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    Ch-4 Macro (Measurement of National Income) - Theory

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    MSs LEARNING OBJECTIVES 41 Introduction 4,7 Treatment of Different items in 4.2. Value Added Method Domestic Income 4.3 Income Method 4.8. National Income at Current Price and Constant Price 4.9 Nominal GDP and Real GDP 4.10 Solved Practicals 4.4 Expenditure Method 45. Reconciliation of Three Methods 4.6 Treatment of Different Items in National Income 4.1 INTRODUCTION — National Income is considered as the most comprehensive measure of the performance of an economy. However, its measurement is an extremely complicated task. * When the process of production takes place, then the factor incomes are paid to factors of production for their factor services. It means, there is an ‘Income Flow’ corresponding to the ‘Output Flow’. + Factors of production spend their income on purchase of goods and services by making consumption ‘Expenditure’ Thus, production gives rise to income, income results in expenditure, which in turn, generates income again. Similarly, National Income of a country can be measured by 3 different methods: 1. Value Added Method 2. Income Method 3. Expenditure Method We have three different methods to measure the national income because production, income and expenditure are three different phases of circular flow of income. Use of a particular method depends on the availability of reliable data. Itmust be noted that all the three methods give the same value of national income because they are used to measure the same physical output at three different phases. In India, the task of estimating national income is entrusted with the National Statistical Office (NSO). 41 AG Introductory Macro, : Rca, 4.2 VALUE ADDED METHOD This method is used to measure national income in different phases ‘of production inthe, flow. Itshows the contribution (value added) of each producing unit in the prog ction iy * Every individual enterprise adds certain value to the products, which it PUtchags some other firm as intermediate goods. : hy * When value added by each and every individual firm is summed up, we national income. E Value Added Method is also known as: (i) Product Method; (i) Inventory Method; (ii) Net Out; (iv) Industrial Origin Method; and (v) Commodity Service Method. Concept of Value Added : Value added refers to the addition of value to the raw material (intermediate 800dS) by a f, i Virtue of its productive activities. Itis the contribution of an enterprise to the current flow, fg & services. It is calculated as the difference between value of output & value of intermediate cons Value Added = Value of Output - Intermediate Consumption Example of Concept of Value Added Suppose a baker needs only flour to produce bread. He purchases flour as inputs worth 5 from the miller and then by virtue of its productive activities, converts the flour into bread a sells the bread for € 700. In the given example: * Flourisaninput (Intermediate goods) and its value of ® 500 is termed as value of ‘Intermed Consumption’, * Bread is the Output and its value of 8 700 is termed * Difference between the value of out i Bet the vay Put Mey timp as ‘Value of Output’, and services in the economy. * Value added by each Producing enterprise is also known as the Gross Value Added value added by baker (2 200) can be termed either as Val f mn ng enterprises within the domestic territory of: equal to GDP,» (Gross Domestic Product at Market Price i re incurred by a production unit ” its, which are meant for re" year. In the given exampe meant for final consumpo* final consumption. a chapters ® Measurement of National Income Cd As discussed in the Chapter 2, intermediate goods include all those inputs, whose value is merged with the value of final goods. For example, flour is an Intermediate good as Its value Is merged in the value of bread, However, any machinery purchased for making bread is not an intermediate good as its value will not be included in the value of intermediate consumption, imports are not Separately Included prealue of inter mediate consumption is given, then imports are nol included separately ds imports.are sant noludatan Mie vale oF HiterMaTiale consiomption, When ‘Purchase of Raw Material’ is given, rt SME MAT HincTudes purchases within the domestic territory and purchases from abroad (ie. imports). However, if domestic purchases are specifically mentioned, then imports will also be included, : Let us understand this through following cas Calculate Intermediate Consumption in the following cases: Case 1: (i) Intermediate Consumption =F 1,200; (ii) Imports = % 300 ‘Ans. intermediate Consumption = & 1,200 As imports are already included in the value of intermediate consumption. Case 2: (i) Purchase of raw material from domestic firm = 500; (ii) Imports = % 100 Ans. Intermediate Consumption = % 500 + % 100 = % 600 Imports are included as it is specifically mentioned that purchase of raw material is from domestic firm. Case 3: (i) Purchase of raw material = 1,000; (ii) Imports = % 200 ‘Ans. \ntermediate Consumption = 1,000 Imports are not included as total purchase of raw material is given. Case 4: (i) Purchase of raw material = € 700; (ii) Imports = % 1,500 ‘Ans. Intermediate Consumption =% 700 + 1,500=% 2,200 In this particular case, we cannot assume that imports of & 1,500 to be included in purchases of %700..So, we will consider both separately. Value of Output Value of output refers to market value of all goods and services produced during a period of ‘one year. How to Measure the Value of Output? (i) When the entire output is sold in an accounting year, then: Value of Output = Sales + Production for Self-Consumption** **Allthe goods produced are not necessarily sold in the market. Apart of them is kept by the producer for his own use and consumption. Imputed value of such goods is included in Value of Output. (ii) When the entire output is not sold in an accounting year, then the unsold stock is also added. Unsold stock is the excess of closing stock over opening stock and is termed as ‘Change in Stock’. It means, Value of Output = Sales + Change in Stock + Production for Self-Consumption Where, Change in stock = Closing stock - Opening stock te Value of Output ed as: Value of Output = (Quantity x Price) + Change in Stock Introductory i, aro oe ‘y shoes annually and sells them @ ‘ s 1,000 pairs of F Output = 1000 * 500 = 85,0999), ifa firm manufactur then: Value o! For example, in stock is nil), pair (assuming change ly Included Iso not separately incl ) In case of an ope! ofoutput if'Sales' are given (ang, Exports are not Separatel sales include both dome."% tics Like imports, exports area sales are not specifically mentioned and exports. Let us understand this: juded in value economy, Calculate Value of Output: Case 1: (i) Sales = ¥ 2,000; ‘Ans. Value of Output =€ 2,000 asexpots are already included ote valle of ales. Case 2: () Domestic Sales = © 700; i) Exports = © 200 Ans. Value of Output =€700 +8 200=% 900 Exports are included as domestic sal 7° specifically mentioned. Before we proceed with the steps needed to estimate national income, let us first grou various production units into distinctindustrial groups or sectors. It is done because itis toestimate national income of a group of similar production units as compared to cota iy for each production unit separately: (i) Exports = © 400 ication of Producing Enterprises eo. sector. reengaged intransforming one good into activity. These units convert raw materia ing sugarcane into sugar, construction cause it depends on primary sector for icing services. For example, trans inds third oe of each sector is calculate GDP yp el Pe Measurement of National Income ram chapte step 3 Calculate Domestic Income (NDP) VALUE ADDED METHOD age reci a Fi eubtracting the amount of depr eciation and net indirect taxes GVAyyp of Primary Sector Tn GDPyp: WE get domestic income, ice. NDP,o = GDP yp = | (+) GVAy of Secondary Sector as sciation - Net Indirect Taxes. (+) GVA,» of Tertiary Sector Dept : sandy Estimate net factor income from abroad (NFIA) to arrive ee at National Income Gross Domestic Product the final step, NFIA is added to domestic income to arrive at (_*Matket Pie (GOPu) National Income. (-) Depreciation National Income (NNPpc) = NDP, + NFIA ()Net indirect Taxes precautions of Value Added Method Domestic Income (NOP,<) | Trevarious precautions tobe taken in Value Added Method are: Bs 1. Intermediate Goods are not o be included in the national eS WME cs rc aloady mcivtcninne dance final goods. If they are included again, it wll lead to double counting. 2, Sale and Purchase of second-hand goods is not included: as they were included in the year in which they were produced and do notadd to current flow of goods and services. However, any commission or brokerage on sale or purchase of such goods will be included in the Stora incrme a itis a productive service 3, Production of Services for self-consumption (Domestic Services) are not included: Domestic services like services of a housewife, kitchen gardening, etc. are not included produced and consumed at home and never enter the market place and are termed as non-market transactions. | Fae cainen paid services, like services of maids, drivers, private tutors, etc. should be included jonal income. 4, Production of Goods for self-consumption will be included: in the national income as they contribute to the current output. Their value is to be estimated or imputed as they are not sold in the market. 5. Imputed value of owner-occupied houses should be included: People, who live in their own houses, do not pay any rent. But, they enjoy housing services similar to those people whostay in rented houses, Therefore, value of such housing services is estimated according tomarket rent of similar accommodation. Such an estimated rent is known as imputed rent. 6, Change in *Stock of Goods (Inventory) will be included: Net increase in the stock of inventories will be included in the national income as it is a part of capital formation. “Stock or Inventory is unsold goods, unused raw material or semi-finished goods which a firm carries ‘from one year to the next. of shares, bonds and debentures (new and old): will not be included donot contribute to current flow of goods and services. These financial assets Introductory Macy, Dee, My n » only. However, any com sa change of title on ne nd involve a chang n productive service sig are mere paper claims a 1s oF included as it is brokerage on such financial asse as Production for Self-consumption National Income: All the final ed in « Goods Produced for self-consumption ee included In 7 rket. A part of then is heyy 2% Id in the produced within the country are not necessarily SO Pasieen® Pape for his own use and consumption. For ex: re ample, fats in national income he for self-consumption, imputed value of such Becca USS "ational Income: Produced for self-consumption are not included in Re each 1 Services Services TOO doctor treating his own child or teact aching his. on cyt pennant Seal resi auitis difficult to.ascertain theirmariet value and such seat 18 18 Vice are not rendered for the irpose of earning income. Problem of Double Counting s : final goods and s; 5 In measuring the National Income, the value of only 8 ervices ig 1g rs i en value of in included. However, the problem of double counting es oie cn emet iat is also included along with value of final goods. Dou! i 8 Of any, ‘more than once while passing through various stages of | De a : ‘A.commodity passes through various stages of production before reactung the final stage iy value of the commodity is taken at each stage, itis likely to include the cost of inputs more r once. This leads to double counting. Letus understand this through the famous example of Farmer, Miller and Baker. « Farmer: Suppose, farmer produces 50kg of wheat and sellsit for € 500 to miller (floury For farmer, wheat of & 500 is a final product. (ifintermediate cost for farmer to be zr, palue added will be 7500). © Miller: For miller, wheat is an intermediate good. Miller converts wheat into flour andy it for & 700 toa baker. Now, flour of & 700 is a final product for the Miller. (Value adi miller = 700 - 500 = © 200) © Baker; For baker, flour is an intermediate good. Baker manufactures bread from flow sells the entire bread to final consumers for € 1,000. Bread of € 1,000 is a final produc: the baker. (Value added by baker = 1,000 - 700 = 300) Let us present the data in a chart I reas Introductory Mary, nt paid to employers by e Uy 1): COE refers to amor 4, Compensation of Employees (00 includes all the payments 4 nd beret, yy it ‘S. ” : , Whi rendering productive eee actly, from the employer. Compensation of fy b sployees recelv®s directly orindirec ly, 7a e s sists vents: a; ‘ . am i. le incash: It includes all monetary benefits, like wages, salaries 9, i) Wagesan 1ST — : S Hae allowances, ‘commission, etc. ; it of business: expenses incurred by the employees will be excluded 1, 3 Se part of intermediate consumption of business enterprises, f as such ex} : ies in kind: Itt -monetary benefits, like rent fr ii) ies in kind: It includes all non-mone vie eae sonal facilities, ete. An imputed value of thet free cat, free medical and educationa! pl be should be included in national income. However it does not include any fallty whichis necessary for work and in which empliyea, othave any discretion, Forexample, uniforms to beworn during work only or vehicles to be y, for work only. Such payments are intermediate consumption of business enterprises. sribution to social security schemes: It includes contributions made socal security of employees. For example, contribution to provid funds, etc. Theaim of uch contributions is to ensures (iii) Employers’ cont employer for the: fund, gratuity, labour welfare and security of life ofthe employees. ‘Any contribution by third party (say,an insurance company) to an employee is not the part ofc as the insurance company is not the employer of injured worker. Any contribution by employe is azo not included as uch payments are made by the employees from COE only. 2. Rentand Royalty: Rent isa factor income earned by the owners, for lending their servic such as land, building etc. Rental income includes both actual rent (rent of let out land), well as imputed rent (rent of selF-occupied properties). Imputed rent of owner occur houses is calculated on the basis of market rental value of the house. Royalty is the income earned by a person! institution for lending intellectual proper rights and rights of sub soil assets. For example, owners of mineral deposits like coal. is ore, natural gas, etc. can earn income by giving rights of mining to the contractors. Interest: Interest refers to amount received for lending funds to a production unit. It include both actual interest as well as imputed interest of funds provided by the entreprene: “Interest income’ includes interest on loans taken for productive services only. For exam? ( ernment) to households or interest paid by bank* terest income as it contributes to the producti™ interest paid by consumers as swt = Measurement of National Income chapter 4 4, Profit: Profit is the reward to the entrepreneur for his contribution to the production of goods and services. It is the residual income, which an entrepreneur earns after paying all the other factors of production, The profit earned by an enterprise is used for 3 purposes (i) Corporate Tax: Itis the direct tax paid by an enterprise to the government on the total profit earned by it. It is also known as Profit tax or Business tax (ji) Dividend: Itrefers to that part of profit, which is paid to the shareholders in the ratio. of their shareholding. It is also known as distributed profits. (iii) Retained Earnings: It refers to that part of profit, which is kept as reserve to meet unexpected contingencies or for business expansion. It is also known as Undistributed Profits or Savings of Private Sector or Reserves and Surplus. In short, Profit = Corporate Tax + Dividend + Retained Earnings iF Cee Rus “operating surplus is another term used in factor payments. It refers to sum total of income from “onmership of physical/financial or intellectual property rent + royaity + interest) and income from rplus arises in both private CEU So, Operating Surplus = Rent + Royalty + Interest + Profit 5. Mixed Income: Itis the income generated by own-account workers (like farmers, barbers, etc.) and unincorporated enterprises (like retail traders, small shopkeepers, etc.). It is the termused for any income that has elements of more than one type of factor income. Mixed income arises from productive services of self-employed persons, whose income includes ‘wages, rent, interest and profit and these elements cannot be separated from each other. For example, income of a doctor running a clinic at his residence. ae ated usu into separate heads (COE, , known as ‘Mixed Income’ - Introductory ry sation of employers | salaries in Cash ene ‘ontribution ’ Profit Corporate, Dividend Retained Ea, ig Steps of Income Method antes national income by INCOME Mtg } The various steps involved Compersatong) Income Method are: ‘ o + Rent and Roya, ‘classify the, “sl ae Step 1: Identify and various factors of | * mee into primary, secondary + Mixed income (NFA y National Income (Ne, ed up, we get ation of Employees + Rent and Royih arrive at National Income. eee chapter 4 = Measurement of National Income ro 9, Income from sale of second-hand goods will not be included: in national income as their original sale has already been counted. If they are included again, it would lead to double counting. However, any brokerage or commission received by brokers or commission agents on sale of such goods wil be included as itis an income received for rendering productive service. 3, Income from sale of shares, bonds and debentures will not be included: as such transactions do not contribute to current flow of goods and services. These financial assets are mere paper claims and involve a change of title only. However, any commission or brokerage on such financial assets is included as itis a productive service. * (nen Capital gainsreferto income from sale of second-hand goods (say old car) and financial assets (bonds, debentures, etc). Any income arising from such transactions is not a factor income as these transactions arenot productive transactions and do not add to the current flow of goods and services in the economy. 4, Windfall gains: (like income from lotteries, horse race, etc.) are not included as there is no productive activity connected with them. 5, Imputed value of services provided by owners of production units will be included: Imputed value of owner-occupied houses, interest on own capital, production for self- consumption, etc. will be included as these are productive activities and add to the flow of goods and services. 6. Payments out of past savings: (like death duties, gift tax, interest tax, etc.) are not included in the National income because they are paid out of wealth or past savings and do not add to current flow of goods and services. 4.4 EXPENDITURE METHOD Factor income earned by factors of production is spent in the form of expenditure on purchase of goods and services produced by firms. * This method measures national income as sum total of final expenditures incurred by households, business firms, government and foreigners. * This total final expenditure is equal to gross domestic product at market price, Final Expenditure = GDPyp- * This method is also known as ‘Income Disposal Method’ or ‘Consumption and Investment car . ; 3 ‘ The various components of final expenditure are: PN dan ae a ea Private Final Government Final Gross Domestic Consumption | 4 | Consumption | 4. | capital Formation Expenditure Expenditure (aocr) (PFCE CFC) : art Household + Private Non- GrossFied + Inventory Exports — import Final Profit institutions CopitaFormation Investment) a Consumption Serving Soe dane: Expenditure Households Final . . Consumption NetFixed + Depreciation Expenditure Capital Formation 1. Private Final Consumption Expenditure (PFCE): It refers to expenditure fin households and private non-profit institutions serving households on all types Of consy, goods, i.e. durable (except houses**), semi-durable, non-durable goods and Services, Be * PECE = Household Final Consumption Expenditure + Private Non-Profit Institution Serving Households Final Consumption Expenditure * PFCE includes expenditures incurred by normal residents, whether in the domes territory or abroad. So, any expenditure incurred by residents during their foreign tour/travel will be added in PFCE. However, any expenditure incurred by non-resien and foreign visitors in the domestic market will be deducted from PFCE. “*Note:The expenditure incurred on purchase or construction of owner-occupied houses is treated as capi formation (included under Gross Residential Construction Investment) and not as durable. ‘consumption, Other costly consumer durables, like cars, air conditioners, washing machines, etc. are included under PE 2. Government Final Consumption Expenditure (GFCE): It refers to the expenditure incurred by general government on various administrative services like defence, law and order, education etc. Government produces goods and services with the aim of social welfare without any intention of earning profits. = Estimation of Government Final Consumption Expenditure (GFCE) GFCE is equal to cost of goods and services produced by government for collective use by the public. These services are valued at their cost to the government as they are not normally sold to the public. It means, GFCE is calculated as: : Government Final Consumption Expenditure = Intermediate Consumption of government + COE paid by government + Direct purchases from abroad for embassies and consulates located abroad - Sale of goods and services produced by general government. jdition 3. Gross Domestic Capital Formation (GDCF) or Gross Investment It refers to the ada, to capital stock of the economy. It represents the expenditure incurred on acquiring 8 bis eel _ 4g 8 Measurement of National Income rer) investment by the production units located within the domestic territory. There are tor “DCE cee omponents of GDCF: wor » Gross Fixed Capital Formation: It re (a) Gr to the expenditure incurred on purchase of fixed This expenditure is generally divided into three sub-categories: (a) Gross Business Fixed Investment: It includes expenditure on the purchase of new plants, machinery, equipments, etc, (b) Gross Residential Construction Investment: It includes expenditure on purchase or construction of new houses by the households. (c) Gross Public Investment: It includes expenditure on construction of flyovers, roads, bridges ete. by the government. temust be noted that ‘Net Purchases of Fixed Assets (both new and old) from Abroad is a part of Fixed Capital Formation as it adds to the existing stock of capital in the domestic economy. ii) Inventory Investment (Change in Stock or Change in Inventory): It refers to the physical change in the stock of raw material, semi-finished goods and finished goods lying with the producers. Itis included as an investmentitem because it represents the goods produced putnotused for current consumption. It is calculated as the difference between the closing stock and the opening stock of the year. “nwentory’ is a stock concept as it is related to a point of time, while ‘Change in Inventory’ is a flow concept as it is measured over a period of time. Fixed investment Vs Inventory Investment: Fixed investment refers to addition to stock of fied assets in the ands ofproducers during an accounting year. On the other hand, inventory investment is addition to the stock ofinventory with the producers during an accounting year. It means, GDCF = Gross Fixed Capital Formation + Inventory Investment; or GDCF = Gross Business Fixed Investment + Gross Residential Construction Investment + Gross Public Investment + Inventory Investment. to understand that purchase of shares and debentures, either old ornew, isnot included For example, if! have purchased 500 shares of Reliance Industries it may bean investment int of view, but for economy, it is simply a transfer of purchasing power and not an It. GROSS DOMESTIC CAPITAL FORMATION. Lerten Dice) ser hshes Gross Residential Gross Public Closing Stock - Opening Stock Investment Construction Investment Investment a a INtroductory ha, “km Increase in stock of consumer goods with households is excluded from inventory j ’ Cena npesen ™™rn,, ei cara tener hr of purchasing power and there is no addition te flow of goods and service: Ney See eee bine Hove (ean ieee Me Media) 15 8h rot chided in Goce goods have been already included in the year of original purchase. _ 4. Net Exports (X - MD: It during a period of one fers to the difference between ear, rts and imports Of aco unt * Exports (X) reter to expenditure by foreigners on purchase of domestic Products Thee geoxishavebeen produced within the country’s domestic territory. So, they arg Porta in output of an economy include ‘* Imports (M) are the expenditure by residents on foreign products. Imports are deduct, obtain domestic product as they are not produced within the domestic territory, el + Instead of treating exports and imports separately, the difference between the ty v0 taken and is termed as Net Exports. ~ Calculate Net Exports in the following cases: Case 1: (i) Exports = & 500; (ii) Imports = % 300 Ams. Net Exports = 7 500 -% 300 = 200 Case 2: (i) Exports = % 600; (ii) Imports = % 700 ‘Ans, Net Exports = 600 - % 700 = -% 100 Case 3: (i) Exports = 0; (ii) Imports = % 200 ‘Ans. Net Exports = 0 -% 200 = -% 200 Case 4: (i) Net Exports = % 500; (ii) Imports Ans. Net Exports =% 500 Case 5: (4) Net Imports = % 200 Ans. Net Exports = -~% 200 Case 6: (i) Net Imports = Ans. Net Exports =% 350 7200 {As Net Exports are given, we will gnore impors) {As Net Imports is positive, it means that Exports are less than impor) 350 {As Net Imports is negative, it means that Exports are more than Impors! Comparison between Net Exports and Net Factor Income from Abroad Pein Peer eae — t refers to difference between exports | It refers to difference between factor income received from abroad and facto" eee a income paid abroad. al Cong itis a National Concept. e Factor/Non-Factor includes non-tactor services like B includes factor services. Services 4 | banking, shipping and insurance. ——— chopter 4 = Measurement of National Income of Expenditure Method steps involved in calculating National Income by Expenditure Method are: .: Identify the Economic Units incurring Final Expenditure si seconomic units, Which incur final expenditure within the domestic teritory, are classified All oe groups: (i) Household sector; (i) Government sector; (ii) Producing sector; (iv) Rest ao world sector. -,-» 2: Classiication of Final Expenditure a expenditures incurred by the above mentioned economic units are estimated and classified nder the following heads: , private Final Consumption Expenditure (PFCE) Government Final Consumption Expenditure (GFCE) Gross Domestic Capital Formation (GDCF) + Net Exports OM). EXPENDITURE METHOD Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Capital Formation + Net Exports Gross Domestic Product at Market Price (GDP yp) (-) Depreciation ()Net Indirect Taxes ‘pesumtoaloffour components of final expenditure aves Gross Domestic Product at Market Price (Gp? yg) ie. GDPyp=PFCE + GFCE + GDCF +(X-M) step 3 Calculate Domestic Income (NDP;o) By subtracting the amount of depreciation and net indirect taxes from GDP,yp, we get domestic income, ie, NDPr-= GDP ip Depreciation — Net Indirect Taxes. Step 4: Estimate net factor income from abroad (NEIA) to arrive at National Income Inthe final step, NFIA is added to domestic income aise toarrive at National Income. National Income (NNP;c) = NDP c+ NFIA Precautions of Expenditure Method The various precautions to be taken while using the Expenditure Method are: 1. Expenditure on Intermediate Goods will not be included in the national income: as it is already included in the value of final expenditure. If it is included again, it will lead to double counting of expenditures. 2 Transfer Payments are not included: as such payments are not connected with any productive Activity and there is no value addition. 3. Purchase of second-hand goods will not be included: as such expenditure has already been included when they were originally purchased. Such goods do not affect the current flow of 800ds and services. However, any commission or brokerage on such goods is included as it is a Payment made for productive service. a Aid 4. Porchase of financial assets: (shares, debentures, bonds etc.) will not be in, transactions do not contribute to current flow of goods and services. These mere paper claims and involve a change of title only. lac "Ooh ie 1 clug led Financia, % 5, W Avon a Sate However, any commisston or brokerage on such financial assets is included QS it j service, 5. Expenditure on own account production: (like production for se| value of owner occupied houses, {tee services from general governme, profit institutions serving households) will be included in the national incom, e are production services 4.5 RECONCILIATION OF THREE METHODS Since all the three methods are used to measure the value of the same Physical oy will provide the same National Income. The following chart shows the re methods used for calculating National Income. Value Added Method c | | GWA of Primary Sector | (9) GVAyy of Secondary Sector | (+) GVAye of Tertiary Sector ls | | satker rice cor.) | ee {-} Depreciation (-) Net indirect Taxes ceases LS | Domestic income (NDP, 9 1 ———£ (+) NFIA 1 [ National income (NNP,<) | Piscean Vo Keats a atte latd Income Method Compensation of Employees + Operating Surplus + Rent and Royalty + Interest + Profit + Mixed Income of Self-Employed “Domestic Income (NDP,<) a (+) NFIA t [__ National income (NNP,<) _} Sq Prov, ie IFconsumption i Pte nt and Private, id SINCE th, tput, they Conciliation of three Expenditure Method Private Final Consumption, Expenditure + Government Final Consumption Expenditure + Gross Domestic Capital Formation | + Net Exports Gross Domestic Product at Market Price (GDP) (-) Depreciation (Net Indirect Taxes a (+) NFIA fy (national income (NPs ————t—O” ee je Measurement of National Income chopter4 4.17 Je for Reconciliation of Three Methods ‘xam| - ae following data, calculate national income by (a) Value Added Method; (b) Income ) Expenditure Method, Pee and ( / @ Grose value added by Secondary Sect by Tertiary Sector _ [oi “Gross value ue added b ation of employees rw Compenss ee rent and Royalty tv) Rent one wi Interest (oi Se eee iy, Mixed Income ee [x Profit | Private final consumption expenditure a) Government final consumption expenditure [a Ges domestic capital formation Tip, Net Exports : Net Indirect taxes i) a { Ov) | Depreciation oe fiw) Net Factor income from abroad ia NATIONAL INCOME BY THREE METHODS Value Added Method Income Method Expenditure Method 1,600 (GVAyp of Primary 1,500 (Compensation of 3,500 (Private Final Consumption Sector) Employees) Expenditure) {+) 2,500 (GVA, of Secondary +1,000 (Rent and Royalty) +650 (Government Final Sector) +450 (Interest) Consumption Expenditure) (+) 1,200 (GVA,,, of Tertiary +550 (Profit) +1,300 ee Peres Capital Sector 600 (Mixed oration ) +600 (Mixed Income) SG ~500 Depreciation = 500 Depreciation ~ 700 Net indirect Taxes ~ 700 Net Indirect Taxes (100 HF y { 4,100 (NDP, <) } 4,100 (NDP,..) ) een err ae +100 NFIA +100 NFIA. +100 NFIA. { 7 1 ¥ ¥ 1200 (NNP,_.) jis 4,200 (NP, ) | 4,200 (NP, ) } aa Introd Oductory Macro 4.6 TREATMENT OF DIFFERENT ITEMS IN NATIONAL INCOME On National Income includes income earned (i.e. only factor income, not tra, NSfer ing " a es, ome) jents of the country as a reward for their productive services in the Curreny a Yon, ear, "al ‘At means, transfer payments, financial transactions, income from sale and Purchase goods, non-market activities, windfall gains, etc. are not included in the N; ational income. "hing Let us first discuss the various items ‘not included’ in the National Income. POR Satur uy ‘Transfer Incomes and Payments like scholarship, | They are not connected with old age pension, unemployment allowance, | activity and there is no value ate Product gifts, expenditure on birthday/marriage, pocket ion, money, Remittances from abroad, financial help | to victims of natural calamity, meals to beggars, compensation given to accident victims etc. 2. | Compulsory Transfer Payments like interest tax, | Theyare transfer Payments &, » ‘governm, capital gains tax and indirect taxes, make any promise of providi Bis 9 Services in tum 3. | Saleand purchase of financial assets like shares, | Such transactions do Not contribute tocurenag > | bonds, debentures ete. Of goods and services. These fnancal st | mere paper claimsand involvea change ftiteony 4. | Windfall Gains like winning from lottery, horse | There is no Productive activity | y involved wi | race, contests etc. windfall gains. " 5. | Non-Market Transactions like domestic services| Its difficult to ascertain their market value au [fendered by a housewife, kitchen gardening, a | such services are not rendered forthe purpose! Parent teaching his child or leisure time activities | earning income. like painting the house. 6. | Intermediate Consumption Expenditure like | Such expenditures are already included in the fnal Purchase of raw materials by a firm, vegetables | expenditure. purchased bya restaurant, milk purchased by a dairy shop, electricity or advertisement expenses of a | Production unit, purchase of cold drinks by a school | canteen, expenditure on the tepair of assets etc, 7. | Sale or Purchase of second hand goods like sale/ | They have already been included in the year of Purchase of an old house, old machinery, old caretc. | their original sale or purchase. 8. Capital Loss like destruction of building, | They do not affect the national product direct | machinery etc. by earthquake services 9. | Capital Gains like profit due to increase in the | They do not add to the flow of goods and | price of land, building, shares or income from the | in the economy. sale of second hand goods and financial assets etc, aes, ti consum | National debt interest or interest paid by | Interest paid on the loans taken for | households to the commercial banks, purposes is not included. eo ———a << rement of National Income 4m Measu chapter discuss the various items ‘included’ in the National Income. IH income non the sale / purchase of goods orfinanclal assets services F wovided by the owners of production | They contribute to the current output of goods and 2 | Seite like imputed rent of owner-occupied | services, puted values will be included in the house interest on own capital, production for self | national income as they are related to productive consumption etc. activities. ie —

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