Description
the circular flow of economic activity and income, the concepts of aggregates, stock and flow and final goods, Various concepts of national income, like GDP, GNP and NNP, different methods to measure national income
Macro Economic Aspects of Business
Contents
• The circular flow of economic activity and income. • The concepts of aggregates, stock and flow and final goods. • Various concepts of national income, like GDP, GNP and NNP. • Different methods to measure national income. • Advantages of national income calculation in global perspective.
Circular Flow of Income & Products
Circular Flow of Income
(Two Sector Economy)
(Wages, Rent, Interest and Profits)
Factor Payments (Y)
Factor Inputs Households
Savings (S)
Financial Market
Investment (I)
Firms
Goods and Services (O)
Consumption expenditure (C)
Circular Flow of Income
• In a simple two sector economy, the value of output produced (Y) is equal to the value of output sold (O) • Since the value of output sold is equal to the sum of consumption expenditure and investment expenditure.
Hence since and Hence: Y=O=E Y= C+S E= C+I C+S=C+I
Circular Flow of Income
• Savings are withdrawal of money from the circular flow • Investment is injection of money into the circular flow • For equilibrium savings should be equal to investments
S=I
Circular Flow of Income
(Four Sector Economy)
Government (G)
Taxes Factor Payments Taxes Remittances for purchases
Salaries
Factor Inputs Savings
Households
Exports
Financial Market
Goods
Investment
Firms
Exports Consumption Expenditure
Imports
Foreign Nations
Imports
Circular Flow of Income
(Four Sector Economy)
• Total Expenditure E=C+I+G • Total income (Y) received is allocated to consumption, savings and taxes (T). Thus: Y= C+S+T • Since in equilibrium expenditure is equal to the income earned, Hence: C+I+G = C+S+T
Circular Flow of Income
(Four Sector Economy)
• In a four sector economy aggregate expenditure includes consumption expenditure, government expenditure and net of exports, (X-M), where X represents exports and M represents imports. Thus: Y=C+I+G+(X-M) • Since aggregate income can either be consumed, or saved, or paid as tax to the government, thus: C+I+G+(X-M) =C+S+T
Macro Economic Concepts
Aggregate Demand
• Sum of demand for all goods and services by all consumers for a given period of time may be termed as aggregate demand • It is the total demand in terms of goods and assets at a given price by all the people in an economy. • Thus it can be said that aggregate demand refers to aggregate expenditure made by the society as a whole.
Aggregate Demand
• Aggregate demand consists of two components,
– aggregate demand (AD) for consumer goods i.e. consumption demand (C) – aggregate demand for capital goods i.e. (I).
Thus AD = C+I
Aggregate Supply
• Aggregate supply is the total national output produced and supplied by all the factors of production in an economy. • It refers to the supply of all goods and services in the economy for a given period of time. • Aggregate supply (AS) consists of
– supply of consumer goods (C) and – Supply capital goods (where capital comes from savings (S),
Hence AS=C+S
Equilibrium in Economy
Expenditure AS=C+S
AD=C+I
E E C
I O
Y
Income
C+S=C+I=Y=O=E
Stock and Flow
• The distinction between stock and flow usually lies in the dimension of time. • Stock may be defined as any economic variable which has been accumulated at a specific point of time
– like money, assets and wealth.
• Flow includes the variables which increase (inflows) and decrease (outflows) the stock, over a period of time.
– like income, consumption, saving and investment
Stock and Flow
Stock Inflow Outflow
Inventory Bank balance
Population Money Supply
Incoming goods Deposits
Births + immigration Income
Outgoing goods Withdrawals
Deaths + emigration Consumption + investment
Mathematically a stock can be seen as an accumulation or integration of flows over time, with outflows subtracted from the stock. Stock=Inflows-Outflows
Stock and Flow
•Stock is at a point of time
•Flow is during a period of time •Stock is accumulated flows
Stock and Flow
• A question for you: Suppose a firm produces $10 million worth of final goods but only sells $9 million worth. • Does this violate the expenditure = output identity?
Stock and Flow
• Output = Expenditure • Unsold output goes into inventory and is counted as “inventory investment”. • Whether the inventory buildup was intentional or not. • In effect, we are assuming that firms purchase their unsold output.
Intermediate and Final Goods
• Intermediate goods (and services) are items purchased by firms for using them in production of some other good of utility. • Also known as producer goods because they are used as inputs in the production of other goods.
– partly finished goods or raw material.
Intermediate and Final Goods
• Final goods are demanded by the final consumer for using these goods as they are. • Also known as consumer goods, as no value addition is made beyond this stage.
– Durable, non durable, perishable goods
• The distinction is made for calculation of national income where only final goods are considered.
Capital Formation
• Capital formation is the enlargement of capital stock. • The process of savings being converted into investment is known as capital formation • Investment: individual • Capital formation: nation • Gross private investment is business spending on equipment, residential structures, and inventories; it is net investment plus depreciation (or capital consumption allowance). • Gross Capital Formation refers to the aggregate of additions to fixed assets (Fixed Capital Formation) and increase in stocks of inventories during a period of time.
Capital Formation
• Rate of capital formation is the measure of growth of an economy, because it determines the volume of investment in future. • The higher the rate of capital formation, higher is the increase in production of goods and services and hence higher is the economic growth of the economy.
Capital Formation in India (at 1999-2000 Prices) Rs. Crore
2004-05 Gross Fixed Capital Formation Change in Stocks 6,57,317 46,633
2005-06 7,57,806 78,821
2006-07 8,68,618 86,840
Employment
• An important macro variable that affects the national economy. • A person who is willing and capable to work in a productive activity is engaged for certain number of hours per week, whether working for self or someone else. • The population of any country is divided into working population (age group of 16 to 65 ) and dependents. • Every country tries to achieve full employment so that maximum economic growth with maximum social welfare can be achieved.
Government Expenditure and Revenue
• Government Expenditure: Any expenditure which is made from public exchequer.
– Defence, infrastructure, railways, hospitals, education, salary of government employees, transfer payments.
• Government Revenue: income received by government in various forms
– Taxes, interest, profits
• Transfer payments, refer to payments made to certain sections of the society as a social welfare measure. It is an exchange of purchasing power from one group of people to another.
– unemployment compensation, retirement pensions
National Income Concepts
National Income
• "National income or product is the final figure you arrive at when you apply the measuring rod of money to the diverse apples, oranges, battleships and machines that any society produces with its land, labour and capital resources." Paul A. Samuelson
National Income
• Calculation of national income requires adding together all final goods and services produced in a country in a given year. • Various goods and services produced in the economy cannot be added together in their physical form; hence they need to be converted into monetary terms. • Thus National income is defined as the money value of all the final goods and services produced in an economy during an accounting period of time, generally one year.
Concepts of National Income
• Gross Domestic Product (GDP)
– Gross Domestic Product at factor cost – Gross Domestic Product at market price
• • • • •
Gross National Product (GNP) Net Domestic Product (NDP) Net National Product (NNP) Per Capita Income Per Capita Disposable Income
Gross Domestic Product
• Gross Domestic Product (GDP): GDP is the sum of money values of all final goods and services produced within the domestic territories of a country during an accounting year. GDP= C+I+G+(X-M)
Gross Domestic Product at factor cost = GDP at Market Prices –Indirect Taxes+ Subsidies
Gross Domestic Product
National Income Data for India (Current Prices)
Rs Crore
2003-04
GDP at factor cost (plus) Indirect taxes (less) Subsidies GDP at market price
2004-05 2,519,785 322,882 82,642
2,760,025
2005-06 2,830,465 367,503 92,456
3,105,512
2,254,888 278,421 69,985
2,463,324
Gross National Product
• Gross National Product (GNP): GNP is the aggregate final output of citizens and businesses of an economy in a year. • GNP may be defined as the sum of Gross Domestic Product and Net Factor Income from Abroad. GNP = GDP + NFIA GNP = C+I+G+(X-M)+NFIA • Net Factor Income from Abroad: difference between income received from abroad for rendering factor services and income paid towards services rendered by foreign nationals in the domestic territory of a country
National Income Data for India (Current Prices)
Rs Crore
2001-02 GDP at factor cost Net Income From Abroad GNP at market prices
2002-03
2003-04
2004-05
2005-06
1,902,999 2,081,474 2,254,888 2,519,785 2,830,465 -18,109 -15,566 -13,166 -14,078 -17,707
1,884,890 2,065,908 2,241,722 2,505,707 2,812,758
Net Domestic Product and Net National Product
• Net Domestic Product
= GDP-Depreciation
• Net National Product (NNP) = GDP–Depreciation +NFIA Or =GNP–Depreciation • Thus NNP is the actual addition to a year’s wealth and is the sum of consumption expenditure, government expenditure, net foreign expenditure, and investment, less depreciation, plus net income earned from abroad. = C+I+G+(X–M)–Depreciation + NFIA
National Income
• NNP at Factor Cost is the sum total of income earned by all the people of the nation, within the national boundaries or abroad • It is also called National Income. • NNP at Factor Cost = NNP at Market Prices - Indirect Taxes + Subsidies
Net Domestic Product and Net National Product
National Income Data for India (Rs Crore) S.No. Item 2003-04 2004-05 1. 2. 3. 4 5. 6. National income (Net National Product at factor cost) Indirect taxes less subsidies Net national product at market Prices (1+2) Other current transfers from rest of the world (Net) Net factor income from abroad Net domestic product at market prices 2268576 216828 2485404 104819 -18250 2503654 2531223 277517 2808740 91736 -17916 286656
Real and Nominal National Income
• National income estimated at the prevailing prices, is called national income at current prices or Nominal National Income, or Money National Income. • National income measured on the basis of some fixed price, say price prevailing at a particular point of time, or by taking a base year, is known as national income at constant prices, or Real National Income • National income estimated at the prevailing prices is national income at current prices and at price level of given time period as national income at constant prices
Real GDP
• Real GDP measures changes in the physical output in an economy, between different time periods, by valuing all goods produced in the two periods at the same prices
Real GDP = Nominal GDP GDP deflator
•GDP deflator is the ratio of nominal GDP in a year to real GDP of that year. •GDP deflator measures the change in prices between the base year and the current year.
National Income Estimates for India (2006-07)
Current prices
Gross national product (GNP) Net national product (NNP) Gross domestic product (GDP) Net domestic product (NDP) 37,22,669 32,96,639 37,43,472 33,17,442
1999-2000 Deflator Prices
28,29,349 25,22,576 28,48,157 25,41,384 1.315 1.306 1.314 1.305
Real GDP and living standard
• Changes in nominal GDP can be due to:
– changes in prices – changes in quantities of output produced
• Changes in real GDP can only be due to
– changes in quantities,
• real GDP is constructed using constant base-year prices. • changes in real GDP measure changes in living standard.
Per Capital Income
• The average income of the people of a country in a particular year is called per capita income. In simple words it is income per head of a country for a year.
National Income Per Capita Income = Total Population
•Per capita income for the year 2006-07 may be calculated at the market price prevailing during the financial year 2006-07, i.e. current prices or at prices of a base year say 1999-2000, i.e. constant prices
Per Capita Income of India
(at 1999-2000 prices)
2004-05 2005-06 2006-07
Per Capita GNP Per capita NNP 21,722 19,297 23,313 20,734 25,217 22,483
•PCI is the single most commonly used measure of the standard of living of the people of a nation.
•It is not a very reliable measure because it is a simple arithmetic mean; hence the extreme values dominate.
Personal Disposable Income
• Personal income is the total income received by the individuals of a country from all sources before direct taxes in one year. • Personal Income = National Income – Undistributed Corporate Profits – Corporate Taxes – Social Security Contributions + Transfer Payments + Interest on Public Debt • Personal Disposable Income is the income which can be spent on consumption by individuals and families. • Personal Disposable Income = Personal Income – Personal Taxes
National Income and Personal Income
S.No. Item 2003-04 2004-05
1.
2. 3. 4 5.
National income (Net National Product at factor cost)
Indirect taxes less subsidies Net national product at market Prices (1+2) Other current transfers from rest of the world (Net) Net factor income from abroad
2268576
216828 2485404 104819 -18250
2531223
277517 2808740 91736 -17916
6.
7. 8.
Net domestic product at market prices
Personal income Direct Taxes paid by households and Miscellaneous departments
2503654
2392604 81046
286656
2617279 84131
National Income Accounting
Economic Identity
• In equilibrium Output=Income=expenditure • Hence there are three approaches to the measurement of GDP:
– production – income – spending
Methods of measuring national income
• Product (or Output) Method: National Income by Industry of Origin
– Final Product Method – Value Added Method
• Income Method or National Income by Distributive Shares • Expenditure Method
Product (or Output) Method
• •
–
The market value of all the goods and services produced in the country by all the firms across all industries are added up together. Process
The economy is divided on basis of industries, such as agriculture, fishing, mining and quarrying, large scale manufacturing, small scale manufacturing, electricity, gas, etc. The physical units of output are interpreted in money terms The total values added up. (GDP at market price) The indirect taxes are subtracted and the subsidies are added. (GDP at factor cost) Net value is calculated by subtracting depreciation from the total value (NDP at factor cost)
–
– –
–
Product (or Output) Method
• Final Product Method: the total value of final goods and services produced in a country during a year is calculated at market prices. • Value Added Method: the contribution of each production unit of the economy. • If double accounting is fully avoided, the national income calculated by Final Goods method and Value Added method should be same.
Limitations of Product Method
• Problem of Double Counting:
– unclear distinction between a final and an intermediate product.
• Not Applicable to Tertiary Sector:
– This method is useful only when output can be measured in physical terms
• Exclusion of Non Marketed Products
National Income by Economic Activity
(at Current Prices) 2006-07
Sl No
Industry
1 2 3 4 Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas and water supply
(Rs. Crore) 656051 102152 609596 73135
% change over previous year 10.2 12.9 17.3 10.8
5
6 7
Construction
Trade, hotels, transport and communication Financing, insurance, real estate and business services
259223
968677
16.7
17.4
540160
16.3
National Income by Economic Activity
(at Current Prices) 2006-07
agriculture, forestry & fishing mining & quarrying manufacturing electricity, gas & water supply construction trade, hotels, transport and communication financing, insurance, real estate & business services community, social & personal services
Income Method
• The net income received by all citizens of a country in a particular year that is added up, i.e. total of net rents, net wages, net interest and net profits. (GDP at factor cost) • Add the money sent by the citizens of the nation from abroad and deduct the payments made to foreign nationals (individuals and firms) (GNP at factor cost) or Gross National Income (GNI).
– World Bank has adopted Gross National Income (GNI) in the System of National Accounts 1993 (93SNA), replacing the term Gross National Product (GNP)
Income Method
The Income Components Include: • Wages and salaries • Corporate profits • Proprietors income (the profits of partnerships and solely owned businesses, like a family restaurant) • Farm income • Rent • Interest • Sales taxes • Depreciation (the amount of capital that has worn out during the year)
Process
– – – The economy is divided on the basis of income groups, such as wage/salary earners, rent earners, profit earners, and so on. Income of each of these groups is calculated Income of all the earners is added, including income from abroad and undistributed profits. Income earned by foreigners and transfer payments made in the year are subtracted.
–
GNP at Factor Cost = Rent + Wage + Interest +Profit + other income+ (Income from Abroadpayments made to foreigners)-Transfer payments
Limitations of Income Method
• Exclusion of Non Monetary Income
– barter
• Exclusion of Non Marketed Services
– Family, hobby
Expenditure Method
• The total expenditure incurred by the society in a particular year
– personal consumption expenditure – net domestic investment – government expenditure on goods and services, and – net foreign investment
Limitations of Expenditure Method
• Neglects Barter System: a commodity (or service) is exchanged for another commodity (or service). • Ignores Own Consumption • Affected by Inflation
Uses of National Income Data
• National income is the most dependable indicator of a country’s economic health. • difference between GDP and GNP indicates the contribution of net income earned abroad • Necessary for Economic planning: useful aid in judging which sectors should be given more emphasis • National income is considered as a measure of economic welfare: higher aggregate production implies more and more goods and services being available to people • Helps in comparing the situations of economic growth in two different countries.
International Comparisons
• The World Bank categorizes countries on the basis of GDP – as Low Income with Per Capita Income (PCI) less than $905, – Middle Income (Lower middle income between $ 906 to $ 3595 – Higher middle incme $3596 to $11115) – High Income countries which have PCI more than $11116. • As on July 2007 there are 53 low income countries, 55 lower middle income, 41 high middle income and 85 high income countries (including 25 OECD countries).
International Comparisons
• As per World Development Indicators, 2007, developing economies grew faster during (1995–2005) than in the two previous decades and faster than high-income countries. • Current projections by World Bank suggest that developing countries will continue to grow more rapidly than high-income ones • But the income gap between developing and high-income economies will remain substantial, • The absolute difference in per capita incomes will continue to widen.
International Comparisons
• The international Comparison Programme (ICP) data released by World Bank on 17th December 2007, lists new estimates of purchasing power parity (PPP) for 100 countries benchmarked to year 2005. • India’s GDP in PPP terms was $2.34 trillion in 2005 and in nominal dollar terms was $778.7 billion which is 4.3% of global GDP and makes India fifth largest economy behind US (22.5%), China (9.7%), Japan (7.0%) and Germany (4.6%). • The per capita GDP in PPP terms is $2126 which is almost half of the figure of $4091 for China and one twentieth of US per capita income $41670. PPP is the method of calculating national income of different countries on basis of relative price structure, i.e. price of a basket of goods in one country compared with basket of
Difficulties in the Measurement of National Income
• Non Monetized Transactions: like services rendered out of love, courtesy or kindness, which have no monetary payments as such. Unorganized Sector: including petty traders, unskilled labour, domestic servants, and household production units mostly goes unrecorded. Multiple Sources of Earnings: A person may have multiple sources of income, of which only one may be the main activity while the others may be executed on a part time basis. Categorization of Goods and Services: unclear categorisation of final and intermediate goods Inadequate Data: Lack of adequate and reliable data.
•
•
• •
Key Equations
• • • • • • • • • • AD = C+I AS=C+S AD=AS=C+S=C+I Y=E=O Y=O=C+I Y=E=C+S C+I=Y=C+S Total Expenditure (E) = C + I + G GDP at Market Price = C+I+G+(X-M) GDP at Factor Cost = GDP at Market Prices – Indirect Taxes+ Subsidies • GNP = GDP + NFIA = C+I+G+(X-M) +NFIA
Key Equations
• NNP = C+I+G+(X–M)–Depreciation + NFIA =GDP– Depreciation +NFIA • NNP at Market Price = GNP – Depreciation • NNP at Factor Cost = NNP at Market Prices –Indirect Taxes+ Subsidies • NNP at Factor Cost = National Income= FID+NFIA • NNP at Factor Cost = Rent + Wage + Interest +Profit + Net Income from Abroad- Transfer payments • Personal Income =National Income–Undistributed Corporate Profits–Corporate Taxes–Social Security Contributions+ Transfer Payments+ Interest on Public Debt • Personal Disposable Income=Personal Income – Personal Taxes
Revision Questions
Q. In the national income accounts, what is the difference between: a)A firm’s buying an auto for an executive and the firm’s paying the Executive additional income to buy the automobile herself? b)Your hiring your spouse (who takes care of the house) rather than having him or her do the work without pay? c)Your deciding to buy an Indian car rather than a German car?
Revision Questions
• What do you understand by following information? i. GNP is Rs. 28, 33,558 crore and NNP is Rs. 25, 01,067 crore ii. GDP at factor cost is Rs 28, 55,933 crore and GDP at market price is Rs. 31, 26,596 crore
doc_306337084.pptx
the circular flow of economic activity and income, the concepts of aggregates, stock and flow and final goods, Various concepts of national income, like GDP, GNP and NNP, different methods to measure national income
Macro Economic Aspects of Business
Contents
• The circular flow of economic activity and income. • The concepts of aggregates, stock and flow and final goods. • Various concepts of national income, like GDP, GNP and NNP. • Different methods to measure national income. • Advantages of national income calculation in global perspective.
Circular Flow of Income & Products
Circular Flow of Income
(Two Sector Economy)
(Wages, Rent, Interest and Profits)
Factor Payments (Y)
Factor Inputs Households
Savings (S)
Financial Market
Investment (I)
Firms
Goods and Services (O)
Consumption expenditure (C)
Circular Flow of Income
• In a simple two sector economy, the value of output produced (Y) is equal to the value of output sold (O) • Since the value of output sold is equal to the sum of consumption expenditure and investment expenditure.
Hence since and Hence: Y=O=E Y= C+S E= C+I C+S=C+I
Circular Flow of Income
• Savings are withdrawal of money from the circular flow • Investment is injection of money into the circular flow • For equilibrium savings should be equal to investments
S=I
Circular Flow of Income
(Four Sector Economy)
Government (G)
Taxes Factor Payments Taxes Remittances for purchases
Salaries
Factor Inputs Savings
Households
Exports
Financial Market
Goods
Investment
Firms
Exports Consumption Expenditure
Imports
Foreign Nations
Imports
Circular Flow of Income
(Four Sector Economy)
• Total Expenditure E=C+I+G • Total income (Y) received is allocated to consumption, savings and taxes (T). Thus: Y= C+S+T • Since in equilibrium expenditure is equal to the income earned, Hence: C+I+G = C+S+T
Circular Flow of Income
(Four Sector Economy)
• In a four sector economy aggregate expenditure includes consumption expenditure, government expenditure and net of exports, (X-M), where X represents exports and M represents imports. Thus: Y=C+I+G+(X-M) • Since aggregate income can either be consumed, or saved, or paid as tax to the government, thus: C+I+G+(X-M) =C+S+T
Macro Economic Concepts
Aggregate Demand
• Sum of demand for all goods and services by all consumers for a given period of time may be termed as aggregate demand • It is the total demand in terms of goods and assets at a given price by all the people in an economy. • Thus it can be said that aggregate demand refers to aggregate expenditure made by the society as a whole.
Aggregate Demand
• Aggregate demand consists of two components,
– aggregate demand (AD) for consumer goods i.e. consumption demand (C) – aggregate demand for capital goods i.e. (I).
Thus AD = C+I
Aggregate Supply
• Aggregate supply is the total national output produced and supplied by all the factors of production in an economy. • It refers to the supply of all goods and services in the economy for a given period of time. • Aggregate supply (AS) consists of
– supply of consumer goods (C) and – Supply capital goods (where capital comes from savings (S),
Hence AS=C+S
Equilibrium in Economy
Expenditure AS=C+S
AD=C+I
E E C
I O
Y
Income
C+S=C+I=Y=O=E
Stock and Flow
• The distinction between stock and flow usually lies in the dimension of time. • Stock may be defined as any economic variable which has been accumulated at a specific point of time
– like money, assets and wealth.
• Flow includes the variables which increase (inflows) and decrease (outflows) the stock, over a period of time.
– like income, consumption, saving and investment
Stock and Flow
Stock Inflow Outflow
Inventory Bank balance
Population Money Supply
Incoming goods Deposits
Births + immigration Income
Outgoing goods Withdrawals
Deaths + emigration Consumption + investment
Mathematically a stock can be seen as an accumulation or integration of flows over time, with outflows subtracted from the stock. Stock=Inflows-Outflows
Stock and Flow
•Stock is at a point of time
•Flow is during a period of time •Stock is accumulated flows
Stock and Flow
• A question for you: Suppose a firm produces $10 million worth of final goods but only sells $9 million worth. • Does this violate the expenditure = output identity?
Stock and Flow
• Output = Expenditure • Unsold output goes into inventory and is counted as “inventory investment”. • Whether the inventory buildup was intentional or not. • In effect, we are assuming that firms purchase their unsold output.
Intermediate and Final Goods
• Intermediate goods (and services) are items purchased by firms for using them in production of some other good of utility. • Also known as producer goods because they are used as inputs in the production of other goods.
– partly finished goods or raw material.
Intermediate and Final Goods
• Final goods are demanded by the final consumer for using these goods as they are. • Also known as consumer goods, as no value addition is made beyond this stage.
– Durable, non durable, perishable goods
• The distinction is made for calculation of national income where only final goods are considered.
Capital Formation
• Capital formation is the enlargement of capital stock. • The process of savings being converted into investment is known as capital formation • Investment: individual • Capital formation: nation • Gross private investment is business spending on equipment, residential structures, and inventories; it is net investment plus depreciation (or capital consumption allowance). • Gross Capital Formation refers to the aggregate of additions to fixed assets (Fixed Capital Formation) and increase in stocks of inventories during a period of time.
Capital Formation
• Rate of capital formation is the measure of growth of an economy, because it determines the volume of investment in future. • The higher the rate of capital formation, higher is the increase in production of goods and services and hence higher is the economic growth of the economy.
Capital Formation in India (at 1999-2000 Prices) Rs. Crore
2004-05 Gross Fixed Capital Formation Change in Stocks 6,57,317 46,633
2005-06 7,57,806 78,821
2006-07 8,68,618 86,840
Employment
• An important macro variable that affects the national economy. • A person who is willing and capable to work in a productive activity is engaged for certain number of hours per week, whether working for self or someone else. • The population of any country is divided into working population (age group of 16 to 65 ) and dependents. • Every country tries to achieve full employment so that maximum economic growth with maximum social welfare can be achieved.
Government Expenditure and Revenue
• Government Expenditure: Any expenditure which is made from public exchequer.
– Defence, infrastructure, railways, hospitals, education, salary of government employees, transfer payments.
• Government Revenue: income received by government in various forms
– Taxes, interest, profits
• Transfer payments, refer to payments made to certain sections of the society as a social welfare measure. It is an exchange of purchasing power from one group of people to another.
– unemployment compensation, retirement pensions
National Income Concepts
National Income
• "National income or product is the final figure you arrive at when you apply the measuring rod of money to the diverse apples, oranges, battleships and machines that any society produces with its land, labour and capital resources." Paul A. Samuelson
National Income
• Calculation of national income requires adding together all final goods and services produced in a country in a given year. • Various goods and services produced in the economy cannot be added together in their physical form; hence they need to be converted into monetary terms. • Thus National income is defined as the money value of all the final goods and services produced in an economy during an accounting period of time, generally one year.
Concepts of National Income
• Gross Domestic Product (GDP)
– Gross Domestic Product at factor cost – Gross Domestic Product at market price
• • • • •
Gross National Product (GNP) Net Domestic Product (NDP) Net National Product (NNP) Per Capita Income Per Capita Disposable Income
Gross Domestic Product
• Gross Domestic Product (GDP): GDP is the sum of money values of all final goods and services produced within the domestic territories of a country during an accounting year. GDP= C+I+G+(X-M)
Gross Domestic Product at factor cost = GDP at Market Prices –Indirect Taxes+ Subsidies
Gross Domestic Product
National Income Data for India (Current Prices)
Rs Crore
2003-04
GDP at factor cost (plus) Indirect taxes (less) Subsidies GDP at market price
2004-05 2,519,785 322,882 82,642
2,760,025
2005-06 2,830,465 367,503 92,456
3,105,512
2,254,888 278,421 69,985
2,463,324
Gross National Product
• Gross National Product (GNP): GNP is the aggregate final output of citizens and businesses of an economy in a year. • GNP may be defined as the sum of Gross Domestic Product and Net Factor Income from Abroad. GNP = GDP + NFIA GNP = C+I+G+(X-M)+NFIA • Net Factor Income from Abroad: difference between income received from abroad for rendering factor services and income paid towards services rendered by foreign nationals in the domestic territory of a country
National Income Data for India (Current Prices)
Rs Crore
2001-02 GDP at factor cost Net Income From Abroad GNP at market prices
2002-03
2003-04
2004-05
2005-06
1,902,999 2,081,474 2,254,888 2,519,785 2,830,465 -18,109 -15,566 -13,166 -14,078 -17,707
1,884,890 2,065,908 2,241,722 2,505,707 2,812,758
Net Domestic Product and Net National Product
• Net Domestic Product
= GDP-Depreciation
• Net National Product (NNP) = GDP–Depreciation +NFIA Or =GNP–Depreciation • Thus NNP is the actual addition to a year’s wealth and is the sum of consumption expenditure, government expenditure, net foreign expenditure, and investment, less depreciation, plus net income earned from abroad. = C+I+G+(X–M)–Depreciation + NFIA
National Income
• NNP at Factor Cost is the sum total of income earned by all the people of the nation, within the national boundaries or abroad • It is also called National Income. • NNP at Factor Cost = NNP at Market Prices - Indirect Taxes + Subsidies
Net Domestic Product and Net National Product
National Income Data for India (Rs Crore) S.No. Item 2003-04 2004-05 1. 2. 3. 4 5. 6. National income (Net National Product at factor cost) Indirect taxes less subsidies Net national product at market Prices (1+2) Other current transfers from rest of the world (Net) Net factor income from abroad Net domestic product at market prices 2268576 216828 2485404 104819 -18250 2503654 2531223 277517 2808740 91736 -17916 286656
Real and Nominal National Income
• National income estimated at the prevailing prices, is called national income at current prices or Nominal National Income, or Money National Income. • National income measured on the basis of some fixed price, say price prevailing at a particular point of time, or by taking a base year, is known as national income at constant prices, or Real National Income • National income estimated at the prevailing prices is national income at current prices and at price level of given time period as national income at constant prices
Real GDP
• Real GDP measures changes in the physical output in an economy, between different time periods, by valuing all goods produced in the two periods at the same prices
Real GDP = Nominal GDP GDP deflator
•GDP deflator is the ratio of nominal GDP in a year to real GDP of that year. •GDP deflator measures the change in prices between the base year and the current year.
National Income Estimates for India (2006-07)
Current prices
Gross national product (GNP) Net national product (NNP) Gross domestic product (GDP) Net domestic product (NDP) 37,22,669 32,96,639 37,43,472 33,17,442
1999-2000 Deflator Prices
28,29,349 25,22,576 28,48,157 25,41,384 1.315 1.306 1.314 1.305
Real GDP and living standard
• Changes in nominal GDP can be due to:
– changes in prices – changes in quantities of output produced
• Changes in real GDP can only be due to
– changes in quantities,
• real GDP is constructed using constant base-year prices. • changes in real GDP measure changes in living standard.
Per Capital Income
• The average income of the people of a country in a particular year is called per capita income. In simple words it is income per head of a country for a year.
National Income Per Capita Income = Total Population
•Per capita income for the year 2006-07 may be calculated at the market price prevailing during the financial year 2006-07, i.e. current prices or at prices of a base year say 1999-2000, i.e. constant prices
Per Capita Income of India
(at 1999-2000 prices)
2004-05 2005-06 2006-07
Per Capita GNP Per capita NNP 21,722 19,297 23,313 20,734 25,217 22,483
•PCI is the single most commonly used measure of the standard of living of the people of a nation.
•It is not a very reliable measure because it is a simple arithmetic mean; hence the extreme values dominate.
Personal Disposable Income
• Personal income is the total income received by the individuals of a country from all sources before direct taxes in one year. • Personal Income = National Income – Undistributed Corporate Profits – Corporate Taxes – Social Security Contributions + Transfer Payments + Interest on Public Debt • Personal Disposable Income is the income which can be spent on consumption by individuals and families. • Personal Disposable Income = Personal Income – Personal Taxes
National Income and Personal Income
S.No. Item 2003-04 2004-05
1.
2. 3. 4 5.
National income (Net National Product at factor cost)
Indirect taxes less subsidies Net national product at market Prices (1+2) Other current transfers from rest of the world (Net) Net factor income from abroad
2268576
216828 2485404 104819 -18250
2531223
277517 2808740 91736 -17916
6.
7. 8.
Net domestic product at market prices
Personal income Direct Taxes paid by households and Miscellaneous departments
2503654
2392604 81046
286656
2617279 84131
National Income Accounting
Economic Identity
• In equilibrium Output=Income=expenditure • Hence there are three approaches to the measurement of GDP:
– production – income – spending
Methods of measuring national income
• Product (or Output) Method: National Income by Industry of Origin
– Final Product Method – Value Added Method
• Income Method or National Income by Distributive Shares • Expenditure Method
Product (or Output) Method
• •
–
The market value of all the goods and services produced in the country by all the firms across all industries are added up together. Process
The economy is divided on basis of industries, such as agriculture, fishing, mining and quarrying, large scale manufacturing, small scale manufacturing, electricity, gas, etc. The physical units of output are interpreted in money terms The total values added up. (GDP at market price) The indirect taxes are subtracted and the subsidies are added. (GDP at factor cost) Net value is calculated by subtracting depreciation from the total value (NDP at factor cost)
–
– –
–
Product (or Output) Method
• Final Product Method: the total value of final goods and services produced in a country during a year is calculated at market prices. • Value Added Method: the contribution of each production unit of the economy. • If double accounting is fully avoided, the national income calculated by Final Goods method and Value Added method should be same.
Limitations of Product Method
• Problem of Double Counting:
– unclear distinction between a final and an intermediate product.
• Not Applicable to Tertiary Sector:
– This method is useful only when output can be measured in physical terms
• Exclusion of Non Marketed Products
National Income by Economic Activity
(at Current Prices) 2006-07
Sl No
Industry
1 2 3 4 Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas and water supply
(Rs. Crore) 656051 102152 609596 73135
% change over previous year 10.2 12.9 17.3 10.8
5
6 7
Construction
Trade, hotels, transport and communication Financing, insurance, real estate and business services
259223
968677
16.7
17.4
540160
16.3
National Income by Economic Activity
(at Current Prices) 2006-07
agriculture, forestry & fishing mining & quarrying manufacturing electricity, gas & water supply construction trade, hotels, transport and communication financing, insurance, real estate & business services community, social & personal services
Income Method
• The net income received by all citizens of a country in a particular year that is added up, i.e. total of net rents, net wages, net interest and net profits. (GDP at factor cost) • Add the money sent by the citizens of the nation from abroad and deduct the payments made to foreign nationals (individuals and firms) (GNP at factor cost) or Gross National Income (GNI).
– World Bank has adopted Gross National Income (GNI) in the System of National Accounts 1993 (93SNA), replacing the term Gross National Product (GNP)
Income Method
The Income Components Include: • Wages and salaries • Corporate profits • Proprietors income (the profits of partnerships and solely owned businesses, like a family restaurant) • Farm income • Rent • Interest • Sales taxes • Depreciation (the amount of capital that has worn out during the year)
Process
– – – The economy is divided on the basis of income groups, such as wage/salary earners, rent earners, profit earners, and so on. Income of each of these groups is calculated Income of all the earners is added, including income from abroad and undistributed profits. Income earned by foreigners and transfer payments made in the year are subtracted.
–
GNP at Factor Cost = Rent + Wage + Interest +Profit + other income+ (Income from Abroadpayments made to foreigners)-Transfer payments
Limitations of Income Method
• Exclusion of Non Monetary Income
– barter
• Exclusion of Non Marketed Services
– Family, hobby
Expenditure Method
• The total expenditure incurred by the society in a particular year
– personal consumption expenditure – net domestic investment – government expenditure on goods and services, and – net foreign investment
Limitations of Expenditure Method
• Neglects Barter System: a commodity (or service) is exchanged for another commodity (or service). • Ignores Own Consumption • Affected by Inflation
Uses of National Income Data
• National income is the most dependable indicator of a country’s economic health. • difference between GDP and GNP indicates the contribution of net income earned abroad • Necessary for Economic planning: useful aid in judging which sectors should be given more emphasis • National income is considered as a measure of economic welfare: higher aggregate production implies more and more goods and services being available to people • Helps in comparing the situations of economic growth in two different countries.
International Comparisons
• The World Bank categorizes countries on the basis of GDP – as Low Income with Per Capita Income (PCI) less than $905, – Middle Income (Lower middle income between $ 906 to $ 3595 – Higher middle incme $3596 to $11115) – High Income countries which have PCI more than $11116. • As on July 2007 there are 53 low income countries, 55 lower middle income, 41 high middle income and 85 high income countries (including 25 OECD countries).
International Comparisons
• As per World Development Indicators, 2007, developing economies grew faster during (1995–2005) than in the two previous decades and faster than high-income countries. • Current projections by World Bank suggest that developing countries will continue to grow more rapidly than high-income ones • But the income gap between developing and high-income economies will remain substantial, • The absolute difference in per capita incomes will continue to widen.
International Comparisons
• The international Comparison Programme (ICP) data released by World Bank on 17th December 2007, lists new estimates of purchasing power parity (PPP) for 100 countries benchmarked to year 2005. • India’s GDP in PPP terms was $2.34 trillion in 2005 and in nominal dollar terms was $778.7 billion which is 4.3% of global GDP and makes India fifth largest economy behind US (22.5%), China (9.7%), Japan (7.0%) and Germany (4.6%). • The per capita GDP in PPP terms is $2126 which is almost half of the figure of $4091 for China and one twentieth of US per capita income $41670. PPP is the method of calculating national income of different countries on basis of relative price structure, i.e. price of a basket of goods in one country compared with basket of
Difficulties in the Measurement of National Income
• Non Monetized Transactions: like services rendered out of love, courtesy or kindness, which have no monetary payments as such. Unorganized Sector: including petty traders, unskilled labour, domestic servants, and household production units mostly goes unrecorded. Multiple Sources of Earnings: A person may have multiple sources of income, of which only one may be the main activity while the others may be executed on a part time basis. Categorization of Goods and Services: unclear categorisation of final and intermediate goods Inadequate Data: Lack of adequate and reliable data.
•
•
• •
Key Equations
• • • • • • • • • • AD = C+I AS=C+S AD=AS=C+S=C+I Y=E=O Y=O=C+I Y=E=C+S C+I=Y=C+S Total Expenditure (E) = C + I + G GDP at Market Price = C+I+G+(X-M) GDP at Factor Cost = GDP at Market Prices – Indirect Taxes+ Subsidies • GNP = GDP + NFIA = C+I+G+(X-M) +NFIA
Key Equations
• NNP = C+I+G+(X–M)–Depreciation + NFIA =GDP– Depreciation +NFIA • NNP at Market Price = GNP – Depreciation • NNP at Factor Cost = NNP at Market Prices –Indirect Taxes+ Subsidies • NNP at Factor Cost = National Income= FID+NFIA • NNP at Factor Cost = Rent + Wage + Interest +Profit + Net Income from Abroad- Transfer payments • Personal Income =National Income–Undistributed Corporate Profits–Corporate Taxes–Social Security Contributions+ Transfer Payments+ Interest on Public Debt • Personal Disposable Income=Personal Income – Personal Taxes
Revision Questions
Q. In the national income accounts, what is the difference between: a)A firm’s buying an auto for an executive and the firm’s paying the Executive additional income to buy the automobile herself? b)Your hiring your spouse (who takes care of the house) rather than having him or her do the work without pay? c)Your deciding to buy an Indian car rather than a German car?
Revision Questions
• What do you understand by following information? i. GNP is Rs. 28, 33,558 crore and NNP is Rs. 25, 01,067 crore ii. GDP at factor cost is Rs 28, 55,933 crore and GDP at market price is Rs. 31, 26,596 crore
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