Transcript unit 6
MANAGERIAL ECONOMICS NATIONAL INCOME ACCOUNTING National Income Accounting National income accounting is the principles and methods used to measure a country's income and production. It refer to the bookkeeping system that a national government uses to measure the level of the country's economic activity in a given time period. National income accounting records the level of activity in accounts such as total revenues earned by domestic corporations, wages paid to foreign and domestic workers, and the amount spent on sales and income taxes by corporations and individuals residing in the country. National income accounting provides economists and statisticians with detailed information that can be used to track the health of an economy and to forecast future growth and development. Although national income accounting is not an exact science, it provides useful insight into how well an economy is functioning, and where money are being generate and spent. Some of the metrics calculated by using national income accounting include gross domestic product (GDP), gross national product (GNP) and Depreciation and Net national Product. • Gross National Product(GNP) :Gross National product is the total value of final goods and services produced in a year by domestically owned factors of production. • Gross Domestic Product(GDP):Gross Domestic product is the total value of final goods and services produced within a country’s borders in a year. • Depreciation and Net National Product:Depreciation measures the amount of GNP that must be spent on new capital goods to offset effect. When the value of depreciation is deducted from GNP, we get the Net figure which is known as Net National Income. METHODS OF NATIONAL INCOME CALCULATIONS • Production Method (Value Added Method) • Income Distribution Method. • Final Expenditure Method. Production Method (Value Added Method) • • • • This method approaches the measurement of national income through the value added angle. The measuring national income through this method are as follows: Classify the production units located within the economic territory into the distinct industrial groups likes agriculture,mining,manufacturing , banking , trade etc. the entire production activity of a country is classified into three broad sectors namely Primary sector Secondary sector Tertiary sector Estimate the net value added at factor cost by each indusrial sector. Take the net value added at fctor cost by all the industrial sectors to arrive at net domestic product at factor cost. Add net factor income received from abroad to the net domestic product at factor cost to obtain Net national Product at factor cost which is the National income. • Income Distribution Method In this method, National income is measured at the stage when factor incomes are paid out by the production units to owners of the factors of production. The income created in the production units is distributed among the owners of the factor of production in the form of compensation of employees, rent, interest and profit. When we added this factor we get domestic income. • Final Expenditure Method According to this method, we first estimate gross domestic product at market price which is the total expenditure incurred on the final product produced within economic territory and used for consumption and investment. From this we deduct consumption of fixed capital and net indirect taxes and add net factor income received from abroad to get national income. Determination of Income and Employment • Keynesian Theory of Income and Employment According to “Lord Keynes”, in the short run, the level of income of an economy depends on the level of employment. The higher the level of employment, higher will be the level of income. According to Keynes, the level of income of a country in the short run will change as a result of change in employment. The level of employment depends on aggregate demand and aggregate supply. The equilibrium level of Income depend on the balance between aggregate demand and aggregate supply. Full employment prevails when there is equality occurs between aggregate demand and aggregate supply. Concept of Multiplier The ultimate determinant of income and employment is the Multiplier. Any increase in investment increases income manifold due to Multiplier effect. Thus the concept of Multiplier expresses the relationship between an initial investment on income is called as the Multiplier Effect. i.e. the magnified or amplified effect of initial investment on income is called as the multiplier effect. It is measured by the ratio of change in equilibrium income to change in expenditure. Multiplier(K)= Change in equilibrium income Change in expenditure Or K= Y I IMPORTANCE OF MULTIPLIER • • • • • • • Investment Trade cycle Saving investment equality Formulation of economic policies Achieve full employment Control trade cycle Deficit financing INFLATION • Harry Johnson defines inflation “ a sub stained rise in prices.” • Crowther, similarly defines inflation as “ a state in which value of money is falling i.e., prices are rising”. Inflation is commonly understood as situation of substantial and rapid general in crease in the level of prices and consequent deterioration in the value of money over a period of time. Inflation is a situation of increase in the prices of goods and services. When there is a rise in general price level for all goods & services it is known as inflation. Inflation is statistically measures in term of percentage increase in the price index, as a rate percent per unit of time usually a year or a month. Causes Of Inflation • Increase In Public Expenditure • Rapid Growth In Population • Hoarding On The Part Of Producers & Traders • Increase In Foreign Demand • Increase In Salaries, wages. • Unfavorable Agricultural Production • Insufficient Production • Decrease In Imports • Government Administration Price Level • Factors Of Production Deflation Deflation refers to a decrease in the general price level of the economy. Deflation is just opposite of inflation. Deflation has often had the side effect of increasing unemployment in an economy, the process also leads to a lower level of demand in the economy. Causes for deflation • Decrease In Money Supply • Rise In Production • Decreasing Demand For Goods Types of Inflation Demand Pull Inflation Sectoral Inflation Inflation Pricing Power Inflation CostPush Inflation • Demand Pull Inflation:Demand Pull Inflation is occurs when the total demand for goods and services in an economy exceeds the available supply, so the prices of the goods rise in a market economically. • Cost-Push Inflation:Cost-Push Inflation is occurs if there is increase in costs independent of any increase in aggregate demand. • Power Inflation:Power Inflation occurs whenever businesses in general decide to boost their prices to increase their profit margins. • Sectoral Inflation:Sectoral Inflation occurs whenever any of the other three factors hits a basis industry causing inflation there, and since the industry hit is a major supplier of many other industry . Control of Inflation The control of inflation has become one of the dominant objectives of government economic policy in many countries. Effective policies to control inflation need to focus on the underlying causes of inflation in the economy. Following are the Policies adopted for the control of Inflation. These are:1. Monetary Policy:Under Monetary Policy the interest rates are set with the aim of keeping inflation under control. Monetary policy can control the growth of demand through an increase in interest rates and a contraction in the real money supply. 2. Fiscal Policy:Fiscal policy is an important instrument to stabilise the economy, that is, to overcome recession and control inflation in the economy. Fiscal policy is of two kinds: Discretionary and Non Discretionary fiscal policy. Discretionary fiscal policy deliberate change in the government expenditure and taxes to influence the level of national output and prices. Non-Discretionary Fiscal policy of automatic stabilisers is a built in tax or expenditure mechanism that automatically increase aggregate demand when recession occurs and reduces aggregate demand