income received + 20Imports & factor income paid - 30GNPmp 110Indirect Taxes - 20Subsidies +10GNPfc 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 1201996-97 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 to1996-97?

What is the inflation rate in 1996-97 in relation to1995-96 ?

2500 x 100/120 = 2083.333200 x 100/145 = 2207

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%

Real GNP

Growth rate

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

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

Compute GNP using income method and expenditure method

(a) GNP – INCOME METHOD

INDIRECT BUSINESS TAXES 1250COMPENSATION TO EMPLOYEES 8487.50RENTS 1000.00INTEREST 500.00PROPRIETOR’S INCOME 1250.00CORPORATE TAX 500.00DIVIDENDS 750.00UNDISTRIBUTED 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 costb) National income c) Personal disposable income

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

GDP fc = GNP fc - NFIA

GNPfc = GNP mp - IT + subsidies = 5000 - 450 + 400 = 4950

GDP fc = 4950 –(900-800) = 4850

National incomeNNPfc = GNP fc - Dep 4950 –350 4600

Personal disposable income = Personal income – Personal TaxesPersonal income = National income - Retained earning - Corp tax 4600 -200 – 800 = 3600

GDP mp 6000Corporate income tax 1200Personal income tax 900Subsidies 475Factor incomes receivedfrom abroad 1500Factor incomes paid 1200abroadUndistributed profits 225Indirect taxes 900Depreciation 600

Compute Personal Disposable income, national income andGNP 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 HOUSEHOLDSSINGLE 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 90Profits 10

Consumption 100Sales (to households) 100 100

CONSOLIDATED PRODUCTION ACCOUNT (WITH BUSINESS SAVING & DEPRECIATION)

Dr. Cr.

Wages & Salaries 1340 --Retained Profits 310 --Depreciation 50Sales 1200Investment 500

1700 1700

Dr. Cr.Wages & Profits 360 --Sales Households 325Investment 35

360 360

INVENTORY INVESTMENT

GNP IS NOT EQUAL TO GNI-ROLE OF SAVING & INVESTMENT

PRODUCTION A/C

Wages & Profits 360Sales to Households 325 Saving 35

360 360

HOUSEHOLD A/C.

SAVINGS A/CInvestment in inventories 35Saving (Household) 35

35 35

Wages and salaries 1000Dividends 500Retained profits 500Corporate profit tax 1000

Sales to households 1000 Sales to Government 1000 Domestic investment 1000 3000 3000

Wages and salaries 500 Purchases 1000

Taxes collected 1500 1500 1500

GOVERNMENT SECTOR

(ROLE OF GOVERNMENT)-PR0DUCTION SECTOR

Dr. Cr.Wages & Salaries 1500Dividends 500Personal income tax 500Consumption 1000Personal Saving 500

2000 2000

HOUSEHOLD A/C

Dr. Cr.Personal Saving 500Business Saving 500Domestic Investment 1000

1000 1000

SAVINGS & INVESTMENT

Wages and salaries 1000Dividends 500Retained profits 500Corporate profit tax 500Sales and excise taxes 300

Sales to households 1100 Sales to Government 1100 Domestic investment 1100 3300 3300

Wages and salaries 700 Purchases 1100

Taxes collected 1800 1800 1800

GOVERNMENT SECTOR

INDIRECT TAXES AND SUBSIDIES-PR0DUCTION SECTOR

Dr. Cr.Wages & Salaries 1700Dividends 500Personal income tax 500Consumption 1100Personal Saving 600

2200 2200

HOUSEHOLD A/C

Dr. Cr.Personal Saving 800Business Saving 500Domestic Investment 1100

1100 1100

SAVINGS & INVESTMENT

Dr. Cr.

Factor Incomes 85 Sales to households 78

(a) Paid to domestic residents

(80) Sales to Government 4

(b) Paid to foreign residents

(5) Domestic Investment 12

Retained Profits 8 (a) Fixed Investment (10)

Corporate Profit tax 1 (b) Inventory Investment Exports

(2)

Indirect taxes 6 Subsidies from Govt. 3

Imports 5

105 105

A COMPLETE PICTURE

PRODUCTION A/C

Dr. Cr.

Exports 8 Imports 5

Transfers from foreigners

3 Transfer to foreigners 6

Incomes from abroad

4 Income paid to foreigners

5

Deficit on current a/c.

116

16

EXTERNAL A/C.

SAVINGS & INVESTMENT A/CDr. CR

Fixed Investment 10 Personal Saving 2

Inventory 2 Business Saving 8

Government Saving 1

Deficit on current a/c. 1

12 12

Dr. Cr.

Consumption 78 Incomes from domestic production

86

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

HOUSEHOLD SECTOR

GOVERNMENT A/C.Dr. Cr.

Wages & Salaries 5 Corporate profit tax 1

Purchases of goods & services

4 Indirect Tax 6

Transfers abroad 1 Income Tax 10

Transfers to household 2

Subsidies to producers 3

Surplus 1

17 17

9.88.5 8.1

5.8 5.3

9.5

76

4.5 4.5

0

2

4

6

8

10

12

China

Indi

a

Vietna

m

Singap

ore

S.Kor

ea

Outlook in April

Outlook in Oct

A comparitive picture

1.6

1

9.8

1.3

7.7

4.4

1.3

0.9

8.5

0.9

7.1

4.2

0 5 10 15

US

Japan

China

Euro

India

s. Korea

GDP growth 2009

GDP growth 2008

Budget deficit as a percentage of GDP

-2.50% -2.80%

1.50%

-3.40%

0.60%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

US UK S.Korea

India China Series1

Growth in industrial production

-1.50%

2.40%

-1.70%

12.80%

7.10%

9.10%

-4.00%

-2.00%

0.00%2.00%

4.00%

6.00%

8.00%10.00%

12.00%

14.00%

U.S.

UKEur

o

China

India

S. Kore

a

Growth in industrial production

(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

(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

Required to compute :

(39)

(a) NNP = GNP – Depreciation

= 2400-250

= 2150

Depreciation = Gross Investment – Net Investment

= 400-150

= 250

(b) Net Exports = GNP – (C+I+G)

= 2400-(1500+400+480)

= 20

(c) Net Indirect Profits = NNP – National Income

= 2150-1925

= 225

(d) Corporate Profits = NI – (Wages and Salaries + Proprietors Income + Rental Income + Net Interest)

= 1925-(1460+160+60)

= 1925-1680

= 245

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

= 480+15

= 495

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

Dividends

= (1925-245) + 260+50

= Rs. 1990

(g) Personal Disposable =Personal Income – Personal Taxes and Non-Tax payments

Income = 1990-300

= Rs. 1690

(h) Personal Saving = Personal Disposal Income – Consumption

= 1690 – 1500

= Rs. 190

2. Given below are the accounts of a hypothetical economy

WAGES & SALARIES 100 GOVT. PURCHASE 30

DIVIDENDS( ) 20PERSONAL SECTOR PURCHASES

EXCISE TAX 2020 EXPORTS 40PROFIT TAX 10 FIXED INVESTMENT FIXEDINVESTMENT 20 2020RETAINED PROFIT 50 NET CHANGE IN I

IMPORTS (BF) -1MPORTS(BF) 10__

PERSONAL SECTOR A/C.PURCHASES (BF) FACTOR INCOMES 160

INCOME TAX 20TRANSFER PAYMENT(GOVT) 30

SAVING 60

GOVERNMENT A/C.WAGES & SALARIES EXCISE TAX 20TRANSFER to HH PERSONAL INCOME

TAX 20

TRANSFERS TO ROW

10 PROFIT TAX FROM BUSINESS 10

EXPENSES ON GOODSAVINGS

TOTAL ?

EXPORTS 40 IMPORTSFACTOR INCOMES 20 FACTOR INCOMES

PAID10

?TRANSFERS TO ROWSURPLUS (30)

DOMESTIC INVESTMENT

20 HOUSEHOLD SAVINGS

60

INVESTMENT IN INVENTORIES 10

BUSINESS SAVINGS

GOVT. SAVINGS NET FOREIGN INVEST

Fill up the missing entries and computeGDP & GNPfcGDP & GNPmpPersonal Disposable Income

PRODUCTION A/C

FOREIGN SECTOR A/C

SAVING AND INVESTMENT A/C

2. Given below are the accounts of a hypothetical economy

WAGES & SALARIES 100 GOVT. PURCHASE 30

DIVIDENDS(10) 20PERSONAL SECTOR PURCHASES 110

EXCISE TAX 2020 EXPORTS 40PROFIT TAX 10 FIXED INVESTMENT FIXEDINVESTMENT 20 2020RETAINED PROFIT 50 NET CHANGE IN I 10

IMPORTS (BF) -1MPORTS(BF) 10__-10

PERSONAL SECTOR A/C.PURCHASES (BF) 110) FACTOR INCOMES 160

INCOME TAX 20TRANSFER PAYMENT(GOVT) 30

SAVING 60

GOVERNMENT A/C.WAGES & SALARIES 30 EXCISE TAX 20TRANSFER PAYMENT 30 PERSONAL INCOME

TAX 20

TRANSFERS TO ROW

10 PROFIT TAX FROM BUSINESS 10

PURCHASES(HS) 30SAVINGS -50

TOTAL ?

FACTOR INCOMES 20 FACTOR INCOMES PAID

10

eXPORTS 40TRANSFERS TO ROW 10SURPLUS 30 30 (30)

DOMESTIC INVESTMENT

20 HOUSEHOLD SAVINGS

60

INVESTMENT IN INVENTORIES 10

BUSINESS SAVINGS 50

GOVT. SAVINGS -50NET FOREIGN INVEST (-30)

Fill up the missing entries and computeGDP & GNPfcGDP & GNPmpPersonal Disposable Income

PRODUCTION A/C

FOREIGN SECTOR

SAVINGS AND INVESTMENT A/C

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)

(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

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

The following is the information from the national income accounts for a country XXX

Required to compute :

a. Net Indirect Tax

b. Taxes – Transfers.

c. Personal Income

d. Net Exports

(14)

a. Net indirect taxes = NNP at market prices – National income

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

(14)

The following is the information drawn from

the National Income Accounts for an economy

Amount(Rs. In crore)

A. GNP 4850B. Gross investment 854C. Net investment 310D. Consumption 3095E. Government Spending 968Calcutta the NNP and net export for the

economy.

Item

(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

(20)