National Income and its components

Presented By: Prof Ritesh Lal

The Economy’s Income and Expenditure

When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning.

The Economy’s Income and Expenditure

For an economy as a whole, income must equal expenditure because: Every transaction has a buyer and a

seller. Every rupee of spending by some buyer

is a rupee of income for some seller.

Components of National Income

Gross Domestic Product (GDP) Gross National Product (GNP) Net National Product (NNP) Personal Income Disposable Personal Income

GDP is the market value of all final goods and services produced within a country in a given period of time.

The Measurement of GDP

Output is valued at market prices. It records only the value of final 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).

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.

It measures the value of production that takes place within a specific interval of time, usually a year.

The Measurement of GDP

What Is Counted in GDP?

GDP includes all items produced in the economy and sold legally in markets.

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.

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

The Components of GDP

Consumption (C): The spending by households on goods and

services, with the exception of purchases of new housing.

Investment (I): The spending on capital equipment,

inventories, and structures, including new housing.

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.

To summarise: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

Gross National Product

Gross national product (GNP) is the total income earned by a nation’s permanent residents (called nationals).

It differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn here.

To Summarise: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

Net National Product (NNP)

Net National Product (NNP) is the total income of the nation’s residents (GNP) minus losses from depreciation.

Depreciation is the wear and tear on the economy’s stock of equipment and structures.

To summarise:To summarise:

NNP= GNP - Depreciation

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 household’s interest income and government transfers.

Personal Income & NNPPersonal Income & NNP

Personal Income= NNP

(-) Undistributed Company Profits

(-) Surplus of Public Undertaking

(-) Rentals of Public Property

Disposable Personal Income

Disposable personal income is the income that household and noncorporate businesses have left after satisfying all their obligations to the government.

It equals personal income minus personal taxes.

To Summarise:To Summarise:

Disposable Personal Income= Personal Income

(-) Personal Taxes

1.Net Product Method or Value Added 1.Net Product Method or Value Added MethodMethod2. Factor Income method or Factor share 2. Factor Income method or Factor share methodmethod3. Expenditure Method3. Expenditure Method

Methods of measuring National Methods of measuring National IncomeIncome

Net Product MethodNet Product Method(Three stages)(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.

Net Product MethodNet 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.

Calculation through Net Product MethodCalculation 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

Factor Income MethodFactor 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.

Calculation through Factor Income MethodCalculation through Factor Income Method

Wages and salaries (including compensation for employees)(+) Interest and dividends(+) Rent(+) Profits (including undistributed profits and income from self-

employment/proprietor’s 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

Expenditure MethodExpenditure Method

The components are:Households expenditure or consumer expenditureProducers 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.

Calculation through Expenditure MethodCalculation through Expenditure MethodExpenditure 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

PROBLEMS IN CALCULATING PROBLEMS IN CALCULATING NATIONAL INCOMENATIONAL 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.

PROBLEMS IN CALCULATING PROBLEMS IN CALCULATING NATIONAL INCOMENATIONAL 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 the

quantity of physical goods and services only, quality is of equal importance. The problem that arises is how to measure the quality. Can prices of goods

and services reflect accurately the quality of product? There is no absolute indicator of quality.

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