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## PATUAKHALI SCIENCE & TECHNOLOGY UNIVERSITY

Dumki, Patuakhali-8602

An assignment
On

Course title and code: Macro economics (AES123)

SUBMITTED BY:
SUBMITTED TO:
Md. Sujahangir Kabir Sarker DIBAKAR CHANDRA DAS
Roll no: 019
Lecturer, Department of Agricultural Registration no: 01881,
Economics and Sociology, Faculty of Level-I, Semester-II,
Patuakhali Science and Technology Management, Patuakhali Science and
University.Dumki-8602 Technology University.Dumki-8602

SUBMISSION DATE:05/01/2010

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CONTENTS

## Serial no Topics Page no

1 Defination of national income 03

## Different concepts of national 03-04

2 income
Methods of calculating 05-07
3 national income
4 Circular flow of national 07-08
income
5 15 sectors of GDP in 09
contributions in the last year in
the economy

## 6 Growth Trend of GDP in 10

7 Difficulties/Limitations in 10
calculating National Income

8 Importance of calculating 11
National Income
9 Conclusion 11

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1. Definitions of National Income
National income is a measure of the total value of the goods and services (output) produced
by an economy over a period of time (normally a year). It is also a measure of the income
flown from production, and/or the sum total of all the spending involved for the production of
output. The following are some of the notable definitions.

Alfred Marshal:
The labour and capital of the country acting on its natural resources produce annually a
certain net aggregate of commodities, material and immaterial, including services of all
kinds This is the net annual income or revenue of the country, or the national dividend.

Irving Fisher:
The national dividend or income consists solely of services as received by ultimate
consumers, whether from their material or from their human environment.

National Income Committee of India: National income estimate measures the volume of
commodities and services turned out during a given period counted without duplication.

Paul A. Samuelson:
Gross national product (GNP) is the most comprehensive measure of a nations total output
of goods and services. It is the sum of the dollar (money) value of consumption, gross
investment, government purchase of goods and services and net exports.
Though there are some variations among these definitions, the basic idea is very clear
national income is simply the income of the whole nation. The basic concepts will help to
understand it more precisely.

## Gross National Product

Gross National Product (GNP) is the total value of output (goods and services) produced and
income received in a year by domestic residents of a country. It includes profits earned from

## Gross Domestic Product

Gross Domestic Product (GDP) is the total value of output (goods and services) produced by
the factors of production located within the countrys boundary in a year. The factors of
production may be owned by any one citizens or foreigners.
GNP Net income earned from abroad = GDP

Thus, GDP measures income from where it is earned rather than who owns the factors of
production.

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Net National Product
Net National Product (NNP) is arrived at by making some adjustment, with regard to
depreciation, in GNP. As noted above, GNP is the total value of output produced and income
received in a year by domestic residents of a country. Over this one year period, the available
plant and machinery (capital) will wear and tear and get condemned. Such decline in the
capital assets due to wear and tear is measured as capital depreciation.
NNP is arrived at by deducting value of such depreciation from GNP. That is

## Net Domestic Product

Net domestic product (NDP) is also arrived from GDP by making adjustment with regard to
depreciation in the same way described above.

## Per Capita Income

Per capita income (or) output per person is an indicator to show the living standards of people
in a country. If real PCI increases, it is considered to be an improvement in the overall living
standard of people.

PCI is arrived at by dividing the GDP by the size of population. It is also arrived by making

## NI at Current Prices and Constant Prices

The concepts of national income discussed above can be measured either at current price or
at constant price. The measure based on current price uses the ongoing market prices to
compute the value of output. It is quite possible that the current price may always be higher
than real value due to many factors like taxes and inflation (or rising prices). Hence, national
income arrived at current price includes such influences as inflation and taxes.
With inflation as a common feature in almost all the economies, it is necessary to measure the
national income after deducting any such increase in the value of any output or income.
National income at constant price measures the national income after making necessary
adjustment to eliminate the effect of inflation. Thus it is based on unchanged price of output.
As the national income at constant price is computed based on the real worth of the
purchasing power of income, it is also called as real national income or national income in
real terms.

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3. Methods of Calculating National Income

## There are three different methods of calculating national income.

They are
A. Product or Output Method
B. Income Method
C. Expenditure Method

## a) Output or Product Method

In the output or product method, the measures of national income are calculated by adding
the total value of the output (of goods and services) produced by all activities during any time
period, such as a year.

GNI = Money value of total goods and services + Income from abroad.

## The major challenge of this method is the problem of double-counting.

The output of many businesses is the inputs of some other businesses.
For example, the output of the tire industry is the input of racing bike industry.
Counting the final output of both industries will result in double-counting of the value of tire.

b) Income Method

In the income method, the measures of national income are calculated by adding income of
all individuals in a nations territory.

## In case of income method income is calculated by up the following things:

Rent of land
Wages and salaries of employee
Profits of entrepreneur
Interest of capital
Income of self employed people

This method will help us to know the contributions made by different agents like landlords,
labour, capitalists and organizers to national income.

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c) Expenditure Method

In the expenditure method, the national income is calculated by adding all expenditures and
investment expenditure made by individual as well as the govt. of a country during a given
year.

## The following items are calculated in expenditure method:

1. Personal consumption expenditure
2. Net foreign investment (FDI)
3. Govt. purchase
4. Gross domestic private investment

The sum of all these aggregate expenditure provides us the measure of national income.
.

GDP is the measure of an economys total output. It is also used as a measure of total income
and total expenditure in that economy. It is clear that incomes received by the public are
being spent to buy the output of goods and services produced.

Hence, income is equal to expenditure and expenditure is equal to the value of output
produced in the economy.

## Income = expenditure = output

(Y = E = O)

However, after aggregating the total income components of the economy will be equivalent
to the total expenditure or total output. Therefore, all the three methods are supposed to give
same results.

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expenditure income

output

Figure:1

## 4. Circular flow of national income

In two sector economy
Income flow

## Household Factors of production Firm

Goods and services

Expenditure flow

Capital market
saving Investment

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Income flow

Expenditure flow

## Capital market Investment

saving
Deficit financing
Tax
Govt
Purchase of goods
Transfer payment

Income flow

Expenditure flow

## Capital market Investment

saving
Deficit financing
Tax
Govt
Purchase of goods
Transfer payment
Import Export
Expenditure flow Income flow

Import

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Sectors Contributions in the economy(in
percentage)

2. Fisheries

4. Industry

5. Electricity

6. Construction

## 8. Hotel and restaurants

9. Transport and
communication
10. Financial
intermediaries
11. Real estate and other
and defense
13. Education

## 14. Healthcare and social

service
15. Community, social and
personal service

## 5. 15 sectors of GDP in Bangladesh and their contributions in

the last year in the economy

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6. Growth Trend of GDP in Bangladesh
Growth trend of GDP shows that there is the sign of economic development in Bangladesh.
Whether this trend is slow or fast, can be realized by analyzing the growth rates of Real GDP
and Real Per Capita Income assorted in different years in the following table
Table- 1: Growth Trend of Real Gross Domestic Product (GDP) in Bangladesh during 1975-
2000 (at 1984/85 prices)

## 7. Difficulties/Limitations in calculating National Income

We have already seen that calculation of national income is a difficult process. Let us
examine these difficulties.

## 1. Non availability of reliable statistics.

2. The service of housewives is not included in the national income because this service
is not sold in the market.
3. Individuals do not keep correct account of their consumption.
4. Illiteracy and ignorance.
5. Lack of proper criteria for measuring the value of services.

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8. Importance of calculating National Income
Various utilities of the national income estimates can be described as below:

1 National income estimates help us to know this performance of an economy during one
year and over a period of years.

2 National income estimates also tell us about the economic welfare enjoyed by the people.
We can know the per capital income by dividing national income by population.

3 on the basis of national income estimate comparison between various economics of the
world may be made. National income figures for various countries provides us the rates of
growth in different economies.

4 In an economy, inter-sector comparison can be made with the help of national income
statistics

5 national income figures are inevitable for an economy, which wants to develop with the
help of economic planning.

## 6 National income accounts reflect the structural change in a growing economy.

7 National income estimated over period of years enable us evaluate the planning.

8National income estimated is also important in the formation of the budget by the
finance Minister of the country.

9 National income estimates are also important because they indicate how the income or
wealth is distributed among the various classes. Thus we can know whether the national
income is equally distributed or not.

9. Conclusion
A variety of measures of national income and output are used in economic to estimate total
economic activity in a country or region, including gross domestic product (GDP), gross
national product (GNP) and Net National income (NNI). All are concerned with counting the
total amount of goods and services produced within some "boundary". The boundary may be
defined geographically, or by citizenship; and limits on the type of activity also form part of
the conceptual boundary; for instance, these measures are for the most part limited to
counting goods and services that are exchanged for money: production not for sale but for
barter, for one's own personal use, or for one's family, is largely left out of these measures,
although some attempts are made to include some of those kinds of production by imputing
monetary values to them.

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