Transcript National Income Concepts - JAJUPRAMODKUMAR'S WORLD

National Income Concepts
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National income or national product
National Income and Related Aggregates
Is defined as the total market value of all the final
goods and services produced in an economy in a
given period of time.
This suggests that labor and capital of a country,
working on the natural resources produces certain
net amount of goods and services, the aggregates
of which as known as national income or national
product.
There are many concepts of national income which
are used by different economists and all of which
are inter-related. These concepts are:
1. Gross National Product at Market Price (GNP mp)
 GNP mp refers to the total value of all the final goods
and services produced during the period of one year
plus the net factor incomes earned from abroad
during the year.
 The word “gross” is used to indicate that the total
national product includes in it that part of product
which represents depreciation.
 Depreciation means the wear and tear of the
machinery and other fixed capital during the process
of production.
 GNP includes the economic activities of all the
residents of a nation whether operating within the
country or outside it.
It takes into account the incomes which the residents get from
rest of the world and at the same time it excludes those incomes
which arise from the economic activities within the country but
have to paid out to the non-residents
GNP being the monetary measure of all final goods and services
produced, is widely used as an index for judging the performance
of an economy.
 2. Net National Product at Marker Price (NNP
mp): price is equal to GNP minus the charges of depreciation
and replacements, where depreciation represents the values of
fixed capital consumed during the process of production.
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NNP mp = GNP mp – Depreciation. The concept of NNP is
important because it gives an estimate of the net increase in the
output of final goods and services.
3. Net National Product at Factor Cost (NNP fc) or
National Income:
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NNP fc or national income is equal to the sum total of factor
incomes received by the factors of production during the
year. It is equal to the sum of rent, wages, interests and
profits in a given year.
The sum total of incomes of the factors of production is
known as national income or net national product at factor
cost.
Thus, the national income is equal to the NNP at mp minus
revenue of the government by way of indirect taxes plus
subsidies provided by the government to the business
sector.
NNP fc = NNP mp – {Indirect taxes + Subsidies}
(or)
NNP fc = NNP mp – net Indirect taxes. taxes
4. National Income at Current Price and Constant Price:
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When the value of goods and services is found out by multiplying the
quantity produced during one year by the prices prevailing in that year, we
call it National income at Current Prices.
On the other hand, when the value of goods and services is calculated by
multiplying the quantity during one year with prices of the base year, we
call it National Income at Constant Prices.
Example: (1) q1 is the quantity of final product in year 1980 and p1 is the
price of that year.
Then, the value of the final product I = q1p1
Similarly, q2 is the quantity of final product II in year 1980 and p2 is the
price of that year.
Then, the value of the final product II = q2p2
If we add up the value of all final goods and services produced, we get
National Income at Current Prices.
So, National Income at Current Price will be: q1p1+q2p2+ …………….qnpn =
NI at Current Prices. Prices
(2) Suppose we want to compare the national income figures of
1980 and 1990, we may find that the national income in 1990 is
higher than that of 1980.
 This increase in income may be due to (a) increase in output (b)
increase in prices may be higher in 1990 than 1980.
 To get the exact increase in real income, we need to multiply the
quantity of goods produced in 1990 with the 1980 prices. This
shows: National Income at Constant Prices: Quantity of Current
period x Prices of Base period.
Formula for Real National Income:
Money National Income (Current year) x Price Index of Base year
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Price Index of Current year
Measurement of National Income:
 The methods of estimating national income
of a country depends upon the availability
of proper statistics.
 This can be viewed from three interrelated
angles, such as, in terms of production,
income, and expenditure.
 These three terms are broadly related to
GNP, GNI and GNE respectively.
 The ideal national income equation shows
that National Income or NI
=GNP=GNI=GNE.
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To measure the national income of a country, we use three
different methods, such as:
(a) The product method
(b) The income method
(c) The expenditure method
The Product Method
The production method measures national income as the sum of
net products produced by the production units in the given period.
 Therefore, the production method involves the following steps:
(i) Identifying the production unit
(ii) Estimating their net products
(iii) Valuing the goods and services
(iv) Estimation of net income from abroad
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The next step in the production method is the
estimation of net product of each sector.
This comes from the Gross products minus the
intermediate products minus the depreciation during
the process of production.
NNP = GNP – Intermediate products – Depreciation.
The total estimates would give us Net Domestic
Product at factor cost.
The addition of net income from abroad to this total
would give us net national income at factor cost or
National Income.
The Income Method
 The income method measures national income as the sum
total of factor income shares accruing to the factor owners.
 Factors of Production: Land, Labour, Capital and
Organization.
 Factor incomes: Rent, Wage, Interest and Profit.
 One can easily aggregate all the factor incomes over a
period of time and this aggregate figure is known as
national income at factor cost.
 There are major additions and deductions to the national
income accounting.
 Additions: Income from foreign sectors in the form of rent,
profits etc.
 Deductions: Incomes from all illegal activities: theft,
robbery, smuggling, child labor, etc.
 Incomes to the foreign sector acting in domestic sectors.
Comparison between Product method and Income method:
NI fc = NI mp – Indirect tax + Subsidies.
 For the sake of convenience, economists suggests that the
Product method is for Primary sector and the Income
method is for tertiary sectors.
The Expenditure Method
 Because of identical relation the GNP=GNI=GNE, the
expenditure of one becomes the income of other. Hence,
the GNE is calculated which will be identical with GNI.
 The Expenditure in the Economy can be broadly divided into
three types, such as,
(i) Consumption Expenditure
(ii) Investment Expenditure
(iii) The pure Govt. Expenditure
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 Consumption expenditure provides direct satisfaction
where investment expenditure is necessary to
increase the productivity of the nation.
 Pure Govt. expenditure is necessary for maintenance
of law and order situation and providing the
infrastructural facilities to the nation.
 In detail, all expenses are again divided into five
different categories:
1. Private Consumption Expenditure
2. Public Consumption Expenditure
3. Private Investment Expenditure
4. Public Investment Expenditure
5. Pure Government Expenditure
Comparison of three Methods:
 The product method is very suitable for the primary
sector such as agriculture, industries etc.
 The income method is appropriate for the tertiary and
service sectors.
 The Expenditure method is only for the calculation of
identical relationship between three methods. It is
because we may not get the details of all expenditure
correctly. Neither it is possible nor it is desirable to
reveal all types of expenditure.
 In fact, the expenditure method is only to complete
the identical relationship i.e.
GNP=GNI=GNE=NI
PRICE INDEX
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A price index (plural: “price indices” or “price indexes”) is a
normalized average (typically a weighted average) of
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prices for a given class of goods or services in a given region,
during a given interval of time. It is a statistic designed to help to
compare how these prices, taken as a whole, differ between time
periods or geographical locations.
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Price indices have several potential uses. For particularly broad
indices, the index can be said to measure the economy's price
level or a cost of living. More narrow price indices can help
producers with business plans and pricing. Sometimes, they can be
useful in helping to guide investment.
Some notable price indices include:
 Consumer price index
 Producer price index
 GDP deflator
Consumer Price Index
 A consumer price index (CPI) is a measure
estimating the average price of consumer
goods and services purchased by
households. A consumer price index
measures a price change for a constant
market basket of goods and services from
one period to the next within the same area
(city, region, or nation).
 It is a price index determined by measuring
the price of a standard group of goods
meant to represent the typical market
basket of a typical urban consumer.
Producer Price Index
 A Producer Price Index (PPI) measures
average changes in prices received by
domestic producers for their output. It is
one of several price indices.
 Its importance is being undermined by the
steady decline in manufactured goods as a
share of spending.
 The Producer Price Index (PPI) program
measures the average change over time in
the selling prices received by domestic
producers for their output.
GDP Deflator
 The GDP deflator (implicit price deflator for GDP) is a
measure of the level of prices of all new, domestically
produced, final goods and services in an economy.
In most systems of national accounts the GDP deflator
measures the ratio of nominal (or current-price) GDP
to the real (or chain volume) measure of GDP.
The formula used to calculate the deflator is:
Dividing the nominal GDP by the GDP deflator and
multiplying it by 100 would then give the figure for
real GDP, hence deflating the nominal GDP into a real
measure.
 GDP deflator for India in 2008 - 7.2%
 The GDP deflator is utilized as a measure of shifts in
the prices of goods and services that are produced in
a given country.
 It is understood that the GDP deflator can help
provide a more accurate picture of the current status
of the gross domestic product within the country.
Because the GDP deflator is understood to be an
example of an implicit price deflator for GDP,
economists consider calculating this economic
indicator as an essential component in ascertaining
the current strength or weakness of the country’s
economy.
INDEX NUMBERS
An INDEX NUMBER measures the variation in the time series in a
period as a percentage of the time series in a base period.
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LASPEYRES INDEX number measures the change in price for a
fixed buying pattern.
The LASPEYRES INDEX for the n-th period is obtained by the following
formula:
L=100 x Σ pni q0i
Σ p0i q0i
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PAASCHE INDEX number, measures the change in price for a fixed
buying pattern, in the case the quantity change from the base year
amount.
The PAASCHE INDEX for the n-th period is obtained by the following
formula:
P= 100 x Σ pni qni
Σ p0i qni
INDEX number, measures the average
change in price for a fixed buying
pattern.
The INDEX for the n-th period is obtained
by the following formula:
For the above example, we have:
 L1:0 = 100 x (776.06x102.1 +
3345.56x1.8)/(562.48x102.1+2677x1.8) = 136.9616
 P1:0 = 100 x (776.06x87.9 +
3345.56x2.7)/(562.48x87.9.1+2677x2.7) = 136.3084
I = (Square root of L * P)
NEW SERIES ON
NATIONAL ACCOUNTS STATISTICS
WITH 1993-94 AS THE BASE YEAR
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In the past, National Accounts Statistics have been revised
decennially changing the base to a year in which decennial
Population Census has been
conducted.
It was primarily because in the base year estimates, the
information on working force has played an important role
and working force estimates have been obtained from the
population census which are conducted decennially. In this
sequence, the base of the National Accounts Statistics
should have been revised to 1990-91 from 1980-81.
It may be mentioned that any major changes in the choice
of the alternative sets of data or methodologies are
considered only along with the base year revision exercise.
It has been customary not to make changes every now and
then and necessary major changes are kept for
implementation at the time of base year revision exercise.
 In the present revision exercise, the CSO has mainly
been guided by three considerations, namely;
 (i) revision of base year to a more recent year
(for meaningful analysis of the structural changes in
the economy),
 (ii) complete review of the existing data base and
methodology employed in the estimation of various
macro-economic aggregates including choice of the
alternative databases on individual subjects, and
 (iii) to the extent feasible, implementing the
recommendations of the 1993 System of National
Accounts(1993 SNA).
Of the various methodological improvements/changes in
databases effected in the new series mention may be made
of the following:
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Estimation of working force by economic activities using the
worker population ratio and the workforce participation
rates estimates based on the quinquennial survey on
employment and unemployment conducted by the NSSO,
1993-94 (50th round) and the total population as obtained
from the 1991 population census;
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Coverage of the agricultural production in the
fore/backyard, floriculture, deep sea fishing, valuation of
the output of prawns and shrimps separately, data on which
is available from the Ministry of Agriculture;
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Estimating GDP relating to trading activities in the private
organised segment of the economy using the working force
estimates available from DGE&T and inclusion of activities
relating to National Industrial Classification, 1987 (NIC)
codes 840 and 841 (lottery sales, services) for the first
time;
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Coverage of public services in the quasi-government bodies
and
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Contribution of Employees Provident Fund Organisation in
the GDP;
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Estimation of the contribution of tailoring services (NIC
964) separately;
Interpreting National Income in
Business