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So far we have only considered private sector output.

Errol D’Souza

Macroeconomics – What is it about?

Total output in a country = Private Sector Output
Errol D’Souza + Government Output

Many things that government produces such as

defence and police services are not income
generators and they are not provided through
a market.

In practice output of government is measured by its

costs, which is the expenses it incurs on its
employees and what it pays for goods and
services.
Aggregate output of a country = Private Sector Output
+ Government Costs
Email: errol@iima.ac.in

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Errol D’Souza Errol D’Souza

Connecting Output with Income - Connecting Output with Income -

Product = Output Sold + Unsold Output + Work in Progress Product = Output Sold + Unsold Output + Work in Progress
= Output Sold + Change in Stocks (Inventory)
= Output Sold + Final demand (purchase) by producer

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Errol D’Souza Errol D’Souza

Connecting Output with Income - Product generates revenues for the firm
PRODUCT = Output Sold + Unsold Output + Work in Progress
Claims on the revenues of the firm are -
= Output Sold + Change in Stocks (Inventory)
= Output Sold + Final demand (purchase) by producer Revenues = Payments to + Payments to + Interest + Profits
Inputs from Workers Payments
Other Firms (Employees)
Output Sold in turn comprises - (Suppliers)

Output Sold = Final Purchases by Consumers (Consumer goods) = Inter-firm + Wages + Capital Incomes
+ Final Purchases by Producers (Capital goods) Purchases
+ Intermediate Input Purchases by Producers
(Inter-firm Purchases)

= Final Purchases + Inter-firm Purchases

 PRODUCT = Final Purchases + Inter-firm Purchases

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Errol D’Souza Errol D’Souza

Output generates revenues for the firm Output generates revenues for the firm

Claims on the revenues of the firm are - Claims on the revenues of the firm are -

Revenues = Payments to + Payments to + Interest + Profits Revenues = Payments to + Payments to + Interest + Profits
Inputs from Workers Payments Inputs from Workers Payments
Other Firms (Employees) Other Firms (Employees)
(Suppliers) (Suppliers)

= Inter-firm + Wages + Capital Incomes = Inter-firm + Wages + Capital Incomes

Purchases Purchases
Hence, Hence,
Interfirm + Wages + Capital Incomes = Final Purchases by Inter-firm + Wages + Capital Incomes = Final Purchases by
Purchases consumers and producers Purchases consumers and producers
+ Inter-firm Purchases + Inter-firm Purchases
Or,
Wages + Capital Incomes = Final Purchases

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Errol D’Souza Errol D’Souza

Since, Value added = Revenue – Inter-firm Purchases • Part of the revenue received by the firm is in the
= Wages + Capital Incomes form of indirect taxes levied by government
we may write over which firm has no claims.
Wages + Capital Incomes = Final Purchases
• Then part of revenues must be set aside to replace
as equipment worn out during production – dep-
Value Added = Final Demand reciation.
(Income) (Output)

However, when connecting measured output to income

we must take care to relate them appropriately.

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Errol D’Souza Errol D’Souza

• Part of the revenue received by the firm is in the Only after paying out indirect taxes to government
form of indirect taxes levied by government will firm be able to pay out to suppliers,
over which firm has no claims. employees, and owners of assets of the firm.

NDP – Indirect Taxes = Aggregate Domestic Income

• Then part of revenues must be set aside to replace
equipment worn out during production – dep-
reciation.

GDP – Depreciation = Net Domestic Product (NDP)

It is NDP that constitutes output sold to generate
revenues for the firm

From those revenues the firm must pay out indirect

taxes it collects on behalf of government.

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Errol D’Souza Errol D’Souza

Only after paying out indirect taxes to government

Some terminology that is used by national income
will firm be able to pay out to suppliers,
accountants -
employees, and owners of assets of the firm.
Aggregate output measured at prices at which actually
NDP – Indirect Taxes = Aggregate Domestic Income
sold is referred to as GDP at market prices.
Combine this with -
GDP at market prices – Depreciation = NDP at market
GDP – Depreciation = Net Domestic Product (NDP) prices

to obtain, NDP at market prices – Indirect taxes = NDP at factor

GDP = Aggregate Domestic Income (less subsidies) cost
+ Indirect Taxes
+ Depreciation NDP at factor cost = Aggregate domestic income earned
Or, Output = Income from output produced within the
national territory.
Macroeconomists measure Income as the sum of
aggregate domestic income, indirect taxes and
depreciation. Income measured this way equals output.

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Errol D’Souza Errol D’Souza

Year→ 2018-19 2021-22 Year→ 2018-19 2021-22

GDP (market prices) 189,996.68 234,710.12 GDP (market prices) 189,996.68 234,710.12

Depreciation 19,842.90 26,744.58 Depreciation 19,842.90 26,744.58

NDP (market prices) 169,153.78 207,965.54 NDP (market prices) 169,153.78 207,965.54

Indirect Taxes less Subsidies 17,245.40 20,321.28 Indirect Taxes less Subsidies 17,245.40 20,321.28
NDP (factor cost) = Aggregate Domestic 151,908.38 187,644.26 NDP (factor cost) = Aggregate Domestic 151,908.38 187,644.26
Income Income

GVA (basic prices) 171,751.28 214,388.84 GVA (basic prices) 171,751.28 214,388.84
2021-22:
N.B.: Figures are in Rupees Billion Per Capita Monthly GDP = Rs. 14,287.20
Per Capita Annual GDP = Rs. 171,446.40
Population = 1.369 bn.
In India the percentage of working age population was 47%.
Then, Per Capita Monthly GDP of working age population is
Note: Basic Prices = Factor Cost; GVA = GDP ₹ 30,398.30

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Errol D’Souza
Figure 1.2: Components of GDP at market prices
Indirect taxes (7.7%) Depreciation (10.3%)
GDP is decomposed in another way on the basis of
citizenship.

Some Indian citizens and their assets work for foreign

owned companies and some foreign citizens
and their assets work for Indian owned
companies.

Thus revenues from sales of output of Indian firms

do not automatically become incomes in the
Aggregate Domestic hands of Indian citizens.
Income (82 %)

We must include incomes earned by Indian factors

from abroad and exclude incomes paid to
2018-19: Depreciation = 10.4% foreign factors by Indian firms.
Indirect taxes = 9.5%

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Errol D’Souza Errol D’Souza

Net Factor Incomes from Abroad = Income paid to
domestic factors of
production by the
rest of the world
minus Income paid
to foreign factors of
production by the
domestic economy
Gross National Product = GDP + Net Factor Incomes
from abroad
GDP – measure of output produced within a country’s
borders regardless of whether or not it is prod-
uced by a country’s citizens.
GNP – Output produced by a country’s citizens regar-
dless of where in the world they work.
Payments to domestic factors
of production from rest of world = INR 1,919.43 billion
(2021-22)
Compensation to Indian Payments in form of
employees = ₹ 1,445.53 property and entrep-
reneurial income
= ₹ 473.90
Payments made out to factors from
rest of world by India = INR 4,697.51 billion
Compensation to Employees = ₹ 228.32
Payments to property & entrepreneurial income = ₹ 4,469.19
For 2021-22 Net Factor Incomes were ─ ₹ 2,778.08 bn.

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Errol D’Souza Errol D’Souza

Year→ 2018-19
National Income of a country comprises two compo- GDP (market prices) 190,101.64
nents -
Depreciation 19,793.18
Net Domestic Net Factor NDP (market prices)
Net National Product = 170,308.46
Product at + Incomes
at Factor Cost
Factor Cost From abroad Indirect Taxes less Subsidies 18,103.49
(Aggregate NDP (factor cost) = Aggregate Domestic
(National Income) 152,204.97
Domestic Income
Income) Net Factor Incomes from abroad -1,936.26

NNP (factor cost) = National Income 150,268.71

Per capita National Income = INR 112,984

Per Capita Monthly National Income = INR 9,415
N.B.: Figures are in Rupees Billion
Find: (1) GNPFC (2) GNPMP (3) NNPMP

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National Income GNPMP

Components of Gross Value Added at basic prices, 2019-20
Relationships
Agriculture, Forestry & Fishing 33,940.33
Mining & Quarrying 3,558.33 20.31%
NNPMP GDPMP GNPFC
Manufacturing 27,122.69
Electricity, Gas, Water Supply & Other 4,836.44 17.31%
utilities
Services 115,155.64 62.38%
Construction 13,686.38
Hotels, transport, communication &
NDP NNP GDP services related to broadcasting 34,802.40
MP FC FC
Finance, real estate, & professional 39,158.48
services
Public Administration, Defence, & Other 27,508.37
Services
Depreciation Gross Value Added at Basic Prices 184,613.43
Net Indirect Taxes NDP GDP at Market Prices 203,510.13
FC
Net Income from Abroad

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Share of Components of Gross Value Added at basic prices, 2021-22,

measured in constant prices Components of GDP - Shares of Sectors
Percent
70
Agriculture, Forestry & Fishing 15.6
Mining & Quarrying 2.2 17.8% 60

Manufacturing 18.7
50
Electricity, Gas, Water Supply & Other 2.3 21 %
utilities 40

Share
Services 61.2 61.2%
30
Construction 8.2
Hotels, transport, communication & 20

services related to broadcasting 18.8

10
Finance, real estate, & professional 22.4 (financial
services services = 6.0) 0
1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5 7 9 1 3 5
Public Administration, Defence, & Other 12.7 (public admin & -5 -5 -5 -5 -5 -6 -6 -6 -6 -6 -7 -7 -7 -7 -7 -8 -8 -8 -8 -8 -9 -9 -9
50 952 954 956 958 960 962 964 966 968 970 972 974 976 978 980 982 984 986 988 990 992 994 996 998 000 002 004 -07
-9 -9 -0 -0 -0 Q
E

19 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 06
Services defense = 5.7) 20
Year
Gross Value Added at Basic Prices ₹ 137,980.25
Agriculture Industry Services
GDP at Market Prices ₹ 149,258.40

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Sectoral Shares in Real Gross Value Added

Errol D’Souza Errol D’Souza

Sectoral Composition of GDP

70

60

50

40

30

20

10

Agriculture & Allied Activities Industry Services

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Incomes earned from output are usually attributed to

factor that is the source of earnings – wages of
labour, rent from land, buildings & equipment,
interest on loans, and profit to entrepreneurs.

In India a predominant number of people are self –

employed – 53% of workers in 1999-2000.

Self-employed individuals do not attribute their

incomes under pure categories like entreprene-
urship or labour and their incomes are classified
as mixed income.

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NDP by Factor Incomes

1997-98 1998-99 2004-2005 GDP of Public Sector
2019-20 2020-21 2021-22
Compensation of Employees 4,404.87 5,122.67 9,242.07

Operating Surplus Share of Public Sector GDP 26.71% 28.08% 27.19%

7,976.65 9,177.94 15,992.34
Mixed Income

GDP of Public Sector

How is income spent?
1998-99 1999-00 2005-06
By the private sector and by government (public
sector). GDP (factor cost) 15,981.27 17,865.25 32,509.32
GDP (public sector) 4,066.40 4,570.06 7,485.28
Share of Public Sector GDP 25.4% 25.6% 23.0%

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Errol D’Souza Errol D’Souza

Expenditures by the government are of three types -
• Consumption expenditure – Expenditure on
current economic activities that result in
output in the current accounting period.
• Investment expenditure – e.g. building of roads
and purchase of aircraft – expenditures on
long lived capital goods
Transfers are redistributions of income – the govern-
ment collects taxes from some people and
redistributes to others.
Transfers do not represent any additional economic
production. By counting these we would be
counting the incomes earned that were taxed
and then redistributed back among citizens.

• Transfer payments – direct payments that agents
in the economy receive without having to sell
anything to the government in return – e.g.
welfare payments, subsidies, interest paym-
ents on borrowings by government.
Only expenditure on consumption and investment
is included in expenditure by the public
sector.

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Errol D’Souza Errol D’Souza

Expenditure on the private sector is subdivided into

expenditure by households and businesses.
Economic Classification of Central Govt. Expenditure
1999-00 2001-02 2005-06(BE) Most household expenditure is on consumption
whether of non-durable goods such as food
Consumption Expenditure 688.31 773.24 1,256.07
or durable goods such as t.v. sets & refrigerators
Transfers 1,615.49 2,011.88 3,001.56
Most investment expenditure such as purchase of
Capital Formation 771.29 821.04 872.32 machinery and factory space or additions to
inventory is deemed to be done by businesses
or firms
On average Transfers constitute 55.5% of Central
government expenditures in the last few years. In India due to self employment investment expen-
diture is by firms and households with house-
holds having largest share in capital formation
until recently.

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Income = Expenditure Errol D’Souza

Domestic
Household
Sector Private

Households Firms Government

Pvt Corporate
Sector
Consumption Investment Government
Expenditure
Public
Sector

Consumption Investment

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Errol D’Souza Errol D’Souza

We now account for open economies – that citizens

We now account for open economies – that citizens buy and sell goods to foreigners.
buy and sell goods to foreigners.
If Indian citizen purchases goods worth INR 100 from
If Indian citizen purchases goods worth INR 100 from another Indian citizen then,
another Indian citizen then, Indian income Indian expenditure
Indian income Indian expenditure INR 100 INR 100
INR 100 INR 100
If Indian citizen spends INR 75 on Indian goods and
spends INR 25 on foreign goods (imports)

Indian income Indian expenditure

INR 75 INR 100
To maintain equality between income and expenditure
total expenditure by Indian citizens should be reduced
by the value of imports.

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Errol D’Souza Errol D’Souza

Income = Expenditure
Some goods worth INR 15 produced by Indian business
are sold abroad to foreigners or exported. Domestic Abroad

Indian income Indian expenditure Households Firms Government

INR 15 INR 0
Consumption Investment Government Exports
Expenditure less
To maintain equality between exports and imports Imports
we must add the value of exports to expenditure.

For any country then we must add the value of exports

Consumption Investment
and subtract the value of imports – exports less
imports – to the domestic expenditure to obtain
equality between aggregate income and expend-
iture.

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Errol D’Souza Errol D’Souza

Output = Income = Expenditure Output = Income = Expenditure

Output = Income = Domestic Expenditure Output = Income = Domestic Expenditure

+ (Exports – Imports) + (Exports – Imports)

Domestic Expenditure = Consumption Domestic Expenditure = Consumption

+ Investment + Investment
+ Government expenditure + Government expenditure
Income = Consumptio n + Investment + Government Exp. + (Exports - Imports )

2005-06: Y = C + I + G +  X − M 
( 20 , 646 ) (8,828 ) ( 6, 689 )  ( −1, 056 ) 
( 35 , 672 )

Y : country' s output or income or GDP G : government expenditur e on consumptio n

C : private consumptio n expenditur e and capital formation
I : private investment expenditur e X − M : exports less imports

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Errol D’Souza Errol D’Souza

Y = C + I + G +  X − M  Y = C + I + G +  X − M 
2010-11: ( 45 , 030 ) ( 27 ,383 ) ( 9, 067 )  ( −2,554 ) 
( 78 , 756 ) 2013-14: Provisional
( 64 ,850 ) ( 6, 785 ) (13 , 413 )  ( −4, 083 ) 
(113 ,552 )

2010-11 2010-11 2013-14 2013-14

(Rupees (% to (Rupees (% to
Billion) GDP) Billion) GDP)
Private Final Consumption Private Final Consumption
Expenditure 45,029.74 57.2 Expenditure 64,850.37 57.1
Government Final Consumption Government Final Consumption
Expenditure 9,066.65 11.5 Expenditure 13,413.41 11.8
Gross Capital Formation 27,383.06 34.8 Gross Capital Formation 35,684.59 31.4
Exports less Imports -2,554.42 -3.2 Exports less Imports -4,083.16 -3.6
Discrepancies -168.77 -0.3 Discrepancies 3,685.52 3.2
GDP at market prices 78,756.26 GDP at market prices 113,550.73

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2018-19: Y = C + I + G + (X – M) 2021-22: Y = C + I + G + (X – M)

2018-19 2018-19 2021-22 2021-22

(Rupees (% to (Rupees (% to
Billion) GDP) Billion) GDP)
Private Final Consumption Private Final Consumption
Expenditure 112,900.29 59.4 Expenditure 143,443.36 61.12
Government Final Consumption Government Final Consumption
Expenditure 21,346.15 11.2 Expenditure 26,253.61 11.18
Gross Capital Formation 59,516.61 31.3 Gross Capital Formation 73,289.41 31.23
Exports less Imports -7,417.03 -3.9 Exports less Imports -6,193.78 -2.64
Discrepancies 3,755.62 2.0 Discrepancies -2,082.47 -0.89
GDP at market prices 190,101.64 GDP at market prices 234,710.12

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2017-18 2021-22

Private Final Consumption Expenditure 100,831.21 143,443.36

Govt. Final Consumption Expenditure 21,346.15 26,253.61

Gross Capital Formation 55,268.53 73,289.41

(a) Households 17,679.34 30,763.91

(b) Private Corporate Sector 20,677.71 25,721.00

(c) Public Sector 16,911.48 16,804.50

Exports Less Imports of Goods/Services -5,479.72 -6,193.78
Discrepancies 3,848.35 -1,005.98
GDP 170,950.05 234,710.12
Dimension: Billions of Indian Rupees

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(US Dollars Billion) 2020-21

Components of Net Exports -
Exports 296.30
• Balance of Merchandise Trade -
Agriculture 33.17
Value of exported goods minus value of Gems & Jewellery 26.02
imported goods. This measure of the
balance does not include services of Drugs & Pharma Products 24.44
any kind. Engineering Goods 76.73
Textiles & Carpets 29.47
Petroleum, Plastics & Linoleum 33.25 (78% petroleum)
Imports 398.45
Pearls, precious
Petrol, Crude & Products 82.68 & semi-precious
stones: 18.89
Coal, Coke & Briquettes etc. 16.28
Organic & Inorganic chemicals & products 28.27 Gold & Silver:
Machinery & Transport equipment 49.67 35.39

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Errol D’Souza Errol D’Souza

Components of Net Exports -

• Balance of Merchandise Trade -

• Balance of Trade in Goods & Services includes - Current Account Balance = Balance of Merchandise
Trade
• Non-factor incomes – such as travel, trans- + Net receipts from Non
port, insurance & software exports. Factor Incomes
+ Net receipts from Net
Broader measure (Current Account)which includes -
Factor Incomes
from abroad
• Net factor incomes from abroad – compen- + Net receipts from
sation of employees and investment Transfers
income
• Transfers – Official transfers between gover-
nments + private transfers such as
remittances (99.2% of Transfers)

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Errol D’Souza Errol D’Souza

(US Dollars Billion) Year → 2020-21

Trade Balance -102.15

Invisibles (Net) 126.07
Current Account Balance = Balance of Merchandise
Trade Foreign Travel -3.02
+ Net receipts from Non
Factor Incomes Transport 2.10
The sum of these + Net receipts from Net
3 components is Insurance 0.32
Factor Incomes
referred to as from abroad
Invisibles
Investment Income -41.37 Comp of Employees
+ Net receipts from = 3.19
Transfers Private Transfers 73.32
Private transfers and software exports have in the past Telecom Computer & Information Services 90.80
turned a negative balance of trade into a positive
current account balance. Current Account Balance 23.92

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