National Income

Income and Expenditure

Gross Domestic Product (GDP) measures total income of everyone in the economy. GDP also measures total expenditure on the economys output of g&s.

The Circular-Flow Diagram

is a simple depiction of the macroeconomy. illustrates GDP as spending, revenue, factor payments, and income. First, some preliminaries:
Factors of production are inputs like labor, land, capital, and natural resources. Factor payments are payments to the factors of production. (e.g., wages, rent)

The Circular-Flow Diagram

Households:  own the factors of production, sell/rent them to firms for income  buy and consume g&s Firms Households

The Circular-Flow Diagram

Firms Firms:  buy/hire factors of production, use them to produce g&s  sell g&s

Households

The Circular-Flow Diagram

Revenue (=GDP) G&S sold

Markets for Goods & Services

Spending (=GDP) G&S bought

Firms
Factors of production Wages, rent, profit (=GDP)

Households
Labor, land, capital Income (=GDP)

Markets for Factors of Production

What This Diagram Omits The government

collects taxes purchases g&s

The financial system

matches savers supply of funds with borrowers demand for loans

The foreign sector

trades g&s, financial assets, and currencies with the countrys residents

Gross Domestic Product (GDP) Is

the market value of all final goods & services produced within a country in a given period of time.
Goods are valued at their market prices, so:

GDP measures all goods using the same units

rather than adding apples to oranges.

Things that dont have a market value are

excluded, e.g., housework you do for yourself.

Gross Domestic Product (GDP) Is

the market value of all final goods & services produced within a country in a given period of time.
Final goods are intended for the end user. Intermediate goods are used as components or ingredients in the production of other goods. GDP only includes final goods, as they already embody the value of the intermediate goods used in their production.

Gross Domestic Product (GDP) Is

the market value of all final goods & services produced within a country in a given period of time.
GDP includes tangible goods (like DVDs, bikes, etc) and intangible services (dry cleaning, concerts, cell phone service).

Gross Domestic Product (GDP) Is

the market value of all final goods & services produced within a country in a given period of time.
GDP includes currently produced goods, not goods produced in the past.

Gross Domestic Product (GDP) Is

the market value of all final goods & services produced within a country in a given period of time.
GDP measures the value of production that occurs within a countrys borders, whether done by its own citizens or by foreigners located there.

Gross Domestic Product (GDP) Is

the market value of all final goods & services produced within a country in a given period of time.
usually a year or a quarter (3 months).

Components of GDP
Consumption Durables Nondurables Services Investment Capital Spending (Plant and Equipment) Residential Construction Inventory Investment Net Exports Exports Imports Government purchases (NOT expenditures) National defense State and Local (mainly wages and salaries)

The Components of GDP

Recall: GDP is total spending. Four components:
Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX)

These components add up to GDP (denoted Y):

Y = C + I + G + NX

Consumption (C)
is total spending by households on g&s. Note on housing costs:
For renters, consumption includes rent payments. For homeowners, consumption includes the imputed rental value of the house, but not the purchase price or mortgage payments.

Investment (I)
is total spending on goods that will be used in the future to produce more goods. includes spending on
capital equipment (e.g., machines, tools) structures (factories, office buildings, houses) inventories (goods produced but not yet sold) Note: Investment does not mean the purchase of financial assets like stocks and bonds.

Government Purchases (G)

is all spending on the g&s purchased by govt at the Central, state, and local levels. G excludes transfer payments, such as Social Security or unemployment insurance benefits. These payments represent transfers of income, not purchases of g&s.

Net Exports (NX)

NX = exports imports Exports represent foreign spending on the economys g&s. Imports are the portions of C, I, and G that are spent on g&s produced abroad. Adding up all the components of GDP gives:
Y = C + I + G + NX

Difference Between GDP and GNP

GDP includes profits from all plants located in the India, whether owned by Indian or foreign entities GNP includes profits from all plants owned by Indian entities, whether or not they are located in India.

The Concept of Value Added

NIA is a double-entry system, but there is also a third method of calculation. That is the value added at each stage of production. Value added for all industries in the economy is equal to GDP except for the statistical discrepancy. More important in Europe, where a specific portion of value added is taxed at each state of production.

Items Excluded from GDP

All income from transfers of assets All capital gains and losses Barter of goods and services Actual mortgage payments are replaced by an estimate of what the rental value of the house would be if it were rented The underground economy. Illegal and unreported transactions.

How Useful is GDP to Business Managers?

It is the single figure most often quoted to measure the performance of the economy However, quarterly changes include a large random element, and revisions are usually in the range of 1% to 2%. That means a 1% increase might be revised to a 1% decrease. Helps to decide the level of business activity for the future.

GDP of India
GDP at factor cost at constant (2004-05) prices in the year 2009-10 is now estimated at Rs. 44,64,081 crore (as against Rs. 44,53,064 crore estimated earlier on 8th February, 2010, showing a growth rate of 7.4 per cent (as against 7.2 per cent in the Advance Estimates) over the Quick Estimates of GDP for the year 2008-09 of Rs. 41,54,973 crore, released on 29th January 2010. GDP at factor cost at current prices in the year 2009-10 is estimated at Rs. 58,68,331 crore, showing a growth rate of 12.2 per cent over the Quick Estimates of GDP for the year 2008-09 of Rs. 52,28,650 crore, released on 29th January 2010.

GNI
The gross national income (GNI) at factor cost at 2004-05 prices is now estimated at Rs.44,39,072 crore (as compared to Rs. 44,33,402 crore estimated earlier), during 2009-10, as against the previous years Quick Estimate of Rs. 41,38,174 crore. The GNI at factor cost at current prices is now estimated at Rs. 58,35,493 crore during 2009-10, as compared to Rs. 52,07,534 crore during 200809, showing a rise of 12.1 per cent.

Per Capita Net National Income

The per capita net national income in real terms (at 2004-05 prices) during 2009-10 is estimated to attain a level of Rs. 33,588 (as against Rs. 33,540 estimated on 8th February, 2010), as compared to the Quick Estimates for the year 2008-09 of Rs. 31,821. The per capita income at current prices during 200910 is estimated to attain a level of Rs. 44,345 as compared to the Quick Estimates for the year 200809 of Rs. 40,141, showing a rise of 10.5 per cent.