2. national income iimmm

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NATIONAL INCOME

NATIONAL INCOME

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Gross National Product (GNP) Money value of all goods and services that are:1. Currently produced2. Sold through an official market3. Not resold or used in further production during the

measurement period4. Produced by nationally owned resources ( factors

of production)5. Valued at market prices

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Expressed in money terms

Goods and services are non-additive in physical quantities due to differences in units of measurement

“You cannot add apples and haircuts !!” Quantities of various goods multiplied by their

respective prices added up give GNP

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Time

GNP includes only those items that are produced during the period of time for which the GNP stands.

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Official Market transactions

GNP accounts only for those goods that are traded through the official market.

E.g. housework of a housewife is not included.

BUT! Payment of a house maid is included! Why?

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Double counting

Raw materials and intermediate goods (I.e. goods resold or used further for production during the measurement period) are not included in GNP so as to avoid double counting of production.

E.g. wheat used in making bread, tyres used in newly sold cars are not included.

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Following are not included in GNP……. Goods and services rendered free of charge. Sale and purchase of old goods, shares, bonds

and assets of existing companies. Social Security like unemployment insurance

allowance, old age pension and interest on public loans.

Profits earned or losses incurred on account of changes in capital assets as a result of fluctuations in market prices.

Income earned through illegal activities.

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Gross Domestic Product (GDP) GDP is the value of goods and services

produced within the nation’s geographical territory, irrespective of the ownership of the resources.

E.g. Citibank’s income in India is a part of India’s GDP

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Net Factor Income from Abroad (NFIA) = Exports – Imports

Market Price is when the value of goods and services are calculated according to the prevailing price.

Factor Cost is when the value of goods and services is calculated as per the income received by the factors of production

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Market price and factor cost

GNP at market price is inclusive of indirect taxes, net of subsidies as it values the goods and services at the prices paid by their end users.

To get GNP at factor cost, one must deduct net indirect taxes from GNP at market prices.

Net Indirect Tax = Indirect Tax - Subsidy Thus,

GNPFC= GNPMP - NIT

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GNP belongs to the nation and thus, it must be produced by its owned factors of production only.

E.g. Citibank’s profits are not a part of India’s GNP

For GNP location of production is immaterial.

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Other income concepts

Corresponding to GNP and GDP, there are NNP and NDP. The difference between the gross and the net is the capital consumption, called depreciation. Thus ,

NNP = GNP – depreciation

NDP = GDP – depreciation

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Relation between Gross & Net, MP & FC Gross = Net + Depreciation Market Prices = Factor Cost + Net Indirect

tax National = Domestic + Net Factor Income

from Abroad

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GNPmpGNPmp

=GNPfc =GNPfc

=GDPfc=GDPfc

=GDPmp=GDPmp

=NNPfc=NNPfc

=NDPfc=NDPfc

=NDPmp=NDPmp

=NNPmp=NNPmp

- Depreciation- Depreciation - Net Indirect Taxes- Net Indirect Taxes

- NFIA- NFIA- NFIA- NFIA

- - Net Indirect Taxes

- - Net Indirect Taxes

- Depriciation- Depriciation- Depriciation- Depriciation

- NFIA- NFIA- NFIA- NFIA

- Net Indirect - Net Indirect TaxesTaxes

- Net Indirect - Net Indirect TaxesTaxes- Depreciation- Depreciation

- NFIA- NFIA- NFIA- NFIA

- Depreciation- Depreciation- Depreciation- Depreciation- Net Indirect - Net Indirect TaxesTaxes

- Net Indirect - Net Indirect TaxesTaxes

- NFIA- NFIA- NFIA- NFIA

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Private, Personal & Disposable Income Private Income : The Income obtained by

Private Individuals from any source, productive or otherwise and the retained Income of corporations.

Personal Income : The spendable Income available to individuals before Personal taxes are deducted. It excludes undistributed profits of companies, co-operatives etc.

Disposable Income : Income available with individuals after paying the personal taxes.

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Some important terms which we use : Business Transfer Payments : Corporate gifts to non

profit institutions. Indirect Taxes : All forms of Business Taxes except

those on net Business Income. Subsidies : Government compensation to business for

selling its goods and services below the market price. Government Transfer Payments : Retirement pensions,

social security etc. Supplement to labour Income : Employer’s contribution

to pension fund and employee welfare institutions. Direct Personal Taxes : Taxes on Income paid by

individuals.

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Interrelations between NI concepts GNP

( - ) Depreciation

( = ) NNP NNP

( - ) Indirect taxes

( + ) Subsidies( = ) NNPFC

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Interrelations between NI concepts NNPFC

( + ) Government Transfer Payments and Business Transfer payments ( - ) Profits of government enterprises and from government property ( = ) Private Income.

Private Income ( - ) Corporate savings (retained profits) before taxes( = ) Personal Income

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Interrelations between NI concepts Personal Income

( - ) Employee contributions to Social Security and Pension Funds and Direct Personal Tax

( = ) Disposable Income Disposable Income = Consumer Expenditure

(+) net savings of Individuals.

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Real versus Nominal GDP

GDP valued at current price is Nominal GDP. We calculate it by multiplying the quantity of output by its current selling price.

This GDP usually increases every coming year. This can be because of the increase in the price level or the increase in the quantity.

To understand the real increase in GDP, we have to multiply the current output by a Base year’s price.

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Real versus Nominal GDP

2001 : 100 kgs of wheat X Rs.10 / kg = 1,000+ 200 kgs of iron X Rs. 20 / kg = 4,000

------------Nominal GDP = 5,000

------------ 2005 : 120 kgs of wheat X Rs.15 / kg = 1,800+ 250 kgs of iron X Rs. 25 / kg = 6,250

------------Nominal GDP = 8,050

------------

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Real versus Nominal GDP

Real GDP of 2005 would be : 120 kgs of wheat X Rs.10 / kg = 1,200

+ 250 kgs of iron X Rs. 20 / kg = 5,000

------------

Real GDP = 6,200

------------

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Real Income

When the GDP is expressed in terms of a general level of prices of a particular year taken as base, it is called as Real GDP.

Base year should be : A non election year. A Normal Year where there were no Natural

calamities. Should not be too far in the past. India’s Base year was changed in Jan 2015

from 2004 / 5 to 2011/12.

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Per Capita Income

Per Capita Income = National Income

Total Population

Real Per Capita Income = Real NI

Total Population

GDP deflator

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A deflator is used to convert data compiled over a period into prices prevailing at an earlier point in time.

E.g. the current price of a television can be deflated to what it would cost say three years ago.

Essentially, a deflator removes the effect of inflation from data, making it comparable across periods.

It gives the percentage change in the price of a good as compared to the cost in the base year.

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Methods of measuring national income Product method

Income method

Expenditure method

If done correctly, the following equation must hold:Production = income = expenditure

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Product Approach

Under this approach, GDP at factor cost is measured as the sum of the values of the flows of value added from various production centers or of the production of final goods and services.

Production sectors are conveniently classified into a. Primary – agriculture and allied activitiesb. Secondary- manufacturing, electricity, gas,

construction etc.c. Tertiary – all items under services.

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The Product / Output (Value Added) Method The agricultural and extractive industries Plus Manufacturing industries Plus Services and construction Equals Gross Domestic Product at Factor Cost Plus Net factor income from abroad ( = income

received from abroad – income paid abroad) Equals Gross National Product at Factor Cost Less Capital consumption or depreciation Equals Net National Product at Factor Cost or

National Income

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Income approach

Under the income approach, national income equals the sum of the costs of production of goods and services which equals the earnings that household receive for their factors of production.

Thus,

NDPFC= wages+ interest + rent + profit Transfer payments are not included such as unemp.

benefits and pensions

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Expenditure approach

Under this method national income is measured as the sum of all final expenditure. Final expenditure consists of expenditure on pvt. Consumption, gross investment, expenditure on government consumption, foreigners expenditure on exports net of our expenditure on goods and services from abroad.Thus,

GNPMP = C + I + G + X - M

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Expenditure Approach

Consumption (C)   Plus Gross private domestic investment (Ig) Plus Government purchases (G) Plus Net exports (NX) + Net factor income from abroad   Gross National product at market price Less Net indirect taxes Equals   Gross National Product at factor cost Less   Depreciation Equals   Net National Product at factor cost (National

Income)

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Limitations of the GDP Concept Society is better off when crime decreases,

but a decrease in crime is not reflected in GDP.

An increase in leisure is an increase in social welfare, not counted in GDP.

Nonmarket and domestic activities are not counted even though they amount to real production.

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Difficulties in measurement of national income

Ignores the non-market and unofficial market economy Erroneous measurement of output of services sector Ignores quality of products Is valued at official exchange rate; hence changes in

exchange rates affect NI Ignores benefits due to leisure Equates goods(education) and bads (weapons) Ignores income distribution

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Contd ….. Ignores weather Includes income generated through non-

productive activities such as defense, police, courts etc.

Ignores qualities of life influenced by education, health, living together, human freedom and so on

Ignores ethics, customs, traditions, habits. All these factors have positive values for economic welfare.

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Uses of National Income Statistics National income statistics acts as : a) An instrument of economic planning and

review (b) A means of indicating changes in a

country’s standard of living (c) A means of comparing the economic

performance of different countries (d) An indicator to appraise the changes in

the economic growth of a country.