National income

• 1. National IncomeDr. A.K.Panigrahi

2. Meaning of National Income National income is the moneyvalue of all the final goods andservices produced by a countryduring a period of one year.National income consists of acollection of different types ofgoods and services of differenttypes. 3. Meaning of National IncomeSince these goods are measured indifferent physical units it is notpossible to add them together. Thuswe cannot state national income is somany millions of meters of cloth.Therefore, there is no way except toreduce them to a common measure.This common measure is money. 4. ExampleIf the value of a meter of cloth is Rs.20 and the total cloth produced is100 meters, then the money value ofcloth is Rs. 2000. In this way we canfind out the value of other goodsand services and the total value ofall the goods and services producedduring one year. 5. Basic Concepts in National income Gross domestic product Gross domestic product at constantprice and at current price Gross domestic product at factorcost and Gross domestic product atmarket price 6. Basic Concepts in National income Net domestic productGross national product Net national Product Net national product at factorcost or national income 7. Gross Domestic Product Gross domestic product isthe money value of all finalgoods and servicesproduced in the domesticterritory of a country duringan accounting year. 8. Gross Domestic Product at Constantprice and Current price GDP can be estimated at currentprices and at constant prices. Ifthe domestic product isestimated on the basis of theprevailing prices it is called grossdomestic product at currentprices. 9. Gross Domestic Product at Constantprice and Current price If GDP is measured on the basis ofsome fixed price, that is priceprevailing at a point of time or insome base year it is known as GDPat constant price or real grossdomestic product. 10. Market prices versus factor cost A commodity when goes to the market,indirect taxes are imposed on it. This is themarket price. When we deduct the netindirect taxes we get factor cost. 11. GDP at Factor cost and GDP at Marketprice Conceptually, the value of GDPwhether estimated at market price orfactor cost must be identical. This isbecause the final value of goods andservices must be equal to the costinvolved in their production. GDP F.C = GDP M.P IT + S. 12. Gross Domestic Product Gross domestic product (GDP) is ameasure of the income and expendituresof an economy. It is the total market value of all final goodsand services produced within a country ina given period of time. 13. The Measurement of GDPGDP is the market value of all finalgoods and services produced within acountry in a given period of time. 14. The Measurement of GDP Output is valued at market prices. It records only the value of final goods, notintermediate goods (the value is countedonly once). It includes both tangible goods (food,clothing, cars) and intangible services(haircuts, housecleaning, doctor visits). 15. What Is Counted and Not Counted inGDP?GDP includes all items produced in the economy andsold legally in markets.GDP excludes services that are produced and consumedat home and that never enter the marketplace.Caring labor, the work that is normally produced bywomen.Because GDP does not count it, it diminishes itsimportance.GDP also excludes black market items, such as illegaldrugs. 16. Net Domestic Product While calculating GDP no provisionis made for depreciation allowance(also called capital consumptionallowance). In such a situation grossdomestic product will not revealcomplete flow of goods and servicesthrough various sectors. 17. Net Domestic Product A part of is therefore, set aside inthe form of depreciation allowance.When depreciation allowance issubtracted from gross domesticproduct we get net domesticproduct. NDP = GDP Depreciation. 18. Gross National Product Gross national product (GNP) is the totalincome earned by a nations permanentresidents (called nationals). It differs from GDP by including incomethat our citizens earn abroad andexcluding income that foreigners earnhere. 19. Net National Product (NNP) Net National Product (NNP) is the totalincome of the nations residents (GNP)minus losses from depreciation. Depreciation is the wear and tear on theeconomys stock of equipment andstructures. 20. GNP and GDP tend to be used as synonyms,although GDP is definitely the preferred measureamong economists GDP measures allproduction withinIndia, by whoeverhappens to beworking here; GNP measures theproduction of allIndians, whereverthey happen to beworking. 21. Personal Income and Disposableincome Personal income and disposableincome are two concepts of nationalincome very commonly used inadvanced countries. Personalincome may be defined as thecurrent income of persons orhouseholds from all services.Personal income is not a measure ofproduction. 22. Disposable Income All personal income is not at thedisposal to be spent on consumption.Individuals have to pay personal directtaxes to the government. They are freeto spend only after the payment oftaxes. DPI = Personal income PersonalDirect taxes. 23. Disposable Personal Outlay The disposable personal income maybe spent fully or individuals maysave. What remains after saving iscalled the personal outlay.Disposable income is equal toconsumption and savings. Disposable outlay = Disposableincome Savings. 24. Measurement of National IncomeSince factor income arise from the production ofgoods and services, and since incomes arespent on goods and services produced, threealternative methods of measuring nationalincome are possible. Production based Spending based Income based 25. Methods Value Added Method or Production Method. Income Method. Expenditure Method. 26. Production or Value AddedMethod This method is also called the value-added method. Thismethod approaches national income from the outputside. Under this method, the economy is divided into differentsectors such as agriculture, fishing, mining, construction,manufacturing, trade and commerce, transport,communication and other services. Then, the gross product is found out by adding up thenet values of all the production that has taken place inthese sectors during a given year. 27. Production or Value AddedMethod In order to arrive at the net value of production of a given industry,intermediate goods purchase by the producers of this industry arededucted from the gross value of production of that industry. The aggregate or net values of production of all the industry andsectors of the economy plus the net factor income from abroad willgive us the GNP. If we deduct depreciation from the GNP we getNNP at market price. NNP at market price indirect taxes +subsidies will give us NNP at factor cost or National Income. The output method can be used where there exists a census ofproduction for the year. The advantage of this method is that itreveals the contributions and relative importance and of the differentsectors of the economy. 28. Precautions:The following precautions should be taken whilemeasuring NI of a country through value addedmethod.1. Imputed rent values of self occupied houses should beincluded in the value of output.2. Sale and purchase of second hand goods should notbe included in measuring value of output of a year.3. Value of production for self consumption are to becounted.4. Value of services of housewives are not included.5. Value of intermediate goods must not be counted. 29. Income Approach Measures by summing the following components Employee Compensation Proprietors Income Corporate Profits Rent Interest Income Indirect Business Taxes Net Income from foreigners 30. Income Method This method approaches NI from distribution side. National Income is obtained by summing up theindividuals of a country. This method of estimating NI has the great advantage ofindicating the distribution of national income amongdifferent income groups such as landlords, owners,workers, entrepreneurs. 31. Precautions:1. Transfer payments are not included.2. Imputed rent are included.3. Illegal money is not included.4. Windfall gains are not included.5. Corporate Profit tax are not included.6. Death duties, gift tax, wealth tax are not included.7. Receipt from the sale of second hand goods are notincluded.8. Income equal to the value of production used for selfconsumption used by farmers and others are included. 32. Expenditure Approach Considers total spending on all final goods &services during the year It is a demand based concept Includes: Personal Consumption Durable Goods & Non-Durable Goods and Services Gross Private Investment Government Consumption and Gross Investment Net Exports of Goods and Services So, GDP = C + I + G + (X-M) 33. Measurement of National Income -Expenditure Approach Expenditure Approach:According to this method the money value of allexpenditure on final product will add up to GNP fromwhich capital consumption and net indirect tax (indirecttax-subsidy) are deducted.NI = GNP - Capital Consumption - Indirect Tax +Subsidywhere,GNP = C + I + G + NX 34. (1) Consumption Expenditure (C):It includes expenditure by household (a) durable goodssuch as, automobile, refrigerators etc, (b) non-durablegoods such as: food, shirts etc and (c) services such asdoctors, education etc.(2) Gross Investment (I):It includes (a) all final purchase of machinery, equipment, and toolsby business enterprise in given time period-change incapital stock (b) all current construction (c) changes in inventories: changes in stocks of finishedgoods and goods in process as well as changes in theraw material that businesses keep on hand. Inventoriescan be negative, positive or zero 35. (3) Government Expenditure (G):This includes all governmental spending (central, state andlocal) on the finished product of business and all directpurchases of resources such as labour etc, it excludes allgovt. transfer payments, because it doesn't reflect anycurrent production.(4) Net Exports (NX) = Export - Import :This includes the difference between the imports andexports, called net exports. it is the component of the totaldemand for our goods. it can be negative positive or zero. 36. Thank YouVideo:https://www.youtube.com/watch?v=bvOi3rQg1zQhttps://www.youtube.com/watch?v=XoIqVLO4Smg