national income man

8/7/2019 National income man

1/33

NATIONAL INCOMEIn Economics


2/33

INTRODUCTION

National income falls under the study of

macroeconomics.

It is considered to be an index of economic

growth. It is the mirror image of a nation.

The concept of national income was popularized

by J.M. Keynes.


3/33

J.M. KEYNES

J.M. Keynes is an British economist. He was born on 5th

June, 1883 in Cambridge, England.

Contribution: Macroeconomics, Keynesian Economics,Liquidity preference, Spending multiplier,

Aggregate Demand-Aggregate Supply model

He expired on 21st April, 1946 (aged 62) in East Sussex,

England.


4/33

DEFINITIONS OF NATIONAL INCOME

According to National Income Committee of

India, A national income estimate measures the A national income estimate measures the

volume of commodities and services turned outvolume of commodities and services turned out

during a given period counted withoutduring a given period counted withoutduplication.duplication.


5/33

According to J.M. Keynes National Income is the

money value of all goods and services produced in

a country during a year.


6/33

FROM THE ABOVE DEFINITIONS IT IS

CLEAR THAT:

National income of a country may be expressed

in terms of either aggregate money value of

goods and services or total amount of goods and

services produced by the people during a yearsperiod.

National income is a flow of goods and services

and not a stock.

Only the value of all final goods and services are

to be taken and value of all inputs or

intermediate goods are to be avoided and wear

and tear charges are to be deducted.


7/33

MEANING

National income is the aggregate (i.e., total)

volume of final goods and services produced by a

country during a given period, usually, a year.


8/33

ALTERNATIVE CONCEPTS OF NATIONAL

INCOME

There are a number of concepts in national

income estimates of a country.

Gross Domestic Product [GDP]

Net Domestic Product [NDP] Gross National Product [GNP]

Net National Product [NNP]

Nominal and Real National Income


9/33

GROSS DOMESTIC PRODUCT [GDP]

By gross domestic product we mean the value of

all the final goods and services produced in any

given period usually a year in the domestic

territory of a country.

- Prof. Hansen


10/33

THE MAIN ASPECTS OF DOMESTIC

TERRITORY

Territory lying with in the political boundaries

including territorial waters (12 Nautical Miles) of

the country.

Ships and aircrafts operated by the residents of

the country between different nations.


11/33

Fishing vessels, oil and natural gas rigs and

floating platforms operated by the residents ofthe country in the international waters or

engaged in extraction in areas in which the

country has exclusive rights of exploitation.

Embassies, consults and military establishments

of the country located abroad.


12/33

DETERMINATION OF GDP

There are two approaches in determination or

calculation of GDP.

They are namely:

y Expenditure approachy Income approach (Not Important Not included in

the syllabus).


13/33

EXPENDITURE APPROACH

GDP = C+I+G

Here,

y C=Consumption expenditure of the

consumers or Consumptiony I = Investment Expenditures made by

producers or Investment

y G=Government expenditure


14/33

CONSUMPTION EXPENDITURES

Consumer spending or consumer demand or

consumption is also known as personal

consumption expenditure.

It is normally the largest GDP component in theeconomy.

These personal expenditures fall under one of

the following categories: durable goods, non-

durable goods, and services. Examples include

food, rent, jewelry, gasoline, and medical

expenses but does not include the purchase

of new housing.


15/33

INVESTMENT EXPENDITURES

Investment includes business investments in

equipments.

It does not include exchange of assets.

Examples : Purchasing new software,construction of a new mine, Purchasing of

equipments and machinery, etc,.

Purchasing of new houses by the households also

come under Investment.


16/33

In case of GDP investments does not include

investment on financial products such as shares,

insurance, etc,. WHY?

y Let us consider an example: a person invests on

shares of a company and the company uses that

money to buy some new machineries.

y Here in this situation the money invested on themachinery would come under investment, thus to

also count it when one gives it to the company would

be to count two times an amount that only

corresponds to one group of products.

y Thus to avoid this double counting we classify theinvestment on financial products under savings.


17/33

GOVERNMENT EXPENDITURE

Expenditure of the government made on the final

goods and services.

It includes salaries of the public servants,

purchase of weapons for the military, etc,. It does not include any transfer payments, such

as social security or unemployment benefits.


18/33

GDP AT FACTOR COST

Net Value Added : The contribution of each

producing unit to the current flow of goods and

services is known as the net value added.

GDP at factor cost is estimated as the sum of netvalue added by the different producing units and

the consumption of fixed capital.

This method is based on the fact that the net

value added gets distributed among the various

owners of the factor inputs.

GDP at Factor Cost = [R+W+I+P] +

Depreciation


19/33

GDP AT MARKET PRICES

The market value of goods and services is not the

same as the earnings of the factor inputs.

They are different because factor inputs do not

include taxes. Thus GDP at market prices is based on the

actual prices in the market.

GDP at Market Price = GDP at Factor Cost +

Indirect Taxes


20/33

INDIRECT TAXES

The taxes which are collected by the

intermediary (such as a retailer) from the actual

bearer of the burden (usually) the customers.

Examples: Sales Tax, Value added tax (VAT),goods and services tax (GST), etc,.

Why indirect taxes are used in the GDP at

market price?

y We know that the market price of a commodity is

fixed and denoted as MRP. And this is the price that

should be taken into consideration. But this price

includes the indirect taxes.

y Thus we should include indirect taxes in GDP at

market prices.


21/33

NET DOMESTIC PRICES (NDP)

NDP refers to the market value of all final goods

and services turned out in an economy during a

given period of time after making allowances for

depreciation charges.

Capital assets get depreciated when put into use.

Thus to provide for this loss we keep some

allowance called depreciation charges.

NDP = GDP Depreciation Charges


22/33

NDP AT FACTOR COST AND MARKET

PRICE

NDP at factor cost is the net output evaluated

at factor prices.

NDP at factor cost = GDP at factor cost

Depreciation NDP at market price is the net value of final

goods and services evaluated at market prices in

the course of one year in the country.

NDP at market prices = GDP at market prices

Depreciation


23/33

GROSS NATIONAL PRODUCT (GNP)

GNP may be defined as the total or aggregate

money value of all final goods and services

produced by the people of a nation during a

year in an economy.

GNP may be defined as the current market

value of all goods and services produced by

the economy during an income period

- W.C. Peterson


24/33

MAIN POINTS OF GNP

The value of only final goods and services are to

be taken into account.

The values of all the intermediate goods and

services are to be avoided. No provision for deducting depreciation charges.

The income received from foreign investment and

from other factor services rendered abroad should

be added to the gross domestic product.

Similarly, the income generated by the foreigners

in the given country should be deducted from the

GDP for the purpose of calculating the GNP.


25/33

FORMULAFOR CALCULATING GNP

GNP = (C+I+G)+(X-M)+(R-P)

The value of all consumption goods produced in a

year.

The value of all capital assets created and used inone year including their wear and tear.

The value of net exports. Here, we take the

difference in the value of total exports and

imports in a year. The difference in the value

between the two may be either positive or

negative.


26/33

The value of net foreign earnings. Here, we take

into account the difference in the value of all

payments made to foreigners and all kinds of

receipts by national. The difference here also may

be positive or negative.


27/33

GNP AT MARKET PRICES

It includes the total value of all final goods and

services produced in a years time plus net

income earned from abroad.

GNP at market prices includes indirect taxeslevied by the government on goods and services,

which raise their prices.

GNP at Market Prices = GNP at Factor Cost +

Indirect Taxes


28/33

GNP AT FACTOR COST

GNP at factor cost is the sum of all factor

incomes earned by factor of production in an

accounting year.

It includes even subsidies that are given to theproducers by the government.

Subsidies are the financial assistance granted by

the government to support the producers.


29/33

NET NATIONAL PRODUCT (NNP)

Net national product is the market value of the

net output of all final goods and services

produced by the country during a years time.

NNP again includes provision for depreciationcharges.

NNP=GNP-Depreciation


30/33

NOMINAL AND REAL NATIONAL INCOME

National income can be expressed in two ways:

y National income in monetary terms

y National income in real terms

Nominal N.I. : National income in terms ofmonetary terms is also called as nominal NI.

y In monetary terms it may be explained as the

aggregate money value of all final goods and services

produced by the people of country during a years

time.y This concept does not reflect the actual value of goods

and services in an economy. Quantity of goods and

services produced remaining the same in a year,

market value may differ.


31/33

REAL NATIONAL INCOME

Real national income is estimated on the basis of

the prices existing at the base year rather than

prices existing at the current year.

In order to find out the real national income of acountry, a particular year is taken as the base

year and the price index of that year is assumed

as 100.

RNI = NI of the current year X Base Year

Price Index [100]/Current Year Price Index


32/33

PER CAPITAINCOME

It refers to the average income per head of

population.

It is expressed in terms of money.

PI = NI/Total Population

Per Capita Real Income

Per capita real income is the amount of goods and

services that could be produced with the help ofper capita income.

PRI = RNI/Total Population


33/33

national income man

Documents