CHAPTER 7 Flashcards
National Income is expressed in terms of?
Money
Meaning of national income:
National Income is the flow of goods and services produced in an economy during a year. It is a composite measure of all economic activities such as production, distribution, exchange and consumption and also is an indicator of economic welfare of people in a country.
Definition of National Income by Prof. Irving Fisher:
“National Dividend or income consists solely of services as received by the ultimate consumers, whether from their material or from their human environments.”
Features of National Income:
- Macro Economic concept
- Value of only Final Goods and Services
- Net aggregate value(Depreciation deducted)
- Net Income from Abroad
- Financial Year
- Flow Concept
- Money Value
Gross Domestic Product: (GDP)
It is the Gross Market Value of all final goods and services produced within the domestic territory of a country, during a period of one year.
Formula for Gross Domestic Product:
GDP = C + I + G + (X-M)
Where C = Private consumption expenditure
I = Domestic Private Investment
G = Government’s consumption and Investment Expenditures
X - M = Net export value (Value of Exports -
Value of Imports)
Net Domestic Product: (NDP)
It is the net market value of all final goods and services produced within the domestic territories of India during a period of one year.
Formula for Net Domestic Product:
C + I + G + (X-M) - Depreciation
Where C = Private Consumption expenditure
I = Domestic Private Investment
G = Government’s consumption and investment expenditures
X-M = Net Value of Exports (Value of
exports - imports)
Depreciation
Gross National Product: (GNP)
It is the gross value of all final goods and services produced in the country which is estimated as per the price prevailing in the market.
Formula of Gross National Product:
C + I + G + (X-M) - (R-P)
Where C = Private Consumption expenditure
I = Domestic Private Investment
G = Government’s consumption and investment expenditures
X-M = Net Value of Exports (Value of
exports - imports)
R = receipts from abroad and
P = payments made abroad
Net National Product: (NNP)
It is the net value of all final goods and services produced in the country during a period of 1 year.
Formula of Net National Product:
GNP-Depreciation
Methods of Measurement of National Income:
- Output Method- Final Goods and Value-added method
- Income Method
- Expenditure Method
Output Method is also known as:
Product or Inventory method
Final goods approach/ final product approach:
According to this approach, the value of all final goods and services produced in primary, secondary and tertiary sector are included, and the value of intermediate transactions should be ignored.
Value added approach/ Value added Method:
In this method, the value addition done at each level of production is included. Thus, national income is obtained by sum total of all stages of production till the final output reaches the consumers.
Precautions for Estimating National Income by Output Method:
- Avoid Double Counting: Only include the value of final goods and services.
- Self-Consumption: Estimate goods used for self-consumption by farmers and include their imputed value in national income.
- Adjust Taxes and Subsidies: Deduct indirect taxes and add government subsidies for accurate estimation.
- Price Level Changes: Account for changes in price levels between different years.
- Exports and Imports: Add the value of exports and deduct the value of imports.
- Depreciation: Deduct depreciation of capital assets.
- Second-Hand Goods: Ignore the sale and purchase of second-hand goods as they are not part of current production.
Income Method is also known as:
Factor Cost Method - estimates national income from distribution side.
Meaning of Income Method:
Under this method, the incomes received by all the citizens of the country in a particular year and incomes accruing to all the factors of production in the form of rent, wages, interest and profit are included while transfer payments are ignored in estimating national income.
Formula of calculating GNP/National Income by Income Method:
NI = Rent + Wages + Interest + Profit +
Mixed Income + Net export + Net receipts from abroad.
NI = R + W + I + P + MI + (X–M) + (R–P)
Precautions for estimating NI by Income Method:
- Ignore Transfer Payments: Exclude scholarships, gifts, donations, charity, pensions, and unemployment allowances.
- Exclude Unpaid Services: Do not count services like housework or a teacher teaching their own child.
- Exclude Second-Hand Goods: Ignore income from the sale of second-hand items like cars and houses.
- Ignore Shares and Bonds: Exclude income from the sale of shares and bonds as they do not contribute to real national income.
- Exclude Direct Taxes: Do not include revenue from direct taxes as it is a transfer of income.
- Include Undistributed Profits: Count undistributed profits of companies, income from government property, and profits from public enterprises.
- Include Imputed Values: Add the imputed value of self-consumed production and imputed rent of owner-occupied houses.
Expenditure Method is also known as:
Total Outlay Method.
Meaning of Expenditure Method:
Under this method, National Income is obtained by summing up all of the consumption and investment expenditure made by all the individuals, firms as well as Government of the country.
Formula of NI in Expenditure Method:
NI = C + I + G + (X-M) + (R-P)
Precautions for calculating NI by the Expenditure method:
- Ignore Intermediate Goods: Avoid double counting by excluding expenditure on intermediate goods and services.
- Exclude Second-Hand Goods: Ignore expenditure on repurchasing second-hand goods as they are not currently produced.
- Ignore Transfer Payments: Exclude expenditure on scholarships, pensions, and unemployment allowances.
- Exclude Financial Assets: Do not include expenditure on shares, bonds, and debentures as they do not add to the flow of goods and services.
- Deduct Indirect Taxes: Subtract indirect taxes from the total expenditure.
- Include Final Goods and Services: Ensure expenditure on final goods and services is included.
- Include Subsidies: Add government subsidies to the expenditure.
Which method is used by CSO to estimate India’s National Income:
Central Statistical Organization
(CSO) adopts a combination of both output
method and income method to estimate
national income of India.
Theoretical or Conceptual Difficulties of calculating National Income:
- Transfer Payment - excluded
- Illegal Income - excluded
- Valuation of government services -complicates
- Income of foreign firms - Included - IMF
- Changing Price Levels - Difficult
- Unpaid Services - excluded
- Production for Self - Consumption - excluded
Practical or Statistical Difficulties in calculating NI:
1. Valuation of inventories - Errors in measuring inventory values can distort the final production value.
2. Problem of double counting - Difficulty in distinguishing between final and intermediate products, leading to double counting.
3. Depreciation - Difficulty in making correct deductions for depreciation due to lack of uniform standard rates.
4. Inadequate and unreliable data - Lack of adequate and reliable data on production, costs, and expenditures in developing countries.
5. Existence of non-monetized sector - Non-monetized sectors, especially in rural areas, are excluded from national income calculations.
6. Capital gains or losses - Exclusion of capital gains or losses from national income as they do not result from current economic activities.
7. Illiteracy and ignorance - Small producers’ inability to provide accurate production information due to illiteracy and ignorance.
8. Difficulties in the classification of working population - Challenges in defining and classifying the working population, especially in seasonal occupations.
Importance of National Income:
1. For the Economy - National income data are regarded as ‘Social Accounts’ and show how the aggregates of a nation’s income, output, and product result from various sources.
2. Economic planning - Essential for economic planning, national income data includes information on gross income, output, savings, investment, and consumption.
3. National policies - National income data forms the basis of national policies and helps generate economic models, guiding the economy in the right direction.
4. Comparison of Standard of Living - National income data helps compare the standards of living of people in different countries and at different times.
5. Economic Research - Used by research scholars, national income data provides insights into the country’s input, output, income, savings, consumption, investment, and employment.
6. Distribution of Income - National income statistics reveal the distribution of income in the country, highlighting disparities among different sections of society.
Real / Product Flow:
When Factors of Production flow from households to producers, the producers use these factors to produce goods and services needed for the households. Thus goods flow from households to firms and back to households from firms. This is known as Real Flow or Product Flow.
Money Flow:
Money flows from firms to households through factor payments like rent, wages, interest and profit. Households use this money to buy goods and services produced by the firms. Hence money flows from producers to households and then back to the producers. This is known as Money flow.
