NATIONAL INCOMEGROSS DOMESTIC PRODUCTGROSS NATIONAL PRODUCTNET DOMESTIC PRODUCTNET NATIONAL PRODUCT
Ankit Singh13BAL046
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NATIONAL INCOME The sum of all incomes of the people of a
country is a National Income. It is the money value of all the final goods
and services produced by a country during a period of one year.
Prof. Kuznets: - “The sum total of the market money value of final goods and services, produced by residents of a country in one year is known as National Income.”
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NEEDS FOR THE STUDY OF NATIONAL INCOME To measure the size of the economy and level
of country’s economic performance. To trace the trend or speed of the economic
growth in relation to previous year(s) as well as to other countries.
To know the structure and composition of the national income in terms of various sectors and the periodical variations in them.
To make projection about the future development trend of the economy.
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To help Government to formulate suitable development plans and policies to increase growth rates.
To fix various development targets for different sectors of economy on the basis of there performance.
To help business firms in forecasting future demand for there products.
To make international comparison of people’s living standards.
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There are various concepts of National Income:
a) Gross National Productb) Gross Domestic Productc) Net Domestic Product d) Net National Product National income consists of a collection of
different types of goods and services of different types, thus we need to study all these to measure the accurate National Income.
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GROSS NATIONAL PRODUCT It is defined as the total market value of all
final goods and services produced in a year in a country.
Two things must be noted in regard to GNP:i. It is a monetary measure,ii. For calculating GNP, all goods and services
must be counted once. It is a flow measure of value of goods and
services currently produced by residents of a country.
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Gross National Product has the following components:
i. Value of final consumer goods and services produced in a year and consumed by households.
ii. Value of new capital goods produced and addition to the inventories of goods such as raw materials, unfinished goods and consumer goods produced but not sold during a year. This is called Gross Private Investment.
iii. Value of output of General Government which is taken to be equal to the value of purchases of goods and services by the Government.
iv. Net Exports which is equal to value of goods exported minus the value of goods imported.
v. Net Factor Income from Abroad.
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NET FACTOR INCOME FROM ABROAD It refers to the difference between factor
income received from the rest of the world and factor income paid to the rest of the world.
a) ‘Factor income from abroad’ is the income earned by the normal residents of a country from the rest of the world in the form of wages and salaries, rent, interest, dividend and retained earnings.
b) ‘Factor income to abroad’ is the factor income paid to the normal residents of other countries (i.e. non-residents) for their factor services within the economic territory.
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There are three main components of NFIA: 1. Net Compensation to Employees:
It refers to difference between income from work received by resident workers living or employed abroad for less than one year and similar payments made to non-resident workers staying or employed within the domestic territory of the country for less than one year.
2. Net Income from property and entrepreneurship:It refers to difference between income from property and entrepreneurship (in the form of rent, interest and dividend) received by residents of the country and similar payments made to the non-residents.
3. Net Retained Earnings: It refers to difference between retained earnings of resident companies located abroad and retained earnings of non-resident companies located within the domestic territory of the country.Retained Earnings refer to that part of profits which is kept as reserve after paying the corporate tax and dividends.
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GROSS DOMESTIC PRODUCT Gross domestic product is the monetary value of
all final goods and services produced in the domestic territory of a country during a year.
It is a change in the growth rate of an economy, usually calculated on an annual basis, it can be calculated on a quarterly basis as well.
It includes all private and public consumption, government outlays, investments and exports minus imports that occur within a defined territory.
It is a broad measurement of a nation’s overall economic activity.
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GDP at factor cost is estimated as the sum of net value added by the different producing units and the consumption of fixed capital (subsidies).
GDP(FC)= Cost of Production + Subsidies GDP at market prices is the sum of the gross
values added of all resident consumers at market prices, plus taxes less subsidies.
GDP(MC)= Price Paid by Consumers – Subsidies Per capita GDP of an economy is obtained by
dividing the total GDP in a year by the population of that economy in the same year.
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NET DOMESTIC PRODUCT The Net Domestic Product (NDP) equals the gross
domestic product (GDP) minus depreciation on a country's capital goods.
While calculating GDP no provision is made for depreciation allowance (also called capital consumption allowance). In such a situation gross domestic product will not reveal complete flow of goods and services through various sectors.
A part of is therefore, set aside in the form of depreciation allowance. When depreciation allowance is subtracted from gross domestic product we get net domestic product.
NDP = GDP – Depreciation.
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NET NATIONAL PRODUCT NNP means the total value of goods
produced and services provided in a country during one year, after depreciation of capital goods has been allowed for.
It can be derived by subtracting depreciation allowance from GNP.
NNP = GNP - Depreciation It can also be found out by adding the net
factor income from abroad to the net domestic product.
It is also called National Income at market price.
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NATIONAL INCOME AT FACTOR COST National income at factor cost means the
sum of all incomes earned by resources suppliers for their contribution of land, labor, capital and organizational ability which go into the years net production. Hence, the sum of the income received by factors of production in the form of rent, wages, interest and profit is called National Income. Symbolically,
NI(FC)=NNP + Subsidies - Indirect Taxes
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STOCKS AND FLOWS A flow is any quantity that must be
measured over a period of time. Income : the goods and services produced each
year Deficits: The excess of spending over income each
year A stock is any quantity that is measured at a
single instant in time. Wealth: All the goods a person owns. Wealth is the
sum of past net saving. Capital: All the investment goods owned. Capital is
the sum of past net investment
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MEASUREMENT OF NATIONAL INCOME For calculating National Income an economy is
looked upon from three angles:1) Production units in an economy are classified into
primary, secondary and tertiary sectors. On the basis of this classification, value-added method is used to measure National Income.
2) Economy is viewed as a combination of individuals and households owing different kinds of factors of production. On this basis income method is used to calculate National Income.
3) Economy is also viewed as a collection of units per consumption, saving and investment. On this basis expenditure method is used for calculating National Income.
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VALUE-ADDED METHOD This is also called as output method or production
method. In this method, national income is measured as a
flow of goods and services. We calculate money value of all final goods and services produced in an economy during a year. Final goods here refer to those goods which are directly consumed and not used in further production process.
The economy is classified into sectors like: Agricultural, industrial, fisheries, forest, direct services and foreign transactions etc
In each sector, we can find the value of final goods and services.
NI = NDP + NFIA
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PRECAUTIONS Intermediate Goods are not to be included in the national
income since such goods are already included in the value of final goods. If they are included again, it will lead to double counting.
Sale and Purchase of second-hand goods is not included as they were included in the year in which they were produced and do not add to current flow of goods and services.
Production of Services for self-consumption (Domestic Services) are not included. Domestic services like services of a housewife, kitchen gardening, etc. are not included in the national income since it is difficult to measure their market value. These services are produced and consumed at home and never enter the market place and are termed as non-market transactions.
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INCOME METHOD Under this method, national income is measured
as a flow of factor incomes. There are generally four factors of production labor, capital, land and entrepreneurship. Labor gets wages and salaries, capital gets interest, land gets rent and entrepreneurship gets profit as their remuneration.
Only those incomes earned and received for producing goods and for rendering services are to be counted.
Transfer payments such as old age pensions, widow pensions and unemployment benefits etc. should not be counted as these are the incomes received without contributing to the production.
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PRECAUTIONS1) Transfer payments are not included in estimating national
income.2) Imputed rent of self-occupied houses are to be included in
calculating national income.3) Illegal money through smuggling etc. are not included as
they cannot be easily estimated.4) Windfall gains are not included in this method.5) Death duties, gift tax, tax on lotteries etc. are paid from
past saving or wealth and not from current income. So, they should not be treated as a part of national income of a year.
6) Income from the sale of second hand goods is not included in the national income because it does not relate to the current flow of goods and services.
7) Income of gamblers, smugglers, thieves etc. is not included in the national income because these are not the part of regular productive activities.
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EXPENDITURE METHOD In this method, national income is measured
as a flow of expenditure. GDP is sum-total of private consumption expenditure, government consumption expenditure, gross capital formation (government and private) and net exports.
One man’s income is another man’s expenditure, therefore national income can be arrived at by adding the total expenditure of individual and business firms during a year on goods and services.
NI = GDP(MP) + NFIA – Consumption of fixed capital – Net Indirect Taxes
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PRECAUTIONS Expenditure on Intermediate Goods will not be included in the
national income as it is already included in the value of final expenditure. If it is included again, it will lead to double counting of expenditures.
Transfer Payments are not included as such payments are not connected with any productive activity and there is no value addition.
Purchase of second-hand goods will not be included as such expenditure has already been included when they were originally purchased. Such goods do not affect the current flow of goods and services. However, any commission or brokerage on such goods is included as it is a payment made for productive service.
Purchase of financial assets (shares, debentures, bonds etc.) will not be included as such transactions do not contribute to current flow of goods and services. These financial assets are mere paper claims and involve a change of title only. However, any commission or brokerage on such financial assets is included as it is a productive service.
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DIFFICULTIES IN CALCULATING NATIONAL INCOME Black Money: It has created a parallel
economy - unreported economy which is equivalent to the size of officially estimated size of the economy.
Non-Monetization: In most of the rural economy, considerable portion of transactions occurs informally.
Growing Service Sector: growing faster than Agricultural and Industrial sector; value addition in legal consultancy, health service, financial and business services is not based on accurate reporting.
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House Hold Services: It ignores domestic work and house keeping services.
Social Service: It ignores volunteer and unpaid social services.
Income Generated By Foreign Firms: their income form a part of the national income of the country in which they are located or should it belong to the national income of the country owing the firms.
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