MANAGERIAL ECONOMICS -II
MACRO ECONOMICS- AGGREGATES AND CONCEPTS
NIKHIL GAUTAM LADE S.Y.BMS. A ROLL NO. 7
CIRCULAR FLOW OF INCOME
TODAY, EVERYTHING IS PRODUCED FOR THE MARKET i.e. FOR EXCHANGE UNLIKE IN A BARTER ECONOMY WHERE SUBSTANTIAL PART OF THE PRODUCTION WAS USED FOR THE SELF CONSUMPTION WITH VERY LITTLE MARKETABLE SURPLUS. PRODUCTION AND CONSUMPTION IS CARRIED OUT BY TWO DIFFERENT ECONOMIC IDENTITIES CALLED HOUSEHOLDS AND FIRMS IN THE MODERN ECONOMY. THE HOUSEHOLDS SUPPLY FACTORS LIKE: LAND, LABOUR, CAPITAL AND ENTERPRICE TO THE FIRMS AND ARE PAID IN RETURN FACTOR REWARDS IN THE FORM OF RENT, WAGES, INTEREST AND PROFIT. WHEN THE HOUSEHOLD SECTOR RECEIVES THEIR PAYMENTS, THEY SPEND IT ON THE GOODS AND SERVICES PRODUCED BY THE FIRMS. IN THIS WAY, THE TOTAL INCOME GENERATED IN AN ECONOMY FLOWS IN A CIRCULAR MANNER FROM THE FIRMS TO THE HOUSEHOLDS AND FROM THE HOUSEHOLDS BACK TO THE FIRMS.
CIRCULAR FLOW OF INCOME IN A CLOSED ECONOMY 1. TWO SECTOR MODEL (WITHOUT SAVINGS):
A TWO SECTOR ECONOMY CONSISTS OF HOUSEHOLDS AND FIRMS. IT IS THUS FREE FROM GOVERNMENT AND THE EXTERNAL SECTOR. THIS MODEL IS BASED ON THE FOLLOWING ASSUMPTIONS: a. THERE ARE ONLY TWO SECTORS IN AN ECONOMY, viz., HOUSEHOLDS AND FIRMS. b. HOUSEHOLDS OWN FACTOR SERVICES, NAMELY: LAND, LABOUR, CAPITAL, ENTERPRICE AND FIRMS USE THESE SERVICES. c. HOUSEHOLDS SECTOR RECEIVES FACTOR REWARDS IN THE FORM OF RENT, WAGES, INTEREST AND PROFIT. d. BOTH HOUSEHOLDS AND FIRMS HAVE ZERO SAVINGS. e. THERE IS NO FOREIGN TRADE OR GOVERNMENT SECTOR. SINCE THERE ARE NO SAVINGS, FINANCIAL SECTOR DOESNOT EXIST.
FACTOR PAYMENTS= RENT+WAGES+ INTEREST+PROFITS = FACTOR INCOME LAND, LABOUR, CAPITAL& ENTERPRICE
HOUSEHOLDS (FACTOR SERVICES)
GOODS AND SERVICES
FIRMS (PRODUCERS)
PAYMENTS FOR GOODS AND SERVICES = VALUE OF OUIT
CIRCULAR FLOW IN A CLOSED TWO SECTOR CLOSED ECONOMY (WITHOUT SAVINGS)
IN ABOVE DIAGRAM, THE HOUSEHOLDS SELL THEIR FACTOR SERVICES (LAND, LABOUR, CAPITAL AND ENTERPRICE) AND FIRMS BUY THEM BY MAKING FACTOR PAYMENTS IN THE FORM OF RENT, WAGES, INTEREST AND PROFITS.THIS COMPLETES THE HALF CIRCULAR FLOW. THE FIRM SELL GOODS AND SERVICES AND EARN REVENUE AND HOUSEHOLDS BUY THE GOODS AND SERVICES. IN THIS WAY HOUSEHOLD INCOME FLOWS BACK TO THE FORMS AND GOODS AND SERVICES TO THE HOUSEHOLDS, THEREBY COMPLETING THE CIRCULAR FLOW OF INCOME.
2. TWO SECTOR MODEL (WITH SAVINGS):
IN THIS ECONOMIC MODEL, SAVINGS IS INTRODUCED. SAVINGS ARE LEAKAGGE FROM THE CIRCULAR FLOW OF THE INVESTMENT. HOUSEHOLDS SAVE A PART OF THEIR INCOME IN THE FORM OF BANK DEPOSITS AND FINANCIAL INVESTMENTS THROUGH THE MONEY AND CAPITAL MARKETS. FIRMS BORROW FROM THE MONEY MARKET AS WELL AS THE CAPITAL MARKET AND CONVERT THE FINANCIAL SAVINGS AND HOUSEHOLD SAVINGS INTO REAL INVESTMENTS. THUS WHEN SAVINGS ARE MADE, THE CIRCULARFLOW OF INCOME OR THE EQUILIBRIUM IS DISTRIBUTED ON ACCOUNT OF THE LEAKAGE AND WHEN REAL INVESTMENTS ARE MADE, THE EQULIBRIUM IS STORED ON ACCOUNT OF INJECTION.
MONEY & CAPITAL MARKETS
Savings and financial Investments borrowings, real estate investments
Factor payments
Factor services
HOUSEHOLDS
FIRMS
Goods and services Consumption expenditure
CIRCULAR FLOW OF INCOME IN A CLOSED TWO SECTOR ECONOMY (WITH SAVINGS)
HOWEVER, SAVINGS AND ERAL INVESTMENTS ARE NEVER EQUAL IN REALITY AS THEY ARE UNDERTAKEN BY TWO DIFFERENT ECONOMIC UNITS, NAMELY: HOUSEHOLDS AND FIRMS. THUS, WHEN SAVINGS ARE GREATER THAN INVESTMENTS i.e. WHEN LEAKAGES ARE GREATER THAN INJECTIONS, NATIONAL INCOME WILL DECLINE AND VICE-VERSA.
3. THREE SECTOR MODEL (FIRMS, HOUSEHOLDS AND GOVERNMENT):
IN THREE SECTOR ECONOMY, THE THIRD INSTITUTION INTRODUCED IS THE GOVERNMENT. LEAKAGES FROM AND INJECTIONS INTO THE CIRCULAR FLOW OF INCOME IS ALSO CAUSED BY THE FINANCIAL OPERATIONS OF THE GOVERNMENT. TAXES, BOTH DIRECT AND INDIRECT CONSTITUTE AN IMPORTANT AND MAJOR SOURCE OF PUBLIC REVENUE. TAXES ARE FORM OF LEAKAGE FROM THE CIRCULAR FORM OF INCOMEE.
WHEN THE GOVERNMENT SPENDS THE ENTIRE PUBLIC REVENUE, THE MONEY WHICH IS EJECTED FROM THE FLOW IS INJECTED BACK INTO THE FLOW AND EQUILIBRIUM IS ESTABLISHED.
GOVT. EXP ON SERVICES & TRANSFER PAY.
GOVT EXP ON GOODS & SUBSIDIES
GOVT.
PERSONAL TAXES
S
M&C MKT.
B
B
S
CORPORATION TAXES
SAVINGS & FINANCIAL INVESTMENTS
BORROWINGS AND REAL INVESTMENT
FACTOR PAYMENTS
FACTOR SERVICES
HOUSEHOLDS
FIRMS
GOODS AND SERVICES
CONSUMPTION EXPENDITURE
CIRCULAR FLOW OF INCOME IN A CLOSED THREE SECTOR ECONOMY
FROM ABOVE DIAGRAM, THE INCOME RECEIVED BY THE HOUSEHOLD SECTOR FOR THEIR FACTOR SERVICES IS SPENT ON THE GOODS AND SERVICES PRODUCED BY THE FIRMS AND IT CONSTITUTE THE CONSUMPTION EXPENDITURE. THE SAVINGS AND FINANCIAL INVESTMENTS ARE MADE BY THE HOUSEHOLD SECTOR IS MATCHED BY BORROWINGS AND REAL INVESTMENTS. GOVERNMENT INCOME IN THE FORM OF TAXES IS MATCHED BY GOVERNMENT ON GOODS AND SERVICES, SUBSIDIES ANDF TRANSFER PAYMENTS. WHEN THE GOVERNMENT HAS A SURPLUS BUDJET i.e., WHEN IT SPENDS LESS THAN IT HAS, THE SURPLUS MONEY OR PUBLIC SAVINGS GOES TO THE FINANCIAL MARKET.
SIMILARLY, WHEN THE GOVERNMENT RUNS A DEFICIT BUDJET, i.e., WHEN IT SPENDS MORE THAN WHAT IT HAS, IT BORROWS FROM THE FINANCIAL MARKET.
NATIONAL INCOME
NATIONAL INCOME IS THE MONEY VALUE OF ALL ECONOMIC ACTIVITIES OF A NATION CONDUCTED IN A GIVEN YEAR. ECONOMIC ACTIVITIES INCLUDES AGRICULTURAL PRODUCTION, INDUSTRIAL PRODUCTION AND PRODUCTION OF SERVICES. GOODS AND SERVICES WHICH DONOT HAVE AN EXCHANGE VALUE OR MARKET VALUE ARE NONECONOMIC IN NATURE. THE NATIONAL INCOME OF A COUNTRY CAN BE DEFINED AS, THE TOTLAL MARKET VALUE OF ALL FINAL GOODS AND SERVICES PRODUCED IN THE ECONOMY IN A GIVEN YEAR. NATIONAL INCOME IS THE MONETORY MEASURE OF THE VALUE OF GOODS AND SERVICES. GOODS ARE PRODUCED IN DIFFERENT STAGES BEFORE THEY REACH THE MARKETS IN THE FINAL FORM. HENCE, COMPONENTS OF GOODS ARE EXCHANGED MANY TIMES. THUS TO AVOID MULTIPLE COUNTING, NATIONAL INCOME INCLUDES ONLY THE MARKET VALUE OF ALL FINAL GOODS. THIS IS HOW NATIONAL INCOME IS DEFINED IN TERMS OF PRODUCT FLOW. NATIONAL INCOME OBTAINED BY ADDING FACTOR PAYMENTS IS KNOWN AS NATIONAL INCOME AT FACTOR COST.
NATIONAL INCOME = NATIONAL EXPENDITURE = NATIONAL PRODUCT.
NATIONAL INCOME CONCEPTS
1) GROSS NATIONAL PRODUCT (GNP): THE GNP IS THE MOST WIDELY USED MEASURE OF NATIONAL INCOME. IT IS THE BASIC ACCOUNTING MEASURE OF THE TOTAL OUTPUT OF GOODS AND SERVICES. GNP IS DEFINED AS THE TOTAL MARKET VALUE OF ALL FINAL GOODS AND SERVICES PRODUCED IN A YEAR. IT MEASURES THE MARKET VALUE OF A YEARLY OUTPUT AND THEREFORE IT IS MONETORY MEASURE OF NATIONAL INCOME. WHILE MEASURING GNP, ONLY THE FINAL VALUE OF GOODS AND SERVICES IS TAKEN INTO ACCOUNT, i.e., THE VALUE IS ADDED IN EACH STAGE OF THE STAGES OF THE PRODUCTION PROCESS.
THE VALUE OF GNP AT MARKET PRICES MAY BE SYMBIOLOGICALLY STATED AS:GNP (MP) = C+ I+ G+ XN+ RN WHERE, GNP (MP) = GROSS NATIONAL PRODUCT AT MARKET PRICES. C I G XN RN = CONSUMPTION GOODS = INVESTMENTS GOODS = GOVERNMENT SERVICES = NET EXPORTS = NET RECEIPTS
2) NET NATIONAL PRODUCT (NNP): NNP IS DEFINED AS GNP LESS DEPRECIATION. SYMBIOLICALLY, NNP= GNP DEPRECIATION (D) DEPRECIATION IS THAT PART OF TOTAL PRODUCTIVE ASSETS WHICH IS USED TO REPLACE THE CAPITAL WORNOUT IN THE PROCESS OF CREATING NATIONAL OUTPUT. THE VALUE OF DEPRECIATION IS ESTIMATED AND DEDUCTED FROM THE GNP TO FIND OUR NNP. THE NNP GIVES THE MEASURE OF NET OUTPUT AVAILABLE FOR CONSUMPTION OF THE SOCIETY. 3) NATIONAL INCOME AT FACTOR COST (NIFC) / NATIONAL INCOME(NI): NATIONAL INCOME AT FACTOR COST REFERS TO THE SUM OF ALL INCOMES EARNED BY FACTOR OWNERS FOR THEIR CONTRIBUTION OF FACTOR SERVICES NAMELY: LAND, LABOUR, CAPITAL AND ENTERPRISE IN THE FORM OF RENT, WAGES, INTEREST AND PROFITS. IT SHOWS THE QUANTUM OF ECONOMIC RESOURCES REQUIRED TO PRODUCE THE OUTPUT. NATIONAL INCOME AT FACTOR COST CAN BE STATED AS FOLLOWS: NIFC or NI = NNP or NIMP INDIRECT TAXES (IT) + SUBSIDIES (S) THE DIFFERENCE BETWEEN NATIONAL INCOME AT FACTOR COST AND NATIONAL INCOME AT MARKET PRICE IS BECAUSE OF THE FACT THAT INDIRECT TAXES AND SUBSIDIES CAUSE MARKET PRICES OF OUTPUT TO BE DIFFERENT FROM THE FACTOR INCOMES.
4) PERSONAL INCOME (PI): PERSONAL INCOME IS THE SUM OF ALL INCOMES RECEIVED BY ALL INDIVIDUALS OR HOUSEHOLDS DURING A GIVEN YEAR. IT IS THE INCOME ACTUALLY RECEIVED BY INDIVIDUALS AND HOUSEHOLDS. PERSONAL INCOME CAN BE DERIVED AS FOLLOWS:
PI = NI (SOCIAL SECURITY CONTRIBUTIONS + CORPORATE INCOME TAXES+ UNDISTRIBUTED PROFITS) + TRANSFER PAYMENTS.
SOCIAL SECURITY CONTRIBUTION, CORPORATE INCOME TAXES AND UNDISTRIBUTED PROFITS ARE NOT ACTUALLY RECEIVED BY INDIVIDUALS AND HOUSEHOLDS AND THEREFORE THE SUM OF THESE THREE RECEIPTS IS SUBTRACTED FROM THE NATIONAL INCOME. 5) DISPOSABLE INCOME: AFTER ACCOUNTING FOR DIRECT PERSONAL TAXES SUCH AS INCOME TAX, WEALTH TAX etc., THE REMAINDER OF PERSONAL INCOME IS KNOWN AS DISPOSABLE INCOME. IT CAN BE STATED AS FOLLOWS: DI = PERSONAL INCOME PERSONAL TAXES. DISPOSABLE INCOME CAN BE SAVED OR CONSUMED IN DIFFERENT PROPORTIONS ACCORDING TO THE SPENDING AND SAVING HABITS OF THE PEOPLE. HENCE IT CAN BE WRITTEN AS FOLLOWS: DI = CONSUMPTION (CI) + SAVINGS (S). 6) PERSONAL SAVINGS (PS): PERSONAL SAVINGS REFERS TO THE DIFFERENCE BETWEEN DISPOSABLE PERSONAL INCOME AND PERSONAL CONOSUMPTION EXPENDITURE. IT CAN BE STATED AS FOLLOWS: PS = DI C. 7) GROSS DOMESTIC PRODUCT AT MARKET PRICE(GDPMP): THE GROSS DOMESTIC PRODUCT REFERS TO THE VALUE AT MARKET PRICES OF GOODS AND SERVICES PRODUCED INSIDE THE COUNTRY IN A GIVEN YEAR. IT CAN BE STATED AS FOLLOWS: GDPMP = C+ I+ G+ (X - M). X = EXPORTS; M = IMPORTS.
8) GROSS DOMESTIC PRODUCT AT FACTOR COST (GDPFC) : GDP AT FACTOR COST REFERS TO THE SUM OF NET VALUE ADDED BY THE FACTORS OF PRODUCTION PLUS CAPITAL DEPRECIATION MINUS INDIRECT TAXES PLUS SUBSIDIES GIVEN BY THE GOVERNMENT. GDPFC = GDPMP IT + S 9) NET DOMESTIC PRODUCT (NDP) : WHILE CALCULATING THE GDP, NO PROVISION IS MADE FOR THE DEPRECIATION OR CAPITAL EXPENDITURE. NET DOMESTIC PRODUCT IS ARRIVED AT BY SUBTRACTING DEPRECIATION FROM THE GDP. NDP = GDP D ; D = DEPRECIATION
PER CAPITA INCOME
THE PER CAPITA INCOME REFERS TO THE AVERAGE INCOME PER HEAD IN THE COUNTRY. IT IS OBTAINED BY DIVIDING THE NATIONAL INCOME BY THE POPULATION OF THE COUNTRY. ACCORDING TO WORLD DEVELOPMENT REPORT 2007, COUNTRIES OF THE WORLD ARE DIVIDED INTO FOUR INCOME GROUPS AS PER 2005 GNP CAPITA.
HIGH INCOME COUNTRIES UPPER MIDDLE INCOME COUNTRIES LOWER MIDDLE INCOME COUNTRIES LOW INCOME GROUP COUNTRIES
GNP PER CAPITA > $10,726 GNP PER CAPITA > $3466 TO $10725 GNP PER CAPITA > $876 TO $3466 GNP PER CAPITA < $875
THE LOW INCOME COUNTRIES ARE ALSO KNOWN AS UNDER-DEVELOPED COUNTRIES. THIRTY-SIX AND HALF OF THE GLOBAL POPULATION IS HOME TO THE LOEW INCOME COUNTRIES WITH ONLY THREE PERCENT SHARE IN THE GLOBAL GDP. THESE COUNTRIES ARE CHARACTERIZED BY INADEQUATE INDUSTRIALIZATION, OVER-DEPENDANCE ON AGRICULTURE IN TERMS OF EMPLOYMENT, HIGH BIRTH RATES, LOW LITTERACY, etc.
MEASUREMENT OF NATIONAL INCOME
IN NATIONAL INCOME ESTIMATES, ALL GOODS AND SERVICES PRODUCED AND EXCHANGED FOR MONEY DURING A YEAR ARE TAKEN INTO ACCOUNT. NATIONAL OUTPUT CAN BE ESTIMATED AT THREE DIFFERENT LEVELS, NAMELY: PRODUCTION, DISTRIBUTION AND EXPENDITURE. THUS THERE ARE THREE METHODS OF MEASURING NATIONAL INCOME. THEY ARE: A. THE CENSUS OF PRODUCT METHOD or OUTPUT METHOD B. THE CENSUS OF INCOME METHOD, and C. THE EXPENDITURE METHOD. FOR THE PURPOSE OF ECONOMIC ANALYSIS AND FORECASTING, ACCURATE AND RELIABLE ESTIMATES OF GROSS NATIONAL PRODUCT ASSUMES IMPORTANCE.
A. THE CENSUS OF PRODUCT METHOD or OUTPUT METHOD ACCORDING TO THIS METHOD, THE ECONOMY IS CLASSIFIED INTO THREE SECTORS, NAMELY: THE INDUSTRIAL SECTOR, THE SREVICE SECTOR, AND THE EXTERNAL SECTOR. y THE INDUSTRIAL SECTOR: IT INCLUDES ALL PRODUCTIVE ACTIVITIES. IT CONSTITUTES THE FLOW OF GOODS IN DIFFERENT SUB-SECTORS LIKE AGRICULTURE, MINING, TRANSPORT AND PUBLIC UTILITIES. THE SERVICE SECTOR: THE VALUE OF SERVICES WHICH DIRECTLY SERVE THE CONSUMERS IS TAKEN INTO CONSIDERATION. ALL SALARY PAYMENTS ARE INCLUDED AND TRANSFER PAYMENTS ARE EXCLUDED. THE EXTERNAL SECTOR: THE VALUE OF EXPORTS AND IMPORTS AND RECEIPTS FROM ABROAD AND PAYMENTS TO OTHER COUNTRIES ARE TAKEN INTO CONSIDERATION.
y
y
THIS METHOD OF ESTIMATING NATIONAL INCOME HELPS TO FIND OUT THE ORGIN OF THE NATIONAL INCOME. HENCE, IT IS CALLED NATIONAL INCOME BY INDUSTRIAL ORIGIN. IN ORDER TO AVOID MULTIPLE COUNTING, THERE ARE TWO ALTERNATIVE APPROACHES USED IN THE MEASUREMENT OF NATIONAL INCOME, NAMELY: a) THE FINAL GOODS METHOD b) THE VALUE ADDED METHOD
a) THE FINAL GOODS METHOD ACCORDING TO THIS METHOD, THE VALUE OF FINAL GOODS AND SERVICES ARE TAKEN INTO CONSIDERATION WITHOUT TAKING INTO CONSIDERATION THE VALUE OF INTERMEDIATE GOODS BECAUDE THE VALUE OF INTERMEDIATE GOODS IS ALREADY INCLUDED IN THE VALUE OF FINAL GOODS. b) THE VALUE ADDED METHOD OF ESTIMATING NATIONAL INCOME ACCORDING TO THIS METHOD, THE NATIONAL INCOME ESTIMATE IS OBTAINED BY SUMMATION OF THE VALUE ADDED AT EACH STAGE OF PRODUCTION UNTILL THE FINAL PRODUCT IS PRODUCED. Y= (P-D) + (S-T) + [(X-M) + (R-P)] ; Y= NATIONAL INCOME P= DOMESTIC OUTPUT D= DEPRECIATION M= IMPORTS P= PAYMENTS VALUE ADDED METHOD OF ESTIMATING NATIONAL INCOME S= SUBSIDIES T= TAXES X= EXPORTS R= RECEIPTS
PRODUCTION STAGE
FIRM
SALES PROCEEDS Rs.
COST OF INTERMEDIATE GOODS Rs.
VALUE ADDED [NET INCOME] Rs. (3-4) 5 1000 400 400 200 2000
1 WHEAT FLOUR BREAD TRADING
2 FARMER FLOUR MILL BAKER MERCHANT 1000 1400 1800 2000
3 0 1000 1400 1800
4
TOTAL SUM OF VALUE ADDED
PRECAUTIONS TO BE TAKEN WHILE ESTIMATING NATONAL INCOME BY CENSUS OF PRODUCT METJHOD OR OUTPUT METHOD: i. ii. iii. iv. v. IN OREDR TO AVOID MULTIPLE COUNTING, ONLY THE VALUE OF FINAL GOODS MUST BE ADDED. FARM OUTPUT SET ASIDE FOR SUBSISTENCE SHOULD BE ESTIMATED AND MEASURED AT THE PREVAILING MARKET PRICES. INDIRECT TAXES SHOULD BE DEDUCTED AND SUBSIDIES SHOULD BE ADDED. EXPORT INCOME MUST BE ADDED AND IMPORT EXPENDITURE MUST BE DEDUCTED. VALUATION OF QUANTITIES MUST BE DONE WITH REFERENCE TO BASE YEAR PRICES.
B. CENSUS OF INCOME METHOD OR FACTOR INCOME METHOD : THE INCOME METHOD APPROACHES NATIONAL INCOME FROM THE DISTIBUTION POINT OF VIEW. ACCORDINGLY, THE NATIONAL INCOME IS MEASURED AFTER IT HAS BEEN DISTRIBUTED AND APPEARS AS INCOME EARNED INDIVIDUALS OR FACTOR OWNERS. THE NATIONAL INCOME IS OBTAINED BY ADDING UP THE INCOMES OF ALL INDIVIDUALS OF THE COUNTRY IN THE FORM OF RENT, WAGES, INTERESTS, PROFITS, AND UNDISTRIBUTED PROFITS OF JOINT STOCK COMPANIES AND INCOMES OF SLF EMPLOYEDPEOPLE. THIS METHOD IS THEREFORE CALLED NATIONAL INCOME BY DISTRIBUTIVE SHARES. TRANSFER INCOME IS DEDUCTED FROM THE TOTAL FACTOR INCOMES. NATIONAL INCOME IS THEREFORE EQUAL TO FACTOR INCOMES LESS TRANSFER PAYMENTS. THIS METHOD IS ALSO KNOWN AS FACTOR INCOME OR FACTOR COST METHOD. Y= (r+ w+ i+ ) + [(x-m) + (r-p)] Where; W= WAGES R= RENT I= INTEREST 352),76
PRECAUTIONS TO BE TAKEN IN THE ESTIMATION OF NATIONAL INCOME BY INCOME METHOD: 1. INCOME FROM THE SALES RECEIPTS OF SECOND HAND GOODS MUST BE EXCLUDED BUT THE BROKERAGE ON SUCH TRANSACTIONS MUST BE ACCOUNTED FOR IN THE NATIONAL INCOME. 2. TRANSFER PAYMENTS ARE TO BE EXCLUDED. 3. FINANCIAL INVESTMENTS ARE TO BE EXCLUDED AS THEY DO NOT ADD TO THE REAL NATIONAL INCOME. 4. DIRECT TAX REVENUE TO THE GOVERNMENT SHOULD BE DEDUCTED FROM THE TOTAL INCOME. IN THE SAME MANNER, GOVERNMENT SUBSIDIES SHOULD BE DEDUCTED FROM THE PROFITS OF THE SUNSIDIZED INDUSRTIES. 5. UMNDISTRIBUTED PROFITS OF THE COMPANIES, INCOME FROM GOVERNMENT PROPERTY AND PROFITS OF PUBLIC ENTERPRISES SHOULD BE ADDED. 6. RENT ON ACCOUNT OF SELF OCCUPIED ACCOMODATION SHOULD BE IMPUTED AND INCLUDED IN THE NATIONAL INCOME. 7. VALUE OF PRODUCTION FOR SELF CONSUMPTION SHOULD BE ACCOUNTED FOR THE NATIONAL INCOME.
C. THE EXPENDITURE METHOD OF ESTIMATING NATIONAL INCOME THIS METHOD IS ALSO KNOWN AS THE CONSUMPTION AND INEVSTMENT METHOD OF MEASURING NATIONAL INCOME. NATIONAL INCOME FROM THE EXPENDITURE POINT OF VIEW IS THE SUM OF CONSUMPTION EXPENDITURE. ACCORDING TO THIS METHOD, NATIONAL INCOME IS COMPUTED IN THE FOLLOWING MANNER: a. ESTIMATE PRIVATE AND PUBLIC CONSUMPTION EXPENDITURE. b. ADD THE VALUE OF INVESTMENT IN FIXED CAPITAL AND STOCKS. c. ADD THE VALUE OF NET EXPORTS i.e. (X-M) AND THE VALUE OF NET RECEIPTS (R-P) OR NET FOREIGN INCOME FROM ABROAD. Y = &,* > ;0 53 @ WHERE, Y= CONSUMPTION EXPENDITURE. I = INVESTMENT EXPENDITURE, AND G = GOVERNMENT EXPENDITURE.
PRECAUTIONS TO BE TAKEN TO IN THE ESTIMATION OF NATIONAL INCOME BY EXPENDITURE METHOD: 1. EXPENDITURE ON SECOND HAND GOODS SHOULD BE EXCLUDED. 2. EXPENDITURE ON FINANCIAL ASSSETS SHOULD SUCH AS EQUITY SHARES, BONDS ETC SHOULD BE EXCLUDED. 3. EXPENDITURE ON INTERMEDIATE GOODS SHOULD BE EXCLUDED. 4. TRANSFER PAYMENTS SHOULD BE IGNORED. 5. EXPENDITURE ON FINAL GOODS AND SERVICES SHOULD BE INCLUDED.
DIFFICULTIES IN ESTIMATING NATIONAL INCOME IN INDIA:
THE DIFFICULTIES ENCOUNTERED IN ESTIMATING NATIONAL INCOME IN INDIA ARE BROADLY CLASSIFIED INTO TWO CATEGORIES, NAMELY: a. CONCEPTUAL DIFFICULTIES. b. STATISTICAL DIFFICULTIES.
CONCEPTUAL DIFFICULTIES i. FARM OUTPUTS SET ASIDE BY FARMERS FOR SELF CONSUMPTION AND FARM OUTPUT OF SUBSISTENCE FARMERS IS ESTIMATED AND INCLUDE IN THE NATIONAL INCOME. THE VALUE OF SERVICES OF A HOUSEWIFE AND OTHER MEMBERS OF THE HOUSEHOLD IS EXCLUDEDBECAUSE THESE SERVICES CANNOT BE EXCHANGED FOR A PRICE. THE VALUE OF DOMESTIC SERVICES IS CONSIDERED EQUAL TO THE AMOUNT OF DEFENSIVE EXPENDITURE INCURRED BY THE GOVERNMENT AND IT IS INCLUDED IN THE NATIONAL INCOME. ILLEGAL TRANSACTIONS OR BLACK MONEY GENERATED IN THE PARALLEL ECONOMY IS NOT ACCOUNTED FOR THE NATIONAL INCOME. EVERY UNACCOUNTED ECONOMIC TRANSACTIONIS CONSIDERED ILLEGAL AND THUS GENERATING BLACK INCOME. THE LINE OF SEPARATION BETWEEN FINAL AND INTERMEDIATE PRODUCTS SOMETIMES BLUERRED.
ii.
iii.
iv.
v.
STATISTICAL DIFFICULTIES i. INADEQUATE AND INACCURATE STATISTICAL DATA IS A GREAT LIMITATION ON PRESENTING RELIABLE NATIONAL INCOME FIGURES. A HUGE CLASS OF SELF EMPLOYED PEOPLE, SUBSISTENCE FARMERS AND SELF EMPLOYED PROFESSIONALS EITHER UNDER REPORT OR NOT EVEN BOTHER TO REPORT THEIR INCOMES. THE AVERAGE INDIAN IS HABITUALLY DEPENDENT ON THE GOVERNMENT S LARGESSE. UNDER-REPORTING IS THEREFORE IN THEIR SELF-INTEREST. DATA COLLECTED FROM SUCH PEOPLE CANNOT BE FULLY RELIED UPON. MASSIVE ILLITERACY, WANT OF INFORMATION AND LACK OF OPENESS MAKES PEOPLE IN INDIA INDIFFERENT AND NON-COOPERATIVE TO OFFICIAL INQUIRIES. FINALLY, THE ACCURACY OF STATISTICAL DATA ALSO DEPENDS UPON THE TRAINING, EFFICIENCY AND INTEGRITY OF THE STATISTICAL STAFF.
ii.
iii. iv.
doc_494512603.docx
MACRO ECONOMICS- AGGREGATES AND CONCEPTS
NIKHIL GAUTAM LADE S.Y.BMS. A ROLL NO. 7
CIRCULAR FLOW OF INCOME
TODAY, EVERYTHING IS PRODUCED FOR THE MARKET i.e. FOR EXCHANGE UNLIKE IN A BARTER ECONOMY WHERE SUBSTANTIAL PART OF THE PRODUCTION WAS USED FOR THE SELF CONSUMPTION WITH VERY LITTLE MARKETABLE SURPLUS. PRODUCTION AND CONSUMPTION IS CARRIED OUT BY TWO DIFFERENT ECONOMIC IDENTITIES CALLED HOUSEHOLDS AND FIRMS IN THE MODERN ECONOMY. THE HOUSEHOLDS SUPPLY FACTORS LIKE: LAND, LABOUR, CAPITAL AND ENTERPRICE TO THE FIRMS AND ARE PAID IN RETURN FACTOR REWARDS IN THE FORM OF RENT, WAGES, INTEREST AND PROFIT. WHEN THE HOUSEHOLD SECTOR RECEIVES THEIR PAYMENTS, THEY SPEND IT ON THE GOODS AND SERVICES PRODUCED BY THE FIRMS. IN THIS WAY, THE TOTAL INCOME GENERATED IN AN ECONOMY FLOWS IN A CIRCULAR MANNER FROM THE FIRMS TO THE HOUSEHOLDS AND FROM THE HOUSEHOLDS BACK TO THE FIRMS.
CIRCULAR FLOW OF INCOME IN A CLOSED ECONOMY 1. TWO SECTOR MODEL (WITHOUT SAVINGS):
A TWO SECTOR ECONOMY CONSISTS OF HOUSEHOLDS AND FIRMS. IT IS THUS FREE FROM GOVERNMENT AND THE EXTERNAL SECTOR. THIS MODEL IS BASED ON THE FOLLOWING ASSUMPTIONS: a. THERE ARE ONLY TWO SECTORS IN AN ECONOMY, viz., HOUSEHOLDS AND FIRMS. b. HOUSEHOLDS OWN FACTOR SERVICES, NAMELY: LAND, LABOUR, CAPITAL, ENTERPRICE AND FIRMS USE THESE SERVICES. c. HOUSEHOLDS SECTOR RECEIVES FACTOR REWARDS IN THE FORM OF RENT, WAGES, INTEREST AND PROFIT. d. BOTH HOUSEHOLDS AND FIRMS HAVE ZERO SAVINGS. e. THERE IS NO FOREIGN TRADE OR GOVERNMENT SECTOR. SINCE THERE ARE NO SAVINGS, FINANCIAL SECTOR DOESNOT EXIST.
FACTOR PAYMENTS= RENT+WAGES+ INTEREST+PROFITS = FACTOR INCOME LAND, LABOUR, CAPITAL& ENTERPRICE
HOUSEHOLDS (FACTOR SERVICES)
GOODS AND SERVICES
FIRMS (PRODUCERS)
PAYMENTS FOR GOODS AND SERVICES = VALUE OF OUIT
CIRCULAR FLOW IN A CLOSED TWO SECTOR CLOSED ECONOMY (WITHOUT SAVINGS)
IN ABOVE DIAGRAM, THE HOUSEHOLDS SELL THEIR FACTOR SERVICES (LAND, LABOUR, CAPITAL AND ENTERPRICE) AND FIRMS BUY THEM BY MAKING FACTOR PAYMENTS IN THE FORM OF RENT, WAGES, INTEREST AND PROFITS.THIS COMPLETES THE HALF CIRCULAR FLOW. THE FIRM SELL GOODS AND SERVICES AND EARN REVENUE AND HOUSEHOLDS BUY THE GOODS AND SERVICES. IN THIS WAY HOUSEHOLD INCOME FLOWS BACK TO THE FORMS AND GOODS AND SERVICES TO THE HOUSEHOLDS, THEREBY COMPLETING THE CIRCULAR FLOW OF INCOME.
2. TWO SECTOR MODEL (WITH SAVINGS):
IN THIS ECONOMIC MODEL, SAVINGS IS INTRODUCED. SAVINGS ARE LEAKAGGE FROM THE CIRCULAR FLOW OF THE INVESTMENT. HOUSEHOLDS SAVE A PART OF THEIR INCOME IN THE FORM OF BANK DEPOSITS AND FINANCIAL INVESTMENTS THROUGH THE MONEY AND CAPITAL MARKETS. FIRMS BORROW FROM THE MONEY MARKET AS WELL AS THE CAPITAL MARKET AND CONVERT THE FINANCIAL SAVINGS AND HOUSEHOLD SAVINGS INTO REAL INVESTMENTS. THUS WHEN SAVINGS ARE MADE, THE CIRCULARFLOW OF INCOME OR THE EQUILIBRIUM IS DISTRIBUTED ON ACCOUNT OF THE LEAKAGE AND WHEN REAL INVESTMENTS ARE MADE, THE EQULIBRIUM IS STORED ON ACCOUNT OF INJECTION.
MONEY & CAPITAL MARKETS
Savings and financial Investments borrowings, real estate investments
Factor payments
Factor services
HOUSEHOLDS
FIRMS
Goods and services Consumption expenditure
CIRCULAR FLOW OF INCOME IN A CLOSED TWO SECTOR ECONOMY (WITH SAVINGS)
HOWEVER, SAVINGS AND ERAL INVESTMENTS ARE NEVER EQUAL IN REALITY AS THEY ARE UNDERTAKEN BY TWO DIFFERENT ECONOMIC UNITS, NAMELY: HOUSEHOLDS AND FIRMS. THUS, WHEN SAVINGS ARE GREATER THAN INVESTMENTS i.e. WHEN LEAKAGES ARE GREATER THAN INJECTIONS, NATIONAL INCOME WILL DECLINE AND VICE-VERSA.
3. THREE SECTOR MODEL (FIRMS, HOUSEHOLDS AND GOVERNMENT):
IN THREE SECTOR ECONOMY, THE THIRD INSTITUTION INTRODUCED IS THE GOVERNMENT. LEAKAGES FROM AND INJECTIONS INTO THE CIRCULAR FLOW OF INCOME IS ALSO CAUSED BY THE FINANCIAL OPERATIONS OF THE GOVERNMENT. TAXES, BOTH DIRECT AND INDIRECT CONSTITUTE AN IMPORTANT AND MAJOR SOURCE OF PUBLIC REVENUE. TAXES ARE FORM OF LEAKAGE FROM THE CIRCULAR FORM OF INCOMEE.
WHEN THE GOVERNMENT SPENDS THE ENTIRE PUBLIC REVENUE, THE MONEY WHICH IS EJECTED FROM THE FLOW IS INJECTED BACK INTO THE FLOW AND EQUILIBRIUM IS ESTABLISHED.
GOVT. EXP ON SERVICES & TRANSFER PAY.
GOVT EXP ON GOODS & SUBSIDIES
GOVT.
PERSONAL TAXES
S
M&C MKT.
B
B
S
CORPORATION TAXES
SAVINGS & FINANCIAL INVESTMENTS
BORROWINGS AND REAL INVESTMENT
FACTOR PAYMENTS
FACTOR SERVICES
HOUSEHOLDS
FIRMS
GOODS AND SERVICES
CONSUMPTION EXPENDITURE
CIRCULAR FLOW OF INCOME IN A CLOSED THREE SECTOR ECONOMY
FROM ABOVE DIAGRAM, THE INCOME RECEIVED BY THE HOUSEHOLD SECTOR FOR THEIR FACTOR SERVICES IS SPENT ON THE GOODS AND SERVICES PRODUCED BY THE FIRMS AND IT CONSTITUTE THE CONSUMPTION EXPENDITURE. THE SAVINGS AND FINANCIAL INVESTMENTS ARE MADE BY THE HOUSEHOLD SECTOR IS MATCHED BY BORROWINGS AND REAL INVESTMENTS. GOVERNMENT INCOME IN THE FORM OF TAXES IS MATCHED BY GOVERNMENT ON GOODS AND SERVICES, SUBSIDIES ANDF TRANSFER PAYMENTS. WHEN THE GOVERNMENT HAS A SURPLUS BUDJET i.e., WHEN IT SPENDS LESS THAN IT HAS, THE SURPLUS MONEY OR PUBLIC SAVINGS GOES TO THE FINANCIAL MARKET.
SIMILARLY, WHEN THE GOVERNMENT RUNS A DEFICIT BUDJET, i.e., WHEN IT SPENDS MORE THAN WHAT IT HAS, IT BORROWS FROM THE FINANCIAL MARKET.
NATIONAL INCOME
NATIONAL INCOME IS THE MONEY VALUE OF ALL ECONOMIC ACTIVITIES OF A NATION CONDUCTED IN A GIVEN YEAR. ECONOMIC ACTIVITIES INCLUDES AGRICULTURAL PRODUCTION, INDUSTRIAL PRODUCTION AND PRODUCTION OF SERVICES. GOODS AND SERVICES WHICH DONOT HAVE AN EXCHANGE VALUE OR MARKET VALUE ARE NONECONOMIC IN NATURE. THE NATIONAL INCOME OF A COUNTRY CAN BE DEFINED AS, THE TOTLAL MARKET VALUE OF ALL FINAL GOODS AND SERVICES PRODUCED IN THE ECONOMY IN A GIVEN YEAR. NATIONAL INCOME IS THE MONETORY MEASURE OF THE VALUE OF GOODS AND SERVICES. GOODS ARE PRODUCED IN DIFFERENT STAGES BEFORE THEY REACH THE MARKETS IN THE FINAL FORM. HENCE, COMPONENTS OF GOODS ARE EXCHANGED MANY TIMES. THUS TO AVOID MULTIPLE COUNTING, NATIONAL INCOME INCLUDES ONLY THE MARKET VALUE OF ALL FINAL GOODS. THIS IS HOW NATIONAL INCOME IS DEFINED IN TERMS OF PRODUCT FLOW. NATIONAL INCOME OBTAINED BY ADDING FACTOR PAYMENTS IS KNOWN AS NATIONAL INCOME AT FACTOR COST.
NATIONAL INCOME = NATIONAL EXPENDITURE = NATIONAL PRODUCT.
NATIONAL INCOME CONCEPTS
1) GROSS NATIONAL PRODUCT (GNP): THE GNP IS THE MOST WIDELY USED MEASURE OF NATIONAL INCOME. IT IS THE BASIC ACCOUNTING MEASURE OF THE TOTAL OUTPUT OF GOODS AND SERVICES. GNP IS DEFINED AS THE TOTAL MARKET VALUE OF ALL FINAL GOODS AND SERVICES PRODUCED IN A YEAR. IT MEASURES THE MARKET VALUE OF A YEARLY OUTPUT AND THEREFORE IT IS MONETORY MEASURE OF NATIONAL INCOME. WHILE MEASURING GNP, ONLY THE FINAL VALUE OF GOODS AND SERVICES IS TAKEN INTO ACCOUNT, i.e., THE VALUE IS ADDED IN EACH STAGE OF THE STAGES OF THE PRODUCTION PROCESS.
THE VALUE OF GNP AT MARKET PRICES MAY BE SYMBIOLOGICALLY STATED AS:GNP (MP) = C+ I+ G+ XN+ RN WHERE, GNP (MP) = GROSS NATIONAL PRODUCT AT MARKET PRICES. C I G XN RN = CONSUMPTION GOODS = INVESTMENTS GOODS = GOVERNMENT SERVICES = NET EXPORTS = NET RECEIPTS
2) NET NATIONAL PRODUCT (NNP): NNP IS DEFINED AS GNP LESS DEPRECIATION. SYMBIOLICALLY, NNP= GNP DEPRECIATION (D) DEPRECIATION IS THAT PART OF TOTAL PRODUCTIVE ASSETS WHICH IS USED TO REPLACE THE CAPITAL WORNOUT IN THE PROCESS OF CREATING NATIONAL OUTPUT. THE VALUE OF DEPRECIATION IS ESTIMATED AND DEDUCTED FROM THE GNP TO FIND OUR NNP. THE NNP GIVES THE MEASURE OF NET OUTPUT AVAILABLE FOR CONSUMPTION OF THE SOCIETY. 3) NATIONAL INCOME AT FACTOR COST (NIFC) / NATIONAL INCOME(NI): NATIONAL INCOME AT FACTOR COST REFERS TO THE SUM OF ALL INCOMES EARNED BY FACTOR OWNERS FOR THEIR CONTRIBUTION OF FACTOR SERVICES NAMELY: LAND, LABOUR, CAPITAL AND ENTERPRISE IN THE FORM OF RENT, WAGES, INTEREST AND PROFITS. IT SHOWS THE QUANTUM OF ECONOMIC RESOURCES REQUIRED TO PRODUCE THE OUTPUT. NATIONAL INCOME AT FACTOR COST CAN BE STATED AS FOLLOWS: NIFC or NI = NNP or NIMP INDIRECT TAXES (IT) + SUBSIDIES (S) THE DIFFERENCE BETWEEN NATIONAL INCOME AT FACTOR COST AND NATIONAL INCOME AT MARKET PRICE IS BECAUSE OF THE FACT THAT INDIRECT TAXES AND SUBSIDIES CAUSE MARKET PRICES OF OUTPUT TO BE DIFFERENT FROM THE FACTOR INCOMES.
4) PERSONAL INCOME (PI): PERSONAL INCOME IS THE SUM OF ALL INCOMES RECEIVED BY ALL INDIVIDUALS OR HOUSEHOLDS DURING A GIVEN YEAR. IT IS THE INCOME ACTUALLY RECEIVED BY INDIVIDUALS AND HOUSEHOLDS. PERSONAL INCOME CAN BE DERIVED AS FOLLOWS:
PI = NI (SOCIAL SECURITY CONTRIBUTIONS + CORPORATE INCOME TAXES+ UNDISTRIBUTED PROFITS) + TRANSFER PAYMENTS.
SOCIAL SECURITY CONTRIBUTION, CORPORATE INCOME TAXES AND UNDISTRIBUTED PROFITS ARE NOT ACTUALLY RECEIVED BY INDIVIDUALS AND HOUSEHOLDS AND THEREFORE THE SUM OF THESE THREE RECEIPTS IS SUBTRACTED FROM THE NATIONAL INCOME. 5) DISPOSABLE INCOME: AFTER ACCOUNTING FOR DIRECT PERSONAL TAXES SUCH AS INCOME TAX, WEALTH TAX etc., THE REMAINDER OF PERSONAL INCOME IS KNOWN AS DISPOSABLE INCOME. IT CAN BE STATED AS FOLLOWS: DI = PERSONAL INCOME PERSONAL TAXES. DISPOSABLE INCOME CAN BE SAVED OR CONSUMED IN DIFFERENT PROPORTIONS ACCORDING TO THE SPENDING AND SAVING HABITS OF THE PEOPLE. HENCE IT CAN BE WRITTEN AS FOLLOWS: DI = CONSUMPTION (CI) + SAVINGS (S). 6) PERSONAL SAVINGS (PS): PERSONAL SAVINGS REFERS TO THE DIFFERENCE BETWEEN DISPOSABLE PERSONAL INCOME AND PERSONAL CONOSUMPTION EXPENDITURE. IT CAN BE STATED AS FOLLOWS: PS = DI C. 7) GROSS DOMESTIC PRODUCT AT MARKET PRICE(GDPMP): THE GROSS DOMESTIC PRODUCT REFERS TO THE VALUE AT MARKET PRICES OF GOODS AND SERVICES PRODUCED INSIDE THE COUNTRY IN A GIVEN YEAR. IT CAN BE STATED AS FOLLOWS: GDPMP = C+ I+ G+ (X - M). X = EXPORTS; M = IMPORTS.
8) GROSS DOMESTIC PRODUCT AT FACTOR COST (GDPFC) : GDP AT FACTOR COST REFERS TO THE SUM OF NET VALUE ADDED BY THE FACTORS OF PRODUCTION PLUS CAPITAL DEPRECIATION MINUS INDIRECT TAXES PLUS SUBSIDIES GIVEN BY THE GOVERNMENT. GDPFC = GDPMP IT + S 9) NET DOMESTIC PRODUCT (NDP) : WHILE CALCULATING THE GDP, NO PROVISION IS MADE FOR THE DEPRECIATION OR CAPITAL EXPENDITURE. NET DOMESTIC PRODUCT IS ARRIVED AT BY SUBTRACTING DEPRECIATION FROM THE GDP. NDP = GDP D ; D = DEPRECIATION
PER CAPITA INCOME
THE PER CAPITA INCOME REFERS TO THE AVERAGE INCOME PER HEAD IN THE COUNTRY. IT IS OBTAINED BY DIVIDING THE NATIONAL INCOME BY THE POPULATION OF THE COUNTRY. ACCORDING TO WORLD DEVELOPMENT REPORT 2007, COUNTRIES OF THE WORLD ARE DIVIDED INTO FOUR INCOME GROUPS AS PER 2005 GNP CAPITA.
HIGH INCOME COUNTRIES UPPER MIDDLE INCOME COUNTRIES LOWER MIDDLE INCOME COUNTRIES LOW INCOME GROUP COUNTRIES
GNP PER CAPITA > $10,726 GNP PER CAPITA > $3466 TO $10725 GNP PER CAPITA > $876 TO $3466 GNP PER CAPITA < $875
THE LOW INCOME COUNTRIES ARE ALSO KNOWN AS UNDER-DEVELOPED COUNTRIES. THIRTY-SIX AND HALF OF THE GLOBAL POPULATION IS HOME TO THE LOEW INCOME COUNTRIES WITH ONLY THREE PERCENT SHARE IN THE GLOBAL GDP. THESE COUNTRIES ARE CHARACTERIZED BY INADEQUATE INDUSTRIALIZATION, OVER-DEPENDANCE ON AGRICULTURE IN TERMS OF EMPLOYMENT, HIGH BIRTH RATES, LOW LITTERACY, etc.
MEASUREMENT OF NATIONAL INCOME
IN NATIONAL INCOME ESTIMATES, ALL GOODS AND SERVICES PRODUCED AND EXCHANGED FOR MONEY DURING A YEAR ARE TAKEN INTO ACCOUNT. NATIONAL OUTPUT CAN BE ESTIMATED AT THREE DIFFERENT LEVELS, NAMELY: PRODUCTION, DISTRIBUTION AND EXPENDITURE. THUS THERE ARE THREE METHODS OF MEASURING NATIONAL INCOME. THEY ARE: A. THE CENSUS OF PRODUCT METHOD or OUTPUT METHOD B. THE CENSUS OF INCOME METHOD, and C. THE EXPENDITURE METHOD. FOR THE PURPOSE OF ECONOMIC ANALYSIS AND FORECASTING, ACCURATE AND RELIABLE ESTIMATES OF GROSS NATIONAL PRODUCT ASSUMES IMPORTANCE.
A. THE CENSUS OF PRODUCT METHOD or OUTPUT METHOD ACCORDING TO THIS METHOD, THE ECONOMY IS CLASSIFIED INTO THREE SECTORS, NAMELY: THE INDUSTRIAL SECTOR, THE SREVICE SECTOR, AND THE EXTERNAL SECTOR. y THE INDUSTRIAL SECTOR: IT INCLUDES ALL PRODUCTIVE ACTIVITIES. IT CONSTITUTES THE FLOW OF GOODS IN DIFFERENT SUB-SECTORS LIKE AGRICULTURE, MINING, TRANSPORT AND PUBLIC UTILITIES. THE SERVICE SECTOR: THE VALUE OF SERVICES WHICH DIRECTLY SERVE THE CONSUMERS IS TAKEN INTO CONSIDERATION. ALL SALARY PAYMENTS ARE INCLUDED AND TRANSFER PAYMENTS ARE EXCLUDED. THE EXTERNAL SECTOR: THE VALUE OF EXPORTS AND IMPORTS AND RECEIPTS FROM ABROAD AND PAYMENTS TO OTHER COUNTRIES ARE TAKEN INTO CONSIDERATION.
y
y
THIS METHOD OF ESTIMATING NATIONAL INCOME HELPS TO FIND OUT THE ORGIN OF THE NATIONAL INCOME. HENCE, IT IS CALLED NATIONAL INCOME BY INDUSTRIAL ORIGIN. IN ORDER TO AVOID MULTIPLE COUNTING, THERE ARE TWO ALTERNATIVE APPROACHES USED IN THE MEASUREMENT OF NATIONAL INCOME, NAMELY: a) THE FINAL GOODS METHOD b) THE VALUE ADDED METHOD
a) THE FINAL GOODS METHOD ACCORDING TO THIS METHOD, THE VALUE OF FINAL GOODS AND SERVICES ARE TAKEN INTO CONSIDERATION WITHOUT TAKING INTO CONSIDERATION THE VALUE OF INTERMEDIATE GOODS BECAUDE THE VALUE OF INTERMEDIATE GOODS IS ALREADY INCLUDED IN THE VALUE OF FINAL GOODS. b) THE VALUE ADDED METHOD OF ESTIMATING NATIONAL INCOME ACCORDING TO THIS METHOD, THE NATIONAL INCOME ESTIMATE IS OBTAINED BY SUMMATION OF THE VALUE ADDED AT EACH STAGE OF PRODUCTION UNTILL THE FINAL PRODUCT IS PRODUCED. Y= (P-D) + (S-T) + [(X-M) + (R-P)] ; Y= NATIONAL INCOME P= DOMESTIC OUTPUT D= DEPRECIATION M= IMPORTS P= PAYMENTS VALUE ADDED METHOD OF ESTIMATING NATIONAL INCOME S= SUBSIDIES T= TAXES X= EXPORTS R= RECEIPTS
PRODUCTION STAGE
FIRM
SALES PROCEEDS Rs.
COST OF INTERMEDIATE GOODS Rs.
VALUE ADDED [NET INCOME] Rs. (3-4) 5 1000 400 400 200 2000
1 WHEAT FLOUR BREAD TRADING
2 FARMER FLOUR MILL BAKER MERCHANT 1000 1400 1800 2000
3 0 1000 1400 1800
4
TOTAL SUM OF VALUE ADDED
PRECAUTIONS TO BE TAKEN WHILE ESTIMATING NATONAL INCOME BY CENSUS OF PRODUCT METJHOD OR OUTPUT METHOD: i. ii. iii. iv. v. IN OREDR TO AVOID MULTIPLE COUNTING, ONLY THE VALUE OF FINAL GOODS MUST BE ADDED. FARM OUTPUT SET ASIDE FOR SUBSISTENCE SHOULD BE ESTIMATED AND MEASURED AT THE PREVAILING MARKET PRICES. INDIRECT TAXES SHOULD BE DEDUCTED AND SUBSIDIES SHOULD BE ADDED. EXPORT INCOME MUST BE ADDED AND IMPORT EXPENDITURE MUST BE DEDUCTED. VALUATION OF QUANTITIES MUST BE DONE WITH REFERENCE TO BASE YEAR PRICES.
B. CENSUS OF INCOME METHOD OR FACTOR INCOME METHOD : THE INCOME METHOD APPROACHES NATIONAL INCOME FROM THE DISTIBUTION POINT OF VIEW. ACCORDINGLY, THE NATIONAL INCOME IS MEASURED AFTER IT HAS BEEN DISTRIBUTED AND APPEARS AS INCOME EARNED INDIVIDUALS OR FACTOR OWNERS. THE NATIONAL INCOME IS OBTAINED BY ADDING UP THE INCOMES OF ALL INDIVIDUALS OF THE COUNTRY IN THE FORM OF RENT, WAGES, INTERESTS, PROFITS, AND UNDISTRIBUTED PROFITS OF JOINT STOCK COMPANIES AND INCOMES OF SLF EMPLOYEDPEOPLE. THIS METHOD IS THEREFORE CALLED NATIONAL INCOME BY DISTRIBUTIVE SHARES. TRANSFER INCOME IS DEDUCTED FROM THE TOTAL FACTOR INCOMES. NATIONAL INCOME IS THEREFORE EQUAL TO FACTOR INCOMES LESS TRANSFER PAYMENTS. THIS METHOD IS ALSO KNOWN AS FACTOR INCOME OR FACTOR COST METHOD. Y= (r+ w+ i+ ) + [(x-m) + (r-p)] Where; W= WAGES R= RENT I= INTEREST 352),76
PRECAUTIONS TO BE TAKEN IN THE ESTIMATION OF NATIONAL INCOME BY INCOME METHOD: 1. INCOME FROM THE SALES RECEIPTS OF SECOND HAND GOODS MUST BE EXCLUDED BUT THE BROKERAGE ON SUCH TRANSACTIONS MUST BE ACCOUNTED FOR IN THE NATIONAL INCOME. 2. TRANSFER PAYMENTS ARE TO BE EXCLUDED. 3. FINANCIAL INVESTMENTS ARE TO BE EXCLUDED AS THEY DO NOT ADD TO THE REAL NATIONAL INCOME. 4. DIRECT TAX REVENUE TO THE GOVERNMENT SHOULD BE DEDUCTED FROM THE TOTAL INCOME. IN THE SAME MANNER, GOVERNMENT SUBSIDIES SHOULD BE DEDUCTED FROM THE PROFITS OF THE SUNSIDIZED INDUSRTIES. 5. UMNDISTRIBUTED PROFITS OF THE COMPANIES, INCOME FROM GOVERNMENT PROPERTY AND PROFITS OF PUBLIC ENTERPRISES SHOULD BE ADDED. 6. RENT ON ACCOUNT OF SELF OCCUPIED ACCOMODATION SHOULD BE IMPUTED AND INCLUDED IN THE NATIONAL INCOME. 7. VALUE OF PRODUCTION FOR SELF CONSUMPTION SHOULD BE ACCOUNTED FOR THE NATIONAL INCOME.
C. THE EXPENDITURE METHOD OF ESTIMATING NATIONAL INCOME THIS METHOD IS ALSO KNOWN AS THE CONSUMPTION AND INEVSTMENT METHOD OF MEASURING NATIONAL INCOME. NATIONAL INCOME FROM THE EXPENDITURE POINT OF VIEW IS THE SUM OF CONSUMPTION EXPENDITURE. ACCORDING TO THIS METHOD, NATIONAL INCOME IS COMPUTED IN THE FOLLOWING MANNER: a. ESTIMATE PRIVATE AND PUBLIC CONSUMPTION EXPENDITURE. b. ADD THE VALUE OF INVESTMENT IN FIXED CAPITAL AND STOCKS. c. ADD THE VALUE OF NET EXPORTS i.e. (X-M) AND THE VALUE OF NET RECEIPTS (R-P) OR NET FOREIGN INCOME FROM ABROAD. Y = &,* > ;0 53 @ WHERE, Y= CONSUMPTION EXPENDITURE. I = INVESTMENT EXPENDITURE, AND G = GOVERNMENT EXPENDITURE.
PRECAUTIONS TO BE TAKEN TO IN THE ESTIMATION OF NATIONAL INCOME BY EXPENDITURE METHOD: 1. EXPENDITURE ON SECOND HAND GOODS SHOULD BE EXCLUDED. 2. EXPENDITURE ON FINANCIAL ASSSETS SHOULD SUCH AS EQUITY SHARES, BONDS ETC SHOULD BE EXCLUDED. 3. EXPENDITURE ON INTERMEDIATE GOODS SHOULD BE EXCLUDED. 4. TRANSFER PAYMENTS SHOULD BE IGNORED. 5. EXPENDITURE ON FINAL GOODS AND SERVICES SHOULD BE INCLUDED.
DIFFICULTIES IN ESTIMATING NATIONAL INCOME IN INDIA:
THE DIFFICULTIES ENCOUNTERED IN ESTIMATING NATIONAL INCOME IN INDIA ARE BROADLY CLASSIFIED INTO TWO CATEGORIES, NAMELY: a. CONCEPTUAL DIFFICULTIES. b. STATISTICAL DIFFICULTIES.
CONCEPTUAL DIFFICULTIES i. FARM OUTPUTS SET ASIDE BY FARMERS FOR SELF CONSUMPTION AND FARM OUTPUT OF SUBSISTENCE FARMERS IS ESTIMATED AND INCLUDE IN THE NATIONAL INCOME. THE VALUE OF SERVICES OF A HOUSEWIFE AND OTHER MEMBERS OF THE HOUSEHOLD IS EXCLUDEDBECAUSE THESE SERVICES CANNOT BE EXCHANGED FOR A PRICE. THE VALUE OF DOMESTIC SERVICES IS CONSIDERED EQUAL TO THE AMOUNT OF DEFENSIVE EXPENDITURE INCURRED BY THE GOVERNMENT AND IT IS INCLUDED IN THE NATIONAL INCOME. ILLEGAL TRANSACTIONS OR BLACK MONEY GENERATED IN THE PARALLEL ECONOMY IS NOT ACCOUNTED FOR THE NATIONAL INCOME. EVERY UNACCOUNTED ECONOMIC TRANSACTIONIS CONSIDERED ILLEGAL AND THUS GENERATING BLACK INCOME. THE LINE OF SEPARATION BETWEEN FINAL AND INTERMEDIATE PRODUCTS SOMETIMES BLUERRED.
ii.
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STATISTICAL DIFFICULTIES i. INADEQUATE AND INACCURATE STATISTICAL DATA IS A GREAT LIMITATION ON PRESENTING RELIABLE NATIONAL INCOME FIGURES. A HUGE CLASS OF SELF EMPLOYED PEOPLE, SUBSISTENCE FARMERS AND SELF EMPLOYED PROFESSIONALS EITHER UNDER REPORT OR NOT EVEN BOTHER TO REPORT THEIR INCOMES. THE AVERAGE INDIAN IS HABITUALLY DEPENDENT ON THE GOVERNMENT S LARGESSE. UNDER-REPORTING IS THEREFORE IN THEIR SELF-INTEREST. DATA COLLECTED FROM SUCH PEOPLE CANNOT BE FULLY RELIED UPON. MASSIVE ILLITERACY, WANT OF INFORMATION AND LACK OF OPENESS MAKES PEOPLE IN INDIA INDIFFERENT AND NON-COOPERATIVE TO OFFICIAL INQUIRIES. FINALLY, THE ACCURACY OF STATISTICAL DATA ALSO DEPENDS UPON THE TRAINING, EFFICIENCY AND INTEGRITY OF THE STATISTICAL STAFF.
ii.
iii. iv.
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