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National Income Accounting

                  Unit I
                  PPT 2


17-01-2010                   1
                             © meenal jagtap
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.
17-01-2010                        2
                                  © meenal jagtap
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.

17-01-2010                             3
                                       © meenal jagtap
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.

17-01-2010                         4
                                   © meenal jagtap
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.


17-01-2010                                   5
                                             © meenal jagtap
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.
17-01-2010                        6
                                  © meenal jagtap
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



17-01-2010                        7
                                  © meenal jagtap
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)



17-01-2010                        8
                                  © meenal jagtap
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.
17-01-2010                               9
                                         © meenal jagtap
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.


17-01-2010                                10
                                          © meenal jagtap
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


17-01-2010                                11
                                          © meenal jagtap
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
17-01-2010                       12
                                 © meenal jagtap
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.




17-01-2010                       13
                                 © meenal jagtap
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.


17-01-2010                       14
                                 © meenal jagtap
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.



17-01-2010                        15
                                  © meenal jagtap
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




17-01-2010                            16
                                      © meenal jagtap
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
17-01-2010                       17
                                 © meenal jagtap
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.
17-01-2010                        18
                                  © meenal jagtap
Nominal & Real National 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
17-01-2010                         19
                                   © meenal jagtap
Nominal & 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!

17-01-2010                       20
                                 © meenal jagtap
Nominal & Real National Income

• 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




17-01-2010                                   21
                                             © meenal jagtap
GDP Deflator

• The GDP deflator is
  calculated as follows:


                               Nominal GDP
              GDP deflator =               × 100
                                Real 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


17-01-2010                                               22
                                                         © meenal jagtap
Calculating NI at Constant prices
(Question)   NY at current Price Index   NY at
Year         prices        No. (base     constant
                           year 2006 =   prices
                           100)
2006         500           100           500

2007         525           105           ?

2008         570           112           ?

2009         610           120           ?

2010
17-01-2010
             680           130           ?
                                         23
                                         © meenal jagtap
Answers to Question

2007                         500
2008                         508.93
2009                         508.33
2010                         523.08




17-01-2010                     24
                               © meenal jagtap
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

17-01-2010                        25
                                  © meenal jagtap
Spending Approach
• The spending approach divides GDP into
  four areas:
• households (consumption) (C)
• businesses (investment) (I)
• government (G) and
• foreigners (net exports) (X-IM).


17-01-2010                     26
                               © meenal jagtap
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.

17-01-2010                            27
                                      © meenal jagtap
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




17-01-2010                        28
                                  © meenal jagtap
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.


17-01-2010                      29
                                © meenal jagtap
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
17-01-2010                        30
                                  © meenal jagtap
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.



17-01-2010                     31
                               © meenal jagtap
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.



17-01-2010                        32
                                  © meenal jagtap
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             350
Wholeseller
Sale by retailer    400

Bread sold at Rs.   ?             ?
17-01-2010                              33
                                        © meenal jagtap
Question 1

• GNP = C+I+G+(X-M)
    = (1150 – 155) +150+25+125+(-20)
    = 1275




17-01-2010                    34
                              © meenal jagtap
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


17-01-2010                  35
                            © meenal jagtap
Problems in calculation of National
                  Income




17-01-2010                       36
                                 © meenal jagtap

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National income accounting

  • 1. National Income Accounting Unit I PPT 2 17-01-2010 1 © meenal jagtap
  • 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. 17-01-2010 2 © meenal jagtap
  • 3. 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. 17-01-2010 3 © meenal jagtap
  • 4. 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. 17-01-2010 4 © meenal jagtap
  • 5. 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. 17-01-2010 5 © meenal jagtap
  • 6. 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. 17-01-2010 6 © meenal jagtap
  • 7. 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 17-01-2010 7 © meenal jagtap
  • 8. 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) 17-01-2010 8 © meenal jagtap
  • 9. 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. 17-01-2010 9 © meenal jagtap
  • 10. 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. 17-01-2010 10 © meenal jagtap
  • 11. 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 17-01-2010 11 © meenal jagtap
  • 12. 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 17-01-2010 12 © meenal jagtap
  • 13. 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. 17-01-2010 13 © meenal jagtap
  • 14. 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. 17-01-2010 14 © meenal jagtap
  • 15. 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. 17-01-2010 15 © meenal jagtap
  • 16. 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 17-01-2010 16 © meenal jagtap
  • 17. 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 17-01-2010 17 © meenal jagtap
  • 18. 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. 17-01-2010 18 © meenal jagtap
  • 19. Nominal & Real National 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 17-01-2010 19 © meenal jagtap
  • 20. Nominal & 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! 17-01-2010 20 © meenal jagtap
  • 21. Nominal & Real National Income • 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 17-01-2010 21 © meenal jagtap
  • 22. GDP Deflator • The GDP deflator is calculated as follows: Nominal GDP GDP deflator = × 100 Real 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 17-01-2010 22 © meenal jagtap
  • 23. Calculating NI at Constant prices (Question) NY at current Price Index NY at Year prices No. (base constant year 2006 = prices 100) 2006 500 100 500 2007 525 105 ? 2008 570 112 ? 2009 610 120 ? 2010 17-01-2010 680 130 ? 23 © meenal jagtap
  • 24. Answers to Question 2007 500 2008 508.93 2009 508.33 2010 523.08 17-01-2010 24 © meenal jagtap
  • 25. 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 17-01-2010 25 © meenal jagtap
  • 26. Spending Approach • The spending approach divides GDP into four areas: • households (consumption) (C) • businesses (investment) (I) • government (G) and • foreigners (net exports) (X-IM). 17-01-2010 26 © meenal jagtap
  • 27. 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. 17-01-2010 27 © meenal jagtap
  • 28. 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 17-01-2010 28 © meenal jagtap
  • 29. 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. 17-01-2010 29 © meenal jagtap
  • 30. 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 17-01-2010 30 © meenal jagtap
  • 31. 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. 17-01-2010 31 © meenal jagtap
  • 32. 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. 17-01-2010 32 © meenal jagtap
  • 33. 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 350 Wholeseller Sale by retailer 400 Bread sold at Rs. ? ? 17-01-2010 33 © meenal jagtap
  • 34. Question 1 • GNP = C+I+G+(X-M) = (1150 – 155) +150+25+125+(-20) = 1275 17-01-2010 34 © meenal jagtap
  • 35. 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 17-01-2010 35 © meenal jagtap
  • 36. Problems in calculation of National Income 17-01-2010 36 © meenal jagtap