26761588 national income concept and measurement
TRANSCRIPT
-
7/28/2019 26761588 National Income Concept and Measurement
1/33
National Income and its
components
Presented By: Prof Ritesh Lal
-
7/28/2019 26761588 National Income Concept and Measurement
2/33
The Economys
Income and Expenditure
When judging whether the economy isdoing well or poorly, it is natural to
look at the total income that everyone
in the economy is earning.
-
7/28/2019 26761588 National Income Concept and Measurement
3/33
The Economys
Income and Expenditure
For an economy as a whole, income
must equal expenditurebecause:Every transaction has a buyer and a
seller.
Every rupee of spending by some buyeris a rupee of income for some seller.
-
7/28/2019 26761588 National Income Concept and Measurement
4/33
Components of National Income
Gross Domestic Product (GDP)
Gross National Product (GNP)Net National Product (NNP)
Personal Income
Disposable Personal Income
-
7/28/2019 26761588 National Income Concept and Measurement
5/33
GDP is the market value of all final
goods and services produced withina country in a given period of time.
-
7/28/2019 26761588 National Income Concept and Measurement
6/33
The Measurement of GDP
Output is valued at market prices.
It records only the value offinal goods,
not intermediate goods (the value is
counted only once).
It includes both tangible goods (food,
clothing, cars) and intangible services(haircuts, housecleaning, doctor visits).
-
7/28/2019 26761588 National Income Concept and Measurement
7/33
The Measurement of GDP
It includes goods and services currently
produced, not transactions involving
goods produced in the past.
It measures the value of production
within the geographic confines of a
country.
-
7/28/2019 26761588 National Income Concept and Measurement
8/33
It measures the value of production
that takes place within a specific
interval of time, usually a year.
The Measurement of GDP
-
7/28/2019 26761588 National Income Concept and Measurement
9/33
What Is Counted in GDP?
GDP includes all items produced in theeconomy and sold legally in markets.
-
7/28/2019 26761588 National Income Concept and Measurement
10/33
What Is Not Counted in GDP?
GDP excludes most items that are
produced and consumed at home and
that never enter the marketplace.
It excludes items produced and sold
illicitly, such as illegal drugs.
-
7/28/2019 26761588 National Income Concept and Measurement
11/33
The Components of GDP
GDP (Y) is the sum of the following:
Consumption (C)Investment (I)Government Purchases (G)Net Exports (NX)
Y = C + I + G + NX
-
7/28/2019 26761588 National Income Concept and Measurement
12/33
The Components of GDP
Consumption (C):
The spending by households on goods and
services, with the exception of purchases ofnew housing.
Investment (I):
The spending on capital equipment,inventories, and structures, including
new housing.
-
7/28/2019 26761588 National Income Concept and Measurement
13/33
The Components of GDP
Government Purchases (G):
The spending on goods and services by local,
state, and federal governments.Does not include transfer payments because
they are not made in exchange for currently
produced goods or services.
Net Exports(NX):
Exports minus imports.
-
7/28/2019 26761588 National Income Concept and Measurement
14/33
To summarise:
GDP= Market value of goods & services
produced by the residents in the country
(+) Incomes earned in the country by
foreigners
(-) Incomes received by residents of a
country from abroad
-
7/28/2019 26761588 National Income Concept and Measurement
15/33
Gross National Product
Gross national product (GNP) is the total
income earned by a nations permanent
residents (called nationals).
It differs from GDP by including income
that our citizens earn abroad and
excluding income that foreigners earnhere.
-
7/28/2019 26761588 National Income Concept and Measurement
16/33
To Summarise:
GNP= Market value of domestically
produced goods & services
(+) Incomes earned by the residents of a
country in foreign countries
(-) Incomes earned by the foreigners in the
country
-
7/28/2019 26761588 National Income Concept and Measurement
17/33
Net National Product (NNP)
Net National Product (NNP) is the
total income of the nations residents
(GNP) minus losses from depreciation.
Depreciation is the wear and tear on
the economys stock of equipment and
structures.
-
7/28/2019 26761588 National Income Concept and Measurement
18/33
To summarise:
NNP= GNP - Depreciation
-
7/28/2019 26761588 National Income Concept and Measurement
19/33
Personal Income
Personal income is the income that
households and non-corporate businesses
receive.
Unlike national income, it excludes retained
earnings, which is income that corporations
have earned but have not paid out to their
owners.
In addition, it includes households interest
income and government transfers.
-
7/28/2019 26761588 National Income Concept and Measurement
20/33
Personal Income & NNP
Personal Income= NNP
(-) Undistributed Company Profits
(-) Surplus of Public Undertaking
(-) Rentals of Public Property
-
7/28/2019 26761588 National Income Concept and Measurement
21/33
Disposable Personal Income
Disposable personal income is the income
that household and noncorporate
businesses have left after satisfying alltheir obligations to the government.
It equals personal income minus personal
taxes.
-
7/28/2019 26761588 National Income Concept and Measurement
22/33
To Summarise:
Disposable Personal Income= Personal
Income
(-) Personal Taxes
-
7/28/2019 26761588 National Income Concept and Measurement
23/33
1.Net Product Method or Value AddedMethod
2. Factor Income method or Factor share
method
3. Expenditure Method
Methods of measuring National
Income
-
7/28/2019 26761588 National Income Concept and Measurement
24/33
Net Product Method
(Three stages)
Estimating the gross value of domestic
output in the various branches of
production
Determining the cost of material and
services used and also the depreciation
Deducting these costs and depreciation
from gross value to obtain the net value
of domestic output.
-
7/28/2019 26761588 National Income Concept and Measurement
25/33
Net Product Method
The aggregate of all goods and services
from the 3 sectors.
The components are:
Primary sectors- agricultural, mining,
fishing.
Secondary sectors- industrial sectors.Tertiary sectors- service sector.
-
7/28/2019 26761588 National Income Concept and Measurement
26/33
Calculation through Net Product Method
The total value of final goods and services from the 3 economic sectors:-(+) Primary sector
(+) Secondary sector
(+) Tertiary sector
= Gross domestic product at Market price (GDPmp)
(-) Income paid abroad(+) Income received from abroad
= Gross national product at Market price (GNPmp)
(+) Subsidies
(-) Indirect taxes or taxes on expenditure
= Gross national product at Factor cost (GNPfc)
(-) Depreciation or capital consumption
= Net national product at Factor cost (NNPfc)
= National Income
-
7/28/2019 26761588 National Income Concept and Measurement
27/33
Factor Income Method
This approach looks at the flow of economic
activities from the income point of view.
The components are:Wages and salaries of all employees in every sector.
Interest and dividends from shares.
Rent including inputed rent.
Profits, example- undistributed profits.
Income of self-employed workers such as hawkers.
-
7/28/2019 26761588 National Income Concept and Measurement
28/33
Calculation through Factor Income Method
Wages and salaries (including compensation for employees)
(+) Interest and dividends
(+) Rent
(+) Profits (including undistributed profits and income from self-employment/proprietors income)
= Gross domestic income at market price (GDImp)
(-) Income paid abroad
(+) Income received from abroad
= Gross national income at market price (GNImp)
(+) Subsidies
(-) Indirect taxes or taxes on expenditure
= Gross national income at factor cost (GNIfc)
(-) Depreciation or capital consumption
= Net national income at factor cost (NNIfc)
= National Income
-
7/28/2019 26761588 National Income Concept and Measurement
29/33
Expenditure Method
The components are:
Households expenditure or consumer expenditure
Producers expenditure or gross investment such as:- New construction such as housing, factories, etc.
Equipment like machinery tools, etc.
Changes in business stocks or inventories, example goods
produced but unsold.
Government expenditure on goods and services,
excluding transfer payments.
-
7/28/2019 26761588 National Income Concept and Measurement
30/33
Calculation through Expenditure Method
Expenditure include household, producer and government:-
(+) Consumption
(+) Investment
(+) Government spending
= Total Domestic expenditure at market price
(+) Exports
= Total final expenditure at market price(-) Imports
= Gross domestic expenditure at Market price (GDEmp)
(-) Income paid abroad
(+) Income received from abroad
= Gross national expenditure at Market price (GNEmp)(+) Subsidies
(-) Indirect taxes or taxes on expenditure
= Gross national expenditure at Factor cost (GNEfc)
(-) Depreciation or capital consumption
= Net national expenditure at Factor cost (NNEfc)
= National Income
-
7/28/2019 26761588 National Income Concept and Measurement
31/33
PROBLEMS IN CALCULATING
NATIONAL INCOME
a.Problem of expertise- The shortage of professional in most developing countries is a major
problem. To estimate national income accurately, the services of
statisticians, analysts, programmers, researches and others. These
professionals will be able to present the national income data with the
minimum technical and human errors.
b.Lack of sophisticated machinery- Developing countries like Indonesia, India and Peru face the problem of
technical know-how and even technical equipment. They need the latest
and most advanced computers to compute the massive volume of data.
c. Problem of false information- Businessman and other self-employed people usually underestimate their
earning primarily to evade paying high taxes. This would of course lower
the national income figures of the country. Perhaps stringent rules and
punishment on taxes evaders should be implemented.
-
7/28/2019 26761588 National Income Concept and Measurement
32/33
PROBLEMS IN CALCULATING
NATIONAL INCOME
d. Problem of estimation- Depreciation- machinery can be considered obsolete and loses its value.
But the question is how obsolete is obsolete? The estimation of
depreciation for every country is differ.
- Imputed rent- owner-occupied houses have a value in terms of rent. Some
owner may overestimate and some may underestimate their imputed rent.This will result in a distorted of the actual national income of the country.
e. Problem of measuring quality- In national income accounting we are not merely interested in thequantity
of physical goods and services only, quality is of equal importance. Theproblem that arises is how to measure the quality. Can prices of goodsand
services reflect accurately the quality of product? There is no absolute
indicator of quality.
-
7/28/2019 26761588 National Income Concept and Measurement
33/33
THANK YOU