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NATIONAL INCOME

A.SHIVAKANTH SHETTY Asst Professor IFIM Business School Bangalore

Measurement of Macroeconomic Aggregates

Introduction

The concepts like national income and product are most significant in macroeconomic accounting. As an instrument of economic planning and review As a means of indicating changes in a countrys standard of living To indicate changes in economic growth of a country As a means of comparing the economic performance of different countries
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Gross & Net Concepts of National Income

Gross emphasizes that no allowance for capital consumption has been made or that depreciation has yet to be deducted. Net includes that provision for capital consumption has already been made or that depreciation has already been deducted. Thus, the difference between the gross aggregate and the net aggregate is depreciation.
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National and Domestic Concepts of National Income

The term national denotes that the aggregate under consideration represents the total income which accrues to the normal residents of a country due to their participation in world production during the current year. As against this, it is also possible to measure the value of total output or income originating within the specified geographical boundary of a country known as domestic territory. The resulting measure is called domestic product. Net factor income from abroad=factor income received from abroad-factor income paid abroad.
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Market Prices and Factor Costs of National Income

The valuation of the national product at market prices indicates the total amount actually paid by the final buyers in a country. The valuation of the national product at factor cost is a measure of the total amount earned by the factors of production for their contribution to their final ouptut. GNP at market price/factor cost=GNP at factor cost+indirect taxes-subsidies NNP at market prices/factor cost=NNP at factor cost+indirect taxes-subsidies
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Real vs. Nominal Concepts of National Income

Real GNP is the GNP in current rupees deflated for changes in the prices of the items included in GNP. Nominal GNP expresses in current rupees. It measures the value of output in a given period in the prices of that period, or as it is sometimes put , in current rupees.
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Measures of National Income


Gross National Product Net National Product National Income Personal Income Disposable Income

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Gross Domestic Product (GDP)

GDP is the market value of all final goods and services produced within a country in a given period of time. Y= C+I+G+NX

Measurement of Macroeconomic Aggregates

Gross National Product (GNP)

GNP is the total income earned by a nations permanent residents (Nationals). It differs from GDP by including income that our citizens earn abroad and excluding income that foreigners earn here. For example, if an Indian citizen works temporarily in US, his production is part of US GDP, but it is not part of US GNP.
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Net National Product (NNP)

NNP is the total income of a nations residents (GNP) minus losses from depreciation. Depreciation is the wear and tear on the economys stock of equipment and structures, such as trucks rusting and computers becoming obsolete. NNP=GNP-Depreciation
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Personal Income (PI)

Personal Income can be defined as the sum of all kinds of incomes received by the individuals from all sources of Income. Personal Income also includes transfer incomes like pensions, family allowances, unemployment allowance, sickness allowances, old age benefits and social security benefits. PI=NNP/Total Population
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Disposable Personal Income (DPI)

Disposable Personal Income is the income that households and noncorporate business have left after satisfying all their obligations to the government in the form of taxes. DPI= Personal Income-Taxes

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The Measurement of National Income

The Output Method The Expenditure Method The Income Method

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The Output Method

It is followed either by valuing all the final goods and services produced during a year or by aggregating the values imparted to the intermediate products at each stage of production by the industries and productive enterprises in the economy. The sum of these values added gives the gross domestic product at factor cost.
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Use of Output Method in Real Life

This approach is used to estimate gross and net value added in the following sectors of the Indian economy.

Agriculture and allied activities Forestry Fishing Mining and Quarrying Registered Manufacturing
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The Expenditure Method

It aggregates all money spent by private citizens, firms and the government within the year, to obtain total domestic expenditure at market prices. This includes consumer spending and investment i.e. total domestic spending. It aggregates only the value of final purchases and excludes all expenditures on intermediate goods.
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The Income Method

It aggregates only those of that residents of the nation, corporate and individual, that obtain income directly from the current production of goods and services. It aggregates the money payment made to different factors of production. The total of all factor of income gives total domestic income.
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Use of Income Method

The approach of Income Method is used for following activities.


Railways Electricity, Gas and Water Supply Transport, Storage and Communication Banking, Finance and Insurance Real Estate Public Administration and Defence
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Difficulties in Measuring National Income


Non-market Production Imputed Values The Underground Economy Side Effects and Economic Bads Leisure and Human Costs Double Counting
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