National Income

NATIONAL INCOME

Intro to National Income-Methods of measuring NY-About GNP and GDP-Per capita income-Difficulties in the measurement of NY-Importance of NY data-Some examples and practical application

1. Intro to National Income

Layman terms - Total income earned by all individuals from all possible sources of theirs in

a span of one year. Total amount of income of a country from all kinds of economic

activities.

Economic terms - National income is the total value a country’s final output of all goods

and services produced in one year. It is the methodology to measure the flow of income,

expenditure and output in an economy.

Y = C + I + G

C: Consumption

I : Investment

G: Government spending

It is used as an index to measure the growth of an economy.

Measures of National Product

GNP – Gross National Product

NNP – Net National Product

National Income(NY)

Personal Income(PY)

Disposable Income(DY)

Discretionary Income

GDP – Gross Domestic Product

NDP – Net Domestic Product

Factors….

Personal IncomeIt is the income received by an individual.

PY= NY – (corporate taxes+Corporate retained earnings) + transfer payments

Disposable Income

It is that income which is received by the individuals and is at their disposal. To calculate this value we have to subtract direct taxes from PY because after subtracting it the residual income can be spent by a person.

DY= PY – Direct Taxes.

Discretionary Income

It is the income which an individual can spend at their discretion, i.e. at their free will.

Discretionary Income= Disposable Income(DY) – Compulsory Savings & Loan Payments

GDP vs GNP

GDP=Gross Domestic Product

GNP=Gross National Product

GDP

It is the market value for all final goods and services produced within a given period of

time by factors of production located within the country.

a. GDP is concerned only with new and current production .

b. GDP also excludes output produced abroad by domestically owned factors of production.

c. Intermediate goods (those goods that are produced by one firm for use in further processing by

another firm) are not counted in the GDP.

GNP

Is the total market value of all final goods and services produced within a given period by

factors of production owned by a country’s citizens regardless of where the output is

produced.

Difference

GDPGross Domestic Product

Total value of products &

Services produced within

the territorial boundary of

a country.

GNP

Gross National Product

Total value of Goods and

Services produced by all

nationals of a country

(whether within or outside

the country).

GNP=GDP + (Net Factor Income from Abroad)

FORMULAS

Factor cost=Market price-Indirect taxes+

subsides

GNP=GDP+ Net factor income from Abroad.

Factors….

NNP

While GNP is a gross value, NNP is a net value. For calculating it, we should subtract the depreciation. Depriciation is the wear and tear of capital assets. In macro economic analysis depreciation is generally called capital consumption allowance.

NNP = GNP - Depreciation changes(Capital Consumption Allowance)

NY

It is the aggregate of incomes received by

factors of production in an economy during

a period of one year.

NY=NNP - Indirect Taxes + Subsidies

This method of national income is also

called National Income at Factor Cost,

because it shows the aggregate of

incomes received by the factors of

production.

Similarly, NNP is called National Income at

Market Price because it represents the

market value of National Income.

MARKET VALUE

The price an asset would

fetch in the market place.

Market value is defined as the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.

Determination of market value

Market value is

determined by the

valuations or multiples

accorded by investors to

companies, such as price-

to-sales, price-to-earnings,

enterprise value-to-EBITDA,

and so on. The higher the

valuations, the greater the

market value.

Market value is also

dependent on numerous

other factors, such as the

sector in which the

company operates, its

profitability,debt load And

the broad market

enviorment.

PER CAPITA INCOME

It is also known as income per person.

It is the average income of an individual in an economy over a year. This year, may be a calendar year or a fiscal year.

Per Capita Income= National Income/Total Population

Methods of Measuring National

Income

There are three methods to measure the NY

Methods

Production Method

Income Method

Expenditure Method

Production or Output Method

In this method, we take the aggregate of output of goods and services for the whole economy, while taking care of double counting. This is done by either taking the output of the final goods and services, or by taking a value addition at each stage of production.

For the purpose of measuring the output for different sectors, the economy can be divided into threemajor segments:

i. Primary Sector:-This consists of agriculture, animal husbandary, poultry, fishing, mining,forestry, and other land based activities.

ii. Secondary Sector:-This consists of manufacturing activities. It includes manufacture of steel, copper, and other metals, manufacture of machinary, tools, plant and equipment, building construction, etc.

iii. Tertiary Sector:- This consists of the service sector. These may be business services like banking insurance, consultancy, hotelling, entertainment, software, etc or government services like civil and police services, armed forces, education, etc.

Income Method

Under this method, national income is measured as a flow of factor incomes.

There are generally four factors of production labour, capital, land and entrepreneurship.

1. Labour gets wages and salaries

2. Capital gets interest

3. Land gets rent

4.Entrepreneurship gets profit as their remuneration.

Expenditure Method

In this method, national income is measured as a flow of expenditure.

ie : national Income (NY) = Total Expenditure (E)

= C + I + G + NX

******** GRAPH

GDP is sum-total of :

1. Private consumption expenditure (C).

2. Government consumption expenditure (G).

3. Gross capital Investment (Government and private) (I).

4. Net exports (Export-Import) (NX).

DIFFICULTIES In Measuring NY

Non-Monetized Sector

In most of the developing countries, there is a large non-monetized sector, where goods and services are not actually traded, and therefore they do not enter into the market. These goods do not form a part of the GDP because they do not enter into the market.

Unwillingness of the people to reveal the data

One of the acute problem of measuring the national income data is that most of the people are unwilling to reveal the extent of their annual income.

Continued….

Problem of Collection

An economy consists of large number of variables. For a country like India the number of variables are in crores. It is very difficult to collect data from all these variables.

Calculation of Depreciation It has been already been pointed

out that we need to subtract depreciation or capital consumption allowance to find out the NNP and then national income. Calculation of annual depreciation is very difficult. There are large number of assets of varying types.

Continued….

Double Counting

Double counting is an error caused as a result of illogical calculation.

This term is used in economics to refer to the faulty practice of counting the value of a nation's goods more than once. Since goods are produced in stages, through specialized channels of production, many intermediate goods are used to produce a final good. If the values of each of these intermediate goods is added together, without subtracting expenditures incurred during the production process, the error of double counting will be committed.

Importance of National Income

The following are some of the important uses of national income statistics:

Level of Economic Welfare

Rate of Economic Growth

Distribution of Wealth

Ease in Planning

Formation of Budget

Conclusion

EXAMPLES….

THANK YOU….

Group Members :

Group Leader – Sibeli Mukherjee

Akshit Baunthiyal

Ankit Jhuriya

Aviral Aggarwal

Ashwin Kumar J

Eshan Aswar

Lakshay Sharma

Prakhar Awasthi

Prateek Sachdeva

Saptorshi Dana

Sarang Kurani

Shitanshu Desai

Siddhesh Nachane