Transcript File - Aerosona.Tec

Concept of national income and their inter-relationship
There are various concepts of national income they are explained below one
by one.
A.
Gross National product (GNP)
Gross national product at market prices
The GNP of a country is defined as the total money value of all final
goods and services produced in a country in a one year period.
GNP = GDP plus income received by Pakistanis from abroad minus income
of foreigners taken from Pakistan.
Suppose
GDP
=
Dh 140 billion
Income of UAE national from abroad = (+) Dh 30 billion
Income of foreigners taken away
( -) Dh 20 billion
GNP
=
Dh 150 billion
National Income and concept
Gross National product (GNP)
A.
i.
2.
Aspects of GNP
GNP is a flow concept:
GNP represents a
flow. It is a quantity produced per unit of time. It is
the value of final goods and services produced in a
country during a given time period.
GNP is measures final output: while
calculating GNP, the market value of only final goods
and services produced in a year are added up. Final
goods are those goods which are purchased for final
use in the market.
B.
Net national Product (NNP)
Net national product (NNP) is the measure of national production of a
country obtained by deducting the amount of depreciation from GNP.
As a rough estimate, GNP is very useful indicator of total production of a
country. But if we are interested to have an accurate and true measure of
what a country is producing and what is available for use, the GNP has a
serious defect. It ignores the fact that some capital is used up during the
process of production in the form of decrease in the value of machinery,
building, etc. e.g. if a bus runs for a year. Its value will definitely decrease
and at the end of the year the value will be less than that of a new bus.
NNP = GNP – Depreciation
GNP
=
Dh 150 billion
Depreciation allowance (-) =
Dh 20 billion
NNP (Net National Product)
= Dh 130 billion
C. National Income (at factor cost)
National income can be estimated in terms of either output or total income. When national
income is measured by adding together all income payments made to the factors of
production in a year, in the words of J. Sloman:
“National income (NI) at factor cost is the aggregate earning of the four factors
of production (Land, labor, capital and organization) which arise from the
current production of goods and services by the nation’s economy”
NNP
Indirect taxes
(- )
Subsidies
(+)
Then national income (at factor cost)
=
=
=
=
Dh. 130 billion
Dh. 15 billion
Dh. 5 billion
(130 – 15 + 5) = 120 billion
We must remember about national income that if government increases indirect taxes. Then
the market value of output will increase but the income received by factors will remain the
same.
D. Personal income (PI)
Personal Income is the total income received by the people from all sources.
Personal income differs from national income for two reasons.
Firstly, there are some deductions from the earnings of persons in the form of social
security contribution before they receive their salaries. Then the limited companies do
not distribute the whole of the earned profits of firms is also taken away by the
government as corporate taxes.
Secondly, there are some payments received by the people which they have not earned as
incomes in exchange for production of goods e.g. pensions, gifts, Zakat, unemployment
allowance, scholarship, etc. these payments are called transfer payments and have to be
added to national income to arrive at personal income.
Personal Income (PI)
= NI – Social security contributions – corporate taxes undistributed profits, + transfer payments.
Example: Suppose.
National Income (NI)
(-)
=
Dh 120 billion
Minus Social security contributions, corporate Taxes etc = Dh 12 billion
Plus Transfer Payments
(+)
=
Dh. 27 billion
Then Personal Income (PI)
=
Dh. (120 – 12 + 27) billion
=
Dh. 135 billion
E. Disposable Personal Income (DI)
DI is the total net amount left with the individuals and households
when they have paid direct taxes e.g. income tax is a personal
tax. It is deducted. DI is the amount, which they can dispose of
as they like. They may spend or save it.
Disposable income (DI) = PI – personal taxes.
Example:
personal income
=
Dh. 135 billion
Personal taxes ( - )
=
Dh 10 billion
Disposable Income (DI)
=
Dh (135 – 10 )
=
Dh 125 billion.
PER CAPITA INCOME (Average Income)
In order to know the average income of people of people in a country, per capita income is
calculated i.e. income per head of population. It is obtained when national income is
divided by population of the country.
Per Capital Income =
National Income
population
Let the national income of the country is Dh 600,000 million and the population estimated
as 120 millions. Then per capita income = 600,000/120 = 5000 Dh. Per capita income is
annual income is annual income per person. The concept of per capita income is helpful to
have an idea of the average standard of living of the people of a country. A high per capita
income shows that people have more to consume in terms of goods and services. Lower
PCI implies widespread poverty. If PCI of a country is compared over some years, we can
know whether the country is making any econo0mic progress and whether people’s living
standard is rising or not.
If we consider the case of the third world countries their PCI is very low compare to
developed countries like in dollar Pakistan PCI is 970 $, India got 590 $ while for USA or
Japan it is more then thirty six thousand. There are many economies, social and political
causes for low income level. An important factor, which keeps our per capita income low,
is the fast rising population.
Methods of computing national income
There are three methods of measuring national income of a country. They yield the same
result. These methods are;
1.
The product method.
2.
The income method and
3.
The expenditure method
4.
The product method:
Goods and services are counted in gross domestic
product (GDP) at their market values. The product approach defines a nation’s
gross product as that market value of goods and services currently
produced within a nation during a one year period of time.The product
approach measuring national income involves adding up the value of all the final goods
and services produced in the country during the year. Here we focus on various
sectors of the economy and add up all their production during the year. The main
sectors whose production value is added up are
1.
Agriculture sector
2.
Manufacturing sector
3.
Construction sector
4.
Transport and communication sector
5.
Banking sector 6. Administration and defence and
7.
Distribution of income.
Precautions for this approach
There are certain precautions which are to be taken to avoid miscalculation of national
income using this method. These in brief are:
i.
ii.
iii.
Problem of double counting:
when we add up the value of
output of various sectors, we should be careful to avoid double counting. This pitfall
can be avoided by either counting the final value of the output or by including the
extra value that each firm adds to an item.
Non-marked production and unpaid services.
Goods which are in the process of production.
Advantages and disadvantages: This method can be used where there exists a
census of production for the year. In many countries, figures of production of only
important industries are known. Hence, this method is employed along with other
methods to arrive at the national income. The one great advantage of this method is
that it reveals the relative importance of the different sectors of the economy by
showing their respective contribution to the national income.
The Income method
Income approach is an other alternative way of computing
national income. In the production process we pay to the factors
of production Land is paid rent, labor is paid wages , capital is
paid interest, and organizer is paid profit if we add all these we
will get national through income approach.
NI (Income Method) = (Rent + Wages + Interest + Profits)
In addition to the above four components of national income ,
three other items are to be added for to obtain national income.
These items are indirect business taxes paid by businessmen,
depreciation allowance and net factor payments from abroad.
The Expenditure method:
The expenditure approach measures national income as total spending on final goods and services
produced within nation during an year.
Total expenditure thus is the sum of four broad categories of expenditure.
i.
Consumption expenditure:
ii.
Investment expenditure:
iii.
iv.
consumption expenditure is the largest
component of national income. It includes expenditure on all goods and services produced
and sold to the final consumer during the year.
investment is the use of today’s resources to
expand tomorrow's production or consumption. Investment expenditure is expenditure
incurred on by firms on (a) new plants) adding to the stock of inventories and ( C) on
newly constructed houses.
Government expenditure: (G) it is the second largest component of national
income. It includes all government expenditure on currently produced goods and services
but excludes transfer payments while computing national income.
Net Exports: Total exports minus total imports. National income calculated
from the expenditure side is the sum of consumption, investment, investment government
and net exports. NI = C+I+G+(X - M)
Difficulties in the measurement of national income
According to kuznets, the measurement of national income is a
complicated problem and is besets with the following difficulties.
i.
Non-availability of statistical material
ii.
The danger of double counting.
iii.
Non-marketed services.
iv.
Difficulty in assessing the depreciation allowance.
v.
Housing.
vi.
Transfer earning.
vii. Self-consumed production.
viii. Price level changes.
ix.
Self- consumed-barter consumption.
x.
No systematic accounts maintained.
xi.
No occupational classification.
xii. Unreliable data.