national income accounting

17-01-2010 1 © meenal jagtap

National Income Accounting

Unit I

PPT 2


Introduction

• It is necessary to measure the total output and income generated in an economy….why?

• Because only then we can make out that whether the economy is growing or not!

• A increase in real GNP ( a measure of total output in the economy) indicates economic growth.


Basic Concepts

• GNP ( Gross National Product) at market prices: Is defined as the aggregate of market value of final goods & services produced by an economy within a period of one year

• Market value: means the price at which it is sold in the market

• Final goods: those goods that are not going through any further value addition and are sold as such in the market.


GNP..

• Whereas intermediate goods are those which are used for resale or for further processing. E.g Cotton is an intermediate good while shirt made with this cotton is a final good, fertilizer & wheat?...any guesses?

• Non productive transactions must be excluded from calculation of GNP.


GNP

• Non productive transactions are those financial transactions corresponding to which any productive activity is not taking place and in these transactions, money only exchanges hands e.g sale & purchase of shares & stocks, gifts, old age pensions, unemployment allowances etc.

• GNP is usually calculated for a period of one year.• It is a sum total of all goods & services produced by

citizens of an economy, whether within the boundaries of that country or outside. E.g the incomes earned by Indian nationals while working abroad will be included in the calculation of GNP.


GDP

• It is defined as the market value of aggregate goods & services produced within the boundaries of a country during a period of one year.

• GNP at mp – (Net exports or net factor income from abroad) = GDP at mp.

• Net Exports = Exports – Imports• Exports means sale of domestically

produced products outside the economy.


GDP

• On the other hand, Imports are produced outside but sold within the boundaries of a country.

• If what we receive from abroad is greater than what we pay abroad , then GNP > GDP


NNP at market prices

• NNP at mp = GNP at mp – Depreciation

• Depreciation refers to the wear & tear of capital assets.

• In National Income Accounting, depreciation is usually referred to as Capital Consumption Allowance ( CCA)


NNP at factor Cost or National Income (NY or NI or Y)

• National Income at factor cost is the aggregate of all incomes earned by the factors of production for their contribution of land, labor, capital & entrepreneurial ability which go into the year’s net production.

• It is the income that all the factors of production receive for their services rendered during the year.


NNP at factor cost or National Income (NY or NI or Y)

• NNP fc = NNP mp – Indirect taxes + Subsidies• NNP mp is the market value of G&S. However,

the whole of this market value does not get transferred to FOP in the form of incomes.

• Indirect taxes, which form a part of the market value of G&S gets transferred from the seller to the Govt. and therefore does not form a part of the factor incomes.


NNP at factor cost or National Income (NY or NI or Y)

• Subsidies have to be added to NNP mp because it is a price which the Govt. pays to the manufacturer to keep the prices low for consumers.

• Therefore, it forms a part of factor incomes as it is transferred by manufacturer to the FOP


Personal Income

• It is the income that is received by the individuals , whether earned or un earned.

• So, from the NY, we subs tract those incomes which are not received by them.

• PI = NY – ( corporate taxes + Corporate retained earnings/undistributed corporate profits + social security contributions)+ transfer payments


Personal Income

• Transfer Payments : These are payments received by individuals for which they do not have to provide any productive service in return e.g pensions, scholarships, unemployment allowances etc.


Disposable Income or Personal Disposable Income

• It is the income which is received by the individuals & is at their disposal for spending.

• PDI = PI – direct taxes

• Direct taxes have to be paid compulsorily by individuals, only the residual income can be spent by them.


Discretionary Income

• It is defined as the income which the individuals can spend at their own discretion, i.e at their free will.

• DI = Disposable income – compulsory savings & loan installments.


Per Capita Income

• It is defined as the average earnings or income of an individual in a particular country in a year.

• Per capita income = National Income (2010)

Population in 2010


Private Income

• It is the income obtained by individuals from any source, and the retained income of corporations.

• Private income = NNP f c + TP + interest on public debt + corporate retained earnings + savings of Govt. undertakings.

• OR• Private Income = PI + corporate taxes+

corporate retained earnings


Nominal & Real National Income

• National Income or product calculated at current prices is called Nominal Income.

• It is the money value of all final G&S measured at current prices produced by a country during one year.

• However, if there is inflation, the nominal value of national income will increase even if there is no actual growth in the output or income.



• So, during inflation the nominal value of NI will be increasing even when there is no real increase in the output.

• To overcome this discrepancy and to make the NI data comparable over time, we calculate NI or GDP or GNP at constant prices.

• NI at constant prices or at base year’s prices is known as Real National Income



• To calculate NI at constant prices ,we chose a base year, which is taken as a benchmark against which all prices are compared.

• For e.g if we want to compare GNP of 2010 with GNP of 2004, we will calculate GNP of 2010 at 2004’s prices. In this case 2004 will be the base year!



• The formula to convert the NI at current prices to the constant prices ( of the base year) is as follows:NI at constant prices =NI at current prices * 100

Price Index for current year


GDP Deflator

• The GDP deflator is calculated as follows:

100GDP Real

GDP Nominal=deflator GDP

In GDP deflator, we compare the base year price index with current year price index.

So, GDP of constant prices = Nominal GDP

GDP deflator


Calculating NI at Constant prices

(Question)

Year

NY at current prices

Price Index No. (base year 2006 = 100)

NY at constant prices

2006 500 100 500

2007 525 105 ?

2008 570 112 ?

2009 610 120 ?

2010 680 130 ?


Answers to Question

2007 500

2008 508.93

2009 508.33

2010 523.08


Methods to Measure National Income

• Different measurements of national income viz., GNP, GDP, NNP or NY can be calculated with three different methods, which are:

• Expenditure or Spending method

• Income method

• Production method


Spending Approach

• The spending approach divides GDP into four areas:

• households (consumption) (C)

• businesses (investment) (I)

• government (G) and

• foreigners (net exports) (X-IM).


Spending Approach

• Therefore, GNP = C + I + G + ( X- M)• C stands for Private Consumption expenditure. It

is the expenditure on consumer durable goods & single use goods.

• I stands for Investment expenditure or “Gross Domestic Private Investment”. It is the expenditure made by private enterprises on new investment & replacement of old capital. There are two components to it – (i) Fixed investment, (ii) Change in inventories.


Spending Method

• G refers to the expenditure that the Govt. incurs on purchase of goods & services.

• X-M is the net exports or the export surplus


Income Method

• GNP = Wages & salaries + Rent + Interest+ Dividends + Undistributed corporate profits + Mixed Incomes +Net income from abroad

• Mixed Incomes or Composite Income means a combination of any of the above incomes.


Mixed Incomes

• EXAMPLE :• A small grocer has set up his grocery shop

in one portion of his house & has put his own money as capital. He & his family members work in the same house. In this case, the total income recd by that grocer consists of rent, wages, interest & profit. Such types of income are known as Mixed Incomes


The production approach

• The production approach looks at GDP from the standpoint of value added by each input in the production process.

• The three approaches--spending, income, and production– (should) result in equivalent values for GDP.


Production Approach / Value Added

• While taking the aggregate value of output of G &S for the whole economy, we must avoid “Double Counting”.

• It can be avoided by taking the value addition for each stage of production or by taking the final G&S produced.


Value Addition Method

Stage of Prod. Final Value Value Added

Sale of Wheat 100 100

Sale of flour 150

Sale of Bread 300 150

Sale by Wholeseller

350

Sale by retailer 400

Bread sold at Rs. ? ?


Question 1

• GNP = C+I+G+(X-M)

= (1150 – 155) +150+25+125+(-20)

= 1275


Question 2

• GNP mp = C+I+G+(X-M)

= 50,000+5000+4500+500+(800 – 600)

= 60,200

GNP mp = GDP mp + NFIA

60200 = GDP + 500 = 60,700


Problems in calculation of National Income

national income accounting

Economy & Finance

real national

national income

constant prices

calculate

net exports

factor cost

productive

goods amp