national income concepts and measurements

8/3/2019 National Income Concepts and Measurements

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` It is the sum total of all goods and services

produced in a country, in a particular period of

time.

` Time period neither too short nor too long and

hence optimal time period has been set to 1 year.

` Used synonymous with National Product.


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` Defined as the total market value of all the finalgoods and services produced in a year by thenormal residents of a country.

From the definition ofGNP, we can identify 3concepts

1. FinalG

oods2. Current Year

3. Normal Residents


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Two aspects are to be noted while calculating GNP

GNP measures the market value of the annualoutput.

It is a monetary measurement. Since the market value changesconstantly, the GNP is adjusted for price changes.

All goods and services produced in a given yearmust be counted only once

Most of the goods go through a series of production changesbefore going to the market. Hence the goods may be bought

and sold many times.To avoid this redundant counting, GNP should include themarket value of the final goodsfinal goods only.


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Final Goods Goods that are purchased for final use and

not for resale or further processing.

Intermediate Goods Goods that are purchased for

further processing or for resale.

For example,A car sold to a consumer is a final good; the

components such as tires sold to the car manufacturer

are not; they are intermediate goods used to make the

final good.

Value of the car will include the value of the tires in it and

hence, the inclusion of the value of tires separately will

result in double counting!


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GNP includes the final goods and services forthe current yearcurrent yearonly.

Any items that exist, yet are not produced

during the current year should not beincluded in GNP.

Examples include old houses, cars producedduring the previous year. Instances likeselling of stocks and bonds do not includecurrent production and hence should not beincluded in GNP.


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GNP includes the value of goods and servicescurrently produced by normalresidents of anormalresidents of a

country.country.

The residents in a country may be nationalornon-nationalcompanies.

Non National companies are those owned in

India by non-nationals but work to producegoods and services within India sending

profitsprofits to their own countries.


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` Value of Final Goods and Services produced in a year and

consumed by households consumption C

` Value of new investments (non residential/residential/change in

inventories) gross private investment I` Value of purchases of goods and services by the government G

` Value of goods exported minus the value of goods imported

resulting in Net Exports Xn

` Net factor Income from Abroad NFIA


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Net factor Income from AbroadNet factor Income from Abroad --

difference between factor incomes (derived

from selling the services of factors of production) received

from abroad by normal residents of India for rendering factor

services in other countries and the factor income paid to the

foreign residents for factor services rendered by them in thedomestic territory of India.

GNP = C + I + G + Xn + NFIA

CONDITION LAND LABOUR CAPITAL ORG.

Foreigners in India (+) Rent (+) Wages (-) Interest (-) Profit

Indians Abroad (-) Rent (-) Wages (+) Interest (+) Profit


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o Defined as the value of all final goods and

services produced by all normal residents as well

as non-residents working in the domestic territory

of the country but does not include Net FactorIncome earned from Abroad.

o Hence, the difference between GNP and GDP will

be the value ofNet Factor Income earned fromAbroad.


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GDP = GNP (Net Factor Income from

Abroad)

GNP = GDP + (Net Factor Income from

Abroad)

GNP limited to people of India, irrespective of

their place of earningGDP limited to domestic borders of India,

irrespective of who works

GDP = C + I + G + Xn


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Factor cost it refers to the total cost of all factors

of production consumed in producing goods and

providing services.

Market Price It is the price paid by the customer

for the product

Factor Cost = Market Price Tax + Subsidies


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` Agriculture and allied activities

` Industry

` Mining & Quarrying

` Manufacturing

` Electricity, Gas and Water Supply

` Services

` Construction

`

Trade, Hotels, Transport & Communication` Financing, Insurance, Real Estate & Business Services

` Community, Social & Personal Services


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` Private Final Consumption expenditure

` Government Final Consumption expenditure

` Gross fixed capital information

` Changes in stocks` Valuables

` Exports

` Imports


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GDP @ Q 1 Q2 Q3 Q4

Factor Cost 1667160 1692800 1934502 2012528

Market Price 1762793 1808963 2079416 2224454

Values in (`crores)

GDPGrowth Rate for FY 2010 8.7%

GDPGrowth Rate estimate for FY 2011 8.5%


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` Net National product or National Income at Factor Cost` Why it is called national income?

It is the sum of all incomes earned by

suppliers of factors of production for their contribution

of land,labour,capital and entrepreneurial ability which gointo the years net production.


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` Personal income is sum of all income actually receivedbyall individual or households during a year.

` National income,that is total incomes earned

` Personal income,that is total income received

Personal Income=National incomesocial security

contribution-corporate income tax-undistributed

corporate profit(these are not actually received by

house holds )+transfer payments(This is received by

then but not currently earned)

Transfer payment like old age pensions,unemployment

compensation,relief payments,interest payments on the

public debt


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DISPOSABLE

INCOME =PERSONAL INCOME-PERSONAL

TAXES

DI=CONSUMPTION+SAVING


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Factor of income of arise from production of goods

and services and since incomes are spent on goods

and services produced, three methods of measuring

national income1. Value Added Method

2. Income Method

3. Expenditure Method


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In this method the contribution of each

enterprise to the generation of flow of goods and

services are measured. Under this method , the

economy is divided into different industrial sectorsuch as

Agriculture, Fishing, Mining, Construction,

Manufacturing, trade and Commerce, Transport,

Communication and other services.


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(NVAFC) net value added at factor cost:

The NVAFC by each productive enterprise as

well as by each industry or sector is estimated. To

find the NVAFC measure of by each industry requiresto find out the value of output.

value of output of an enterprise is found out by

multiplying the physical output with market prices of

the goods produced.


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To arrive the NVAFC by an enterprise we have to

subtract the value of output of enterprise:

` Intermediate consumption which is the value of

goods (raw materials, fuels, purchased from otherfirms)

` Consumption of fixed capital (depreciation)

` Net indirect taxes


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Summing up the NVAFC by all enterprises of

an industry gives us the NVAFC of each industry.

Then we add up NVAFC by all industries to get Net

Domestic Product at factor cost (NDPFC

).Lastly, to the NDP we add the net factor

income from abroad to get Net National Product at

factor cost (NNPFC) which is also called national

income.NI or NNPFC = NDPFC + Net factor income from

abroad


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This method measures national income from

distribution at the phase of distribution and appears

as income paid and received by individuals of the

country. Therefore national income calculating byadding up all individuals of a country, rent of land,

wages & salaries of employees, interest on capital

etc.,


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Measurement of NI through income method involves

the following main steps:

` Like the value added method, identify productive

enterprises and then classify various industries.` Classify the factor of payments. (compensation of

employees, rent, interest, profits)

` To measure factor payments.


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` Adding up of factor payments by all enterprises

belonging to an industrial sector.

` (NDPFC) National Domestic Product at factor cost

able to find by summing up the incomes paid outby the industrial sectors.

` Finally, by adding net factor income earned from

abroad to NDPFC we get net national product at

factor cost (NNPFC) which is also called nationalincome.


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Expenditure method arrives at national income

by adding up all expenditures made on goods and

services during a year.

`

Final private consumption expenditure, and isdenoted by C.

` Government final consumption expenditure, and is

denoted by G.

` Gross domestic investment and is denoted by I or(GDFC) Gross domestic capital formation.


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` The expenditure made by foreigners on goods and

services of a country exported to other countries

which are called exports and are denoted by X.

Import is denoted by M. To estimate net exports(i.e., exports imports)

We add up the above four types of expenditure

to get final expenditure on gross domestic product at

market prices (G

DPMP).GDPMP = C + G + I + (X M)

= C + G + I + Xn


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On deducting consumption of fixed capital (i.e.,

depreciation) from GDPMP we get Net Domestic

Product at market prices (NDPMP).

In this method, we then subtract net indirect taxes(i.e., IT subsidies) to arrive at NDPFC.

NNPFC = GDPMP Consumption of Fixed capital

- Net Indirect taxes + Net factor Income

from abroad.


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NATIONAL INCOME :

ITMEASURES THE VALUE OF AGGREGATE O/POF GOODS AND SERVICES

PRODUCEDWITHIN A COUNTRY IN A YEAR .

ECONOMIC WELFARE :

SINCE GOODS & SERVICES SATISFY THE WANTS OF THE PEOPLE,ITSOFTEN BEEN USEDAS AMEASURE OF SATISFACTION OR ECONOMIC

WELFARE OF THE PEOPLE.

SO GREATERTHE MAGNITUDE OF NATIONAL INCOME,THE GREATERTHE

LEVELOF ECONOMIC WELFARE.

IN RECENTYEARS DOUBTS HAVE BEEN EXPRESSEDABOUTTHE

VALIDITY OF NATIONAL INCOME OR GROSS NATIONAL PRODUCT (GNP)

AS AMEASURE AND INDEX OF ECONOMIC WELFARE.


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INORDERTOOBTAIN ATRUE MEASURE OF ECONOMIC WELFARE ,SOME

ADJUSTMENTS BOTH IN THE FORMOF ADDITIONS AND SUBTRACTIONS HAVE

TOBE MADE IN THE AGGREGATE OF NATIONAL INCOME.

EXAMPLE : IF THE AVERAGE WORKING HOURS ARE REDUCED,THIS IS LIKELY

TOREDUCE NATIONAL INCOME ORPRODUCTION BUT IT GIVES MORE

LEISURE TOPEOPLE.

NEW : NET ECONOMIC WELFARE

NEW= REAL GNP-DEPRICIATION

+ VALUROF LEISURE

+VALUE OF NON MARKETACTIVITIES(Personal Services)

-ENVIRONMENTPOLLUTION

-REGRETTABLE COST(remedial work is important when problems are

identified)

Thus , composition of national output as between wage goods and luxuries and also the

distribution of goods between individuals determine welfare to a great extent.


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With the increase in total national income and per capita income ,

THE RICH ARE GETTING RICHER ANDPOOR GETTING POORER.

A COUNTRYS NATIONAL INCOME ANDPER CAPITA INCOME MAY BE

VERYHIGH BUTTHE WELL BEING OF THE PEOPLE MAY BE VERY LOW

By contributing more for production of war materials.

By increasing working hours which impair their health and efficiency.

By introducing Labour-saving machinery large no .of workers are out of

employment.

These above types of growth in national income which cannot increase in socialwelfare.

national income concepts and measurements

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