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Adarsh.

R
Measuring the
Production, Income,
and Spending of
Nations
National Income Accounts:
National Income Accounting represents the
tools and methods by which economists and
policy-makers measure economic activity and
economic growth over time.
It measures 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
spending involved for the production of
output.
Standard Measures of Income and Output:
• Gross National Product (GNP)
• Gross Domestic Product (GDP)
• Gross National Income (GNI)
• Net National Product (NNP)
• Net Domestic Product (NDP)
• Net National Income (NNI)
• Per Capita Income (PI)
• Personal Disposable Income (PDI)

In India, the Central Statistical Organization (CSO) has


been estimating the National Income
GNP : the total value of output (goods and services)
produced and income received in a year by
domestic residence of a country

- Includes the profits earned from capital invested abroad

GDP : the total value of output (goods and services)


produced by the factors of production located
with in the country’s boundary in a year

- Factors of production (labor, capital, land) may be owned


by any one (citizens or foreigners)

GNP - Net income earned from abroad = GDP


NNP :decline in capital assets(plant & machinery)
due to wear and tear is measured as ‘capital
depreciation’
NNP = GNP – Depreciation
Depreciation is usually 11%
NNP = 89% of GNP

NDP : same as above, depreciation on GDP.


NDP = GNP – Depreciation

NNI : NNP – Indirect taxes that Business pay


Indirect taxes that Business pay nearly 10%
NNI is nearly 90% of NNP
Per Capita Income (National Income per person) :
an indicator to show the living standards of the people of
the country.

PI is the total income received – whether it is earned or


unearned – by the households of the economy before the
payment of personal taxes.

PI = NNI – (Retained earnings, corporate taxes and interest


on public debt)
PDI = PI – Personal taxes

limitations :
GNP is not considering the poverty, literacy, public
health, gender equality etc.
Needs for the study of National Income :
1.To measure the size of the economy and level of
country’s economic performance
2.To trace the trend or speed of the economic growth
in relation to previous year(s) as well as to other
countries
3.To know the structure and composition of the
national income in terms of various sectors and the
periodical variations in them
4.To make projection about the future development
trend of the economy
Needs…

5. To help Govt. to formulate suitable development


plans and policies to increase growth rates.

6. To fix various development targets for different


sectors of economy on the basis of there
performance.

7. To help business firms in forecasting future


demand for there products

8. To make international comparison of people’s


living standards.
Measuring National Income

Payment for Factor Services


(Rent, Wages, Interest and Profit)
money flow

Supply of Factors of Production


real flow

(Land, Labour, Capital & Organization)

Public Business
Households Circular Flow Firms /
/ Consumers of Income Producers

(Goods & Services)

Supply of Commodities
(Commodity Price)

Payment for Commodities


Circular Flow …
Circular Flow …

-Income (Y) received is equal to the consumption


expenditure (C) made by the consumer
Y = C

- Other Components on national income


Savings or Investments (I)
Public expenditure by Govt. (G)
Expenditure on net exports (X-IM)

Y = C + I + G + (X–IM)
Methods of calculating National
Income
There are three approaches to the
measurement of national income:
Spending or Expenditure Method
Income Method
Production or Output Method

Income = Expenditure = Output


Y = E = O
Why output = expenditure
Unsold output goes into inventory, and is counted as “inventory investment”…
….whether the inventory buildup was intentional or not.
In effect, we are assuming that firms purchase their unsold output.
Spending or Expenditure Approach
The spending approach divides GDP into four areas:
 Households (Consumption expenditures) (C)
 Businesses (Domestic Investment) (I)
 Government (Govt. expenditures) (G) and
 Foreigners (Export (X) and Imports (IM)of Goods
and Services) (X-IM).

GDP = E = C + I + G + (X–IM)
where E is aggregate expenditure
The Income Approach
The measure of GDP are calculated by adding all the income earned
by various factors of production which are engaged in the production
of output.

In addition to aggregate income, national income and personal


income are also used as measures of income.
It includes…
Wages and salaries
Farm income
Rent
Sales taxes
Depreciation (the amount of capital that has worn out during the year)
Income Approach…

• Proprietors income /Income of self employed (the profits


of partnerships and solely owned businesses, like a family
restaurant)
• Interest (only the interest payments made by business
firms are included and the interest payments made by
government are excluded).
• Corporate profits which are subdivided into
Corporate income taxes
Dividends
Undistributed corporate profits
The Production Approach
The measures of GDP are Calculated by adding the total
value of the output (of goods and Service) produced by all
activities during any time period, such as a year.

The production approach looks at GDP from the standpoint


of value added by each input in the production process.

major challenge – problem of double counting


Out put of many business = input of some other
Eg : Out put of tyre industry is the input of bike industry… counting the out put
of both industries will result in double….
Real vs. Nominal GDP

GDP is the value of all final goods and services


produced domestically.

Nominal GDP measures these values using


current prices

Real GDP measure these values using the prices


of a base year.
GDP Deflator

While real GDP captures living standard,


cost of living is measured by general price level.

One measure of the general price level is the GDP


Deflator, defined as

GDP deflator = 100 * Nominal GDP/Real GDP


Calculation Overview

Simple Economy…..No Govt…no foreign trade


C=consumption I=investment S=saving Y= Income
Output produced=output sold i.e, Y = C + I ………….(1)
Introducing Govt. in the above identity
G = Govt. purchases of goods and services
TA = all taxes
TR = transfers to private sector (including interest)
NX = net exports (exports-imports)
YD = disposable income
Y = C + I + G + NX……….(2)
YD = Y + TR – TA ………..(3)
YD = C + S …..……………(4)
Calculation….

C = YD – S = Y + TR – TA – S ……………..(5)
Consumption is disposable income less saving
Or consumption is equal to income plus transfers less taxes and
saving
Using RHS of (5) in (2) :
Y = ( Y + TR – TA – S ) + I + G + NX
S – I = (TR – TA + G ) + NX ……………(6)
Govt. budget deficit,
i.e., Excess of private saving over investment = total govt.
expenditure consisting of govt. purchases of goods and
services(G) + Govt. transfer payments (TR) + net exports –
amount of taxes (TA) received by govt.
Problems in calculating National Income
Black Money : It has created a parallel economy -
unreported economy which is equivalent to the size of
officially estimated size of the economy
Non-Monetization : In most of the rural economy,
considerable portion of transactions occurs informally
Growing Service Sector : growing faster than
Agricultural and Industrial sectors… value addition in
legal consultancy, health service ,financial and business
services is not based on accurate reporting.
Problems…

House Hold Services : It ignores domestic work and house keeping


services

Social Services : It ignores volunteer and unpaid social services.


(Mother Teresa’s social service)

Environment Cost : It does not distinguish between environmental-


friendly and environmental-hazardous industries … cost of polluting
industries is not included in the estimate.
National Income series in
India
National Accounting system was initiated in the mid-sixties

Indian System of National Accounting statistics follows the


UN system of national accounts (1968)

Based on the National Income Committee’s


recommendation(1954), the Central Statistical
Organization(CSO) has been estimating the NI

The CSO revised its national accounting series by shifting


the base year to 1970-71 … again to 1980 – 81 and then to
1993-94.. recently by improving the database and
extended coverage the base year shifted to 1999-2000
Trends in national
Income
Growth of National Income in India
(in percentage)

9.2% 9%
8.3% 8.4%
7.4%

6.2%

4.3%
Sectoral Composition on National Income

2010f
International comparison of National income (2009)
Ref. Websites

Government of India, Ministry of Statistics


http://mospi.gov.in/ or http://www.mospi.nic.in/

Central Intelligence Agency (CIA)


https://www.cia.gov/library/publications/the-world-factbook/geos/in.html

Wikipedia
http://en.wikipedia.org/wiki/Gross_domestic_product

India In Business
http://www.indiainbusiness.nic.in

Thank You

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