National Income

Click to edit Master subtitle style

5/13/12

Gross Income Vs Net Income

During the process of production, machinery and equipment which is a part of gross capital formation usually wears out(depreciates) or becomes obsolete. This is called as Consumption of Fixed Capital. To the extent there is wear and tear and the amount produced is used for replacement. To get more accurate estimation of the output generated in an economy one needs to take account of the net value of investment or net capital formation.
5/13/12

Gross Income Vs Net Income Cont

Gross Fixed Capital Formation = Net Fixed Capital Formation + Depreciation. Gross Capital Formation (Gross Investment) = Gross Fixed Capital Formation + Change in Stock of Inventories. Net Fixed Capital Formation = Gross Fixed Capital Formation Depreciation. Net Capital Formation = Net Fixed Capital Formation + Change in Stock of Inventories.
5/13/12

Market Price Vs Factor Cost

The market price (mp) is the same as the factor cost (fc).These two prices would be the same if the government is neither imposing any tax on commodities nor providing any subsidy to the producer. Hence, the market price faced by the households while purchasing commodities is the same as the factor cost faced by the producers of these commodities. However, when government imposes taxes on commodities and provides subsidies to the producers the market price differs from factor 5/13/12 cost.

Market Price Vs Factor Cost Cont

The market value of goods and services includes indirect taxes in the form of sales tax and excise duties. These are indirect as they are levied on sellers and may be shifted to buyers in form of market prices for commodities. The market value also includes subsidies that are provided by the government to the producers for selling their products at lower prices. Thus, indirect taxes increase the price, whereas subsidies reduce the price of the commodity. In order to equate factor cost to market prices, 5/13/12

Domestic Income Vs National Income

Domestic output is the output generated within the domestic territory of the country which includes the output generated within the political territory including the territorial waters, income generated by the ships and aircrafts operated by the country and also the income generated by the embassies; government offices located abroad but excludes all the income generated by the foreign embassies and offices of international organizations located in the political territory. National income or output refers to the income or output produced by the normal residents of the country. Normal residents are those individuals who normally 5/13/12

Domestic Income Vs National Income

The normal residents of the country can generate income/output not only inside the domestic territory but also outside the domestic territory by supplying factor inputs abroad. For supply of these factor inputs they receive factor income from abroad. On the contrary , the normal residents of other countries also provide factor inputs to the domestic territory and thereby receive factor payments from them. This is referred to as the factor payments made abroad. National Income (Product) = Domestic (Product) + Net Factor Income From Abroad. Income

Net Factor Income From Abroad = Factor Income 5/13/12 Received From Abroad Factor Payment Made to the

Eight Possible Combinations of National Product Aggregates

GNPM P NNPMP GDPMP GNPF C

NNP FC NDPMP NDPFC

5/13/12

GDPFC

Eight Possible Combinations of National Product Aggregates Cont

Gross= Net + Depreciation Market Prices= Factor Cost + (Indirect taxes Subsidies) National= Domestic + Net Factor Income from Abroad (NFIA)

NDPFC = Compensation of the Employees (CoE) + Operating Surplus (OS) + Mixed Income of the Self Employed (MISE) NDPMP = Net Indirect Taxes + NDPFC GDPFC = Consumption of Fixed Capital + NDPFC GDPMP= Net Indirect Taxes + GDPFC 5/13/12

Eight Possible Combinations of National Product Aggregates Cont

There are four categories of factor incomes: Compensation of employees (CoE), rent interest and profit. CoE is the total remuneration in cash, kind and in term of social security contributions by employers to their employees. The sum of rent, interest and profit is called Operating Surplus (OS). Hence there are two basic categories of factor incomes: CoE and OS. Mixed Income is a mixture of CoE and OS. The sum total of factor payments (CoE + OS) by all the production units located within the 5/13/12

Eight Possible Combinations of National Product Aggregates Cont

Net Factor Income from Abroad (NFIA) is the difference between the income received from abroad by the residents for rendering factor services abroad and the income paid to the non residents for rendering services within the economic territory. The three component of NFIA are: Net CoE received from abroad (CoE received by residents from abroad - CoE paid to nonresidents) Net OS (OS received by residents from abroad OS paid to non-residents)
5/13/12

(a)

(b)

(c)

Net Retained Earnings of Resident Companies

National Income

Income of an individual is an important determinant of his/her consumption level, investment and standard of living in a given period of time. National income is the measurement of overall income generated in an economy. It represents the money value of all final goods and services (output) produced in a country in a given period of time especially during an accounting year (avoiding the problem of double counting).
5/13/12

National Income Cont.

Data on, and trend in national income and the related aggregates, such as gross domestic product, net domestic product , gross national product and net national product are placed in National Income Accounts. The collection and analysis of this data is referred to as National Income accounting. While estimating, collecting and analyzing of the data economists use various variables like flow variables and stock variables.
5/13/12

National Income Cont.

The flow variables are those variables which are estimated over a period of time like budget deficits, investment expenditure, and capital formation and income (household, national, per capita). Stock variables are those variables which are estimated at a particular point of time like wealth(accumulation of savings), debt (accumulation of borrowings), and capital stock (factories, machines and inventories).
5/13/12

National Income Cont.

Almost all countries have some form of official national income account. For example, in the U.S., the national income accounts are officially known as National Income and Product Account (NIPA) which are constructed quarterly by the government, economists and statisticians in the Bureau of Economic Analysis(BEA). In India the Central Statistical Organization (CSO) regularly compiles and publishes the National Account Statistics (NAS).
5/13/12

Types of National Income

National income at current prices: Goods and services included in national valued at the income

prices of the same year. It reflects changes in prices as well as physical Production. National income at constant prices: Goods and services included in national income valued at the prices of some chosen year, called the base year. It reflects changes
5/13/12

Measurement of National Income

There are three measurements of national income:

1.

Value added method Income method Expenditure method

2.

3.

5/13/12

Value Added Method

Classify production units into industrial sectors. Estimate Net Value Added at factor Cost (NVAFC) of each industrial sector which involves estimates of value of output, intermediate consumption, consumption of fixed capital, net indirect taxes. Calculate the sum of NVAFC arrive at NDPFC. Add NFIA to NDPFC to 5/13/12 National Income. by all sectors to

arrive at NNPFC

or

Income Method

Classify production units into industrial sectors. Estimate factor incomes (CoE, rent, interest, profit) paid out by each sector which equals to NVA FC. Calculate the sum of NVAFC arrive at NDPFC. Add NFIA to NDPFC to National Income.
5/13/12

by all

sectors to

arrive at NNPFC

or

Expenditure Method

Classify production units into industrial sectors. Estimate final expenditures on goods and services produced by these sectors - Private Final Consumption Expenditure, Government Final Consumption Expenditure, Gross Domestic Capital Formation and Net Exports. Calculate the sum of these final expenditures to get GDPMP. Estimate consumption of fixed capital and net indirect taxes and deduct from GDPMP to get 5/13/12

Problems in the Measurement of National Income

Exclusion of value of personal services rendered to oneself in the national product accounts. Non-market activities and imputation. Changes in the inventories valuation adjustment. and inventory

Final product-current and constant rupees.

5/13/12

Uses of National Income Estimates

Measures of economic growth Indicator of success or failure of planning Indicator of structural changes Measure of income inequalities Indicator of the pattern of consumption and investment International and spatial comparisons Measurement of business cycles
5/13/12

Transfer Payments

A transfer is a transaction in which the payer provides a good, service or an asset without receiving from the recipient any good, service or asset in return. Current Transfer: A transfer made out of current income of the payer and added to the current income of the recipient. Capital Transfer: A transfer made out of wealth or capital of the payer and added to the wealth or capital of the recipient.
5/13/12

National Income to Personal Outlays

The total income that is actually received by the households is known as Personal Income (PI) which represents the flow of aggregate income to the households from other sectors. Personal Income (PI) = NNPFC Undistributed Profits Corporate Taxes + Transfer Payments . Personal income differs from disposable income by the amount of direct taxes paid by the individuals.
5/13/12 Deducting personal income tax (a form of direct

The amount of disposable income that is left after total spending in a year is referred to as Personal Saving (PS).Thus, subtracting personal saving from disposable personal income one gets Personal Outlays (PO). PO = DPI - PS

National Income to Personal Outlays Cont

5/13/12

Thank You

5/13/12