by

Sundeep Lavanya Logesh

Mahendran

National income analysis
The national income analyses are an accounting framework used in measuring current economic activity. The national income analyses are based on the idea that the amount of economic activity that occur during a period of time can be measured in terms of: 1.The amount of output produced, excluding output used up in intermediate stages of production (product approach); 2. The income received by the producer of output (income approach); 3.The amount of spending by the ultimate purchase of output (expenditure approach);

EXAMPLE
ORANGE LTD TRANSACTION
Wage paid to orange ltd employee Taxes paid to government Revenue received from sale of orange orange sold to public orange sold to juice ltd Rs 15000 5000 35000 10000 25000

JUICE LTD TRANCATION
Wage paid to juice ltd employee Taxes paid to government Revenue received from sale of orange juice orange purchased from orange ltd Rs 10000 2000 40000 25000

ORANGE LTD
Orange ltd pays Rs 15000 per year in wages to workers to pick and sells orange for 35000(Rs 10000 worth of orange to households and Rs 25000 worth of orange to juice ltd ) .Thus orange ltd profit before taxes is Rs 35000 – Rs.15000= Rs 20000 Because orange ltd pays taxes of Rs 5000 ,its after tax profit is Rs 15000.

JUICE LTD
Juice ltd buys Rs 25000 of orange from orange ltd and pays wages Rs 10000 to worker to process the orange juice. It sells the orange for Rs 40000, so its profit before taxes is Rs 5000 (Rs 40000-25000-10000 ). After paying taxes of Rs 2000 ,its after tax profit is Rs 3000.

Product approach
• Market value of final finished goods and services • Excludes intermediate goods used in intermediate stages of production • Value added is the value of output minus value of its input EXAMPLE: Revenue of Orange Inc = 35,000 Value added by JuiceInc = output-input = 40,000-25,000=15,000 GDP = 35,000+15,000 = 50,000

Expenditure approach
• • Total spending on final goods GDP= consumption+investment+govt. purchases+ net exports • Consumption is spending by domestic household on final goods • Net exports means export minus import EXAMPLE consumption from OrangeInc=10,000 consumption from JuiceInc =40,000 GDP = 10,000+40,000 = 50,000

INCOME APPROACH
It includes  Compensation of employees  Proprietor’s income  Rental income  Corporate tax OrangeInc JuiceInc EXAMPLE: Compensation = 15,000+10,000= 25,000 Proprietor’s income= 15,000+ 3,000= 18,000 Tax = 5,000+ 2,000 = 7,000 GDP = 50,000.

PROBLEMS IN MEASURING
• • • • • • • • Ignores the non-market economy. Ignores the quality of products. Ignores the income distribution. Ignores the costs of growth, pollution, accidents, etc. Ignores the quality of life. Lack of occupational specialisation. Illiteracy. Non availability of data.

PROBLEMS IN MEASURING
• Counts the output of the services sector erroneously. • Counts the official exchange rate and thereby often under valued. • Unreasonable comparison of goods. • Counts the incomes generated through nonproductive activities.

SIGNIFICANCE
• National income data form the basis of national policies. E.g.: Employment policy. • National data are of great importance in Economic Planning. • National income data play a vital role in country’s per capita income, which reflects the economic growth of the country. • It enables to find out the distribution in income or disparities in the incomes of the different sections of the society.

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