Adavsh.R Adavsh.

R
Measuring the Measuring the
Production Production, , Income Income,,
and and Spending Spending oI oI
Nations Nations
National Income Accounts: National Income Accounts:
National Income Accounting represents the National Income Accounting represents the
tools and methods by which economists and tools and methods by which economists and
policy policy- -makers measure economic activity and makers measure economic activity and
economic growth over time. economic growth over time.
It measures the total value of the goods and It measures the total value of the goods and
services(output) produced by an economy over services(output) produced by an economy over
a period of time (normally a year).It is also a a period of time (normally a year).It is also a
measure of the income flown from production, measure of the income flown from production,
and/or the sum total of all spending involved and/or the sum total of all spending involved
for the production of output. for the production of output.
$tandard Measures of Income and Output: $tandard Measures of Income and Output:
W W Gross National Product (GNP) Gross National Product (GNP)
W W Gross Domestic Product (GDP) Gross Domestic Product (GDP)
W W Gross National Income (GNI) Gross National Income (GNI)
W W Net National Product (NNP) Net National Product (NNP)
W W Net Domestic Product (NDP) Net Domestic Product (NDP)
W W Net National Income (NNI) Net National Income (NNI)
W W Per Capita Income (PI) Per Capita Income (PI)
W W Personal Disposable Income (PDI) Personal Disposable Income (PDI)
In India, the In India, the Central $tatistical Organization (C$O) Central $tatistical Organization (C$O) has has
been estimating the National Income been estimating the National Income
GNP GNP : : the total value of output (goods and services) the total value of output (goods and services)
produced and income received in a year by produced and income received in a year by
domestic residence of a country domestic residence of a country
- - Includes the profits earned from capital invested abroad Includes the profits earned from capital invested abroad
GDP : GDP : the total value of output (goods and services) the total value of output (goods and services)
produced by the factors of production located produced by the factors of production located
with in the country`s boundary in a year with in the country`s boundary in a year
- - Factors of production (labor, capital, land) may be owned by Factors of production (labor, capital, land) may be owned by
any one (citizens or foreigners) any one (citizens or foreigners)
GNP GNP - - Net income earned from abroad GDP Net income earned from abroad GDP
NNP : NNP :decline in capital assets(plant & machinery) decline in capital assets(plant & machinery)
due to wear and tear is measured as due to wear and tear is measured as capital capital
depreciation` depreciation`
NNP GNP NNP GNP -- Depreciation Depreciation
Depreciation is usually 11 Depreciation is usually 11
NNP 89 of GNP NNP 89 of GNP
NDP : NDP : same as above, depreciation on GDP. same as above, depreciation on GDP.
NDP GNP NDP GNP -- Depreciation Depreciation
NNI : NNI : NNP NNP -- Indirect taxes that Business pay Indirect taxes that Business pay
Indirect taxes that Business pay nearly 10 Indirect taxes that Business pay nearly 10
NNI is nearly 90 of NNP NNI is nearly 90 of NNP
Per Capita Income (National Income per person) Per Capita Income (National Income per person) : :
an indicator to show the living standards of the people of an indicator to show the living standards of the people of
the country. the country.
PI is the total income received PI is the total income received -- whether it is earned or whether it is earned or
unearned unearned -- by the households of the economy before the by the households of the economy before the
payment of personal taxes. payment of personal taxes.
PI NNI PI NNI -- (Retained earnings, corporate taxes and interest (Retained earnings, corporate taxes and interest
on public debt) on public debt)
PDI PI PDI PI -- Personal taxes Personal taxes
limitations : limitations :
GNP is not considering the poverty, literacy, public GNP is not considering the poverty, literacy, public
health, gender equality etc. health, gender equality etc.
Needs for the study of National Income : Needs for the study of National Income :
1. 1. To measure the size of the economy and level of To measure the size of the economy and level of
country`s economic performance country`s economic performance
2. 2. To trace the trend or speed of the economic To trace the trend or speed of the economic
growth in relation to previous year(s) as well as growth in relation to previous year(s) as well as
to other countries to other countries
3. 3. To know the structure and composition of the To know the structure and composition of the
national income in terms of various sectors and national income in terms of various sectors and
the periodical variations in them the periodical variations in them
4. 4. To make projection about the future development To make projection about the future development
trend of the economy trend of the economy
Needs. Needs.
5. 5. To help Govt. to formulate suitable development To help Govt. to formulate suitable development
plans and policies to increase growth rates. plans and policies to increase growth rates.
6. 6. To fix various development targets for different To fix various development targets for different
sectors of economy on the basis of there sectors of economy on the basis of there
performance. performance.
7. 7. To help business firms in forecasting future To help business firms in forecasting future
demand for there products demand for there products
8. 8. To make international comparison of people`s To make international comparison of people`s
living standards. living standards.
Measuring National Income Measuring National Income
Supply oI Factors oI Production
(Land, Labour, Capital & Organization)
Payment Ior Commodities
Supply oI Commodities
Payment Ior Factor Services
(Rent, Wages, Interest and ProIit)
(Goods & Services)
(Commodity Price)
Fiims ]
Pioduceis
Houselolds ]
Consumeis
Public Business
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Circular Flow Circular Flow
of Income of Income
Circular Flow . Circular Flow .
Income (Y) received is equal to the consumption Income (Y) received is equal to the consumption
expenditure (C) made by the consumer expenditure (C) made by the consumer
Y C Y C
Other Components on national income Other Components on national income
$avings or Investments (I) $avings or Investments (I)
Public expenditure by Govt. (G) Public expenditure by Govt. (G)
Expenditure on net exports (X Expenditure on net exports (X- -IM) IM)
Y C + I + G + (X Y C + I + G + (X--IM) IM)
Circular Flow . Circular Flow .
Mcthods oI ca!cu!ating Nationa! Incomc Mcthods oI ca!cu!ating Nationa! Incomc
Thcvc avc thvcc appvoachcs to thc mcasuvcmcnt oI Thcvc avc thvcc appvoachcs to thc mcasuvcmcnt oI
nationa! incomc: nationa! incomc:
O O $pending or Expenditure Method $pending or Expenditure Method
O O Income Method Income Method
O O Production or Output Method Production or Output Method
Income Expenditure Output Income Expenditure Output
Y E O Y E O
Why output expenditure
&nsold output goes into inventory, and is counted as 'inventory investment.
..whether the inventory buildup was intentional or not.
In eIIect, we are assuming that Iirms purchase their unsold output.
$pending or Expenditure Approach $pending or Expenditure Approach
Thc spcnding appvoach dividcs GDP into Iouv avcas: Thc spcnding appvoach dividcs GDP into Iouv avcas:
O O ouscho!ds (Consumption cxpcndituvcs) ouscho!ds (Consumption cxpcndituvcs) (C) (C)
O O Busincsscs (Domcstic Invcstmcnt) Busincsscs (Domcstic Invcstmcnt) (I) (I)
O O Govcvnmcnt (Govt. cxpcndituvcs) Govcvnmcnt (Govt. cxpcndituvcs) (G) (G) and and
O O Fovcigncvs (Expovt (X) and Impovts (IM)oI Goods Fovcigncvs (Expovt (X) and Impovts (IM)oI Goods
and Scvviccs) and Scvviccs) (X (X--IM). IM).
GDP = E = C + I + G + (X GDP = E = C + I + G + (X--IM) IM)
cleie E is aggiegaie expendiiuie cleie E is aggiegaie expendiiuie
The Income Approach The Income Approach
O O Thc mcasuvc oI GDP avc ca!cu!atcd by adding a!! Thc mcasuvc oI GDP avc ca!cu!atcd by adding a!!
thc incomc cavncd by vavious Iactovs oI pvoduction thc incomc cavncd by vavious Iactovs oI pvoduction
which avc cngagcd in thc pvoduction oI output. which avc cngagcd in thc pvoduction oI output.
O O In addition to aggvcgatc incomc, nationa! incomc In addition to aggvcgatc incomc, nationa! incomc
and pcvsona! incomc avc a!so uscd as mcasuvcs oI and pcvsona! incomc avc a!so uscd as mcasuvcs oI
incomc. incomc.
It inc!udcs. It inc!udcs.
O O Wages and salaries Wages and salaries
O O Farm income Farm income
O O Rent Rent
O O $ales taxes $ales taxes
O O Depreciation (the amount of capital that has worn out Depreciation (the amount of capital that has worn out
during the year) during the year)
Income Approach. Income Approach.
W W Proprietors income /Income of self employed Proprietors income /Income of self employed (the profits (the profits
of partnerships and solely owned businesses, like a family of partnerships and solely owned businesses, like a family
restaurant) restaurant)
W W Interest Interest (only the interest payments made by business (only the interest payments made by business
firms are included and the interest payments made by firms are included and the interest payments made by
government are excluded). government are excluded).
W W Corporate profits Corporate profits which are subdivided into which are subdivided into
Corporate income taxes Corporate income taxes
Dividends Dividends
Undistributed corporate profits Undistributed corporate profits
The Production Approach The Production Approach
O O Thc mcasuvcs oI GDP avc Ca!cu!atcd by adding Thc mcasuvcs oI GDP avc Ca!cu!atcd by adding
thc tota! va!uc oI thc output (oI goods and thc tota! va!uc oI thc output (oI goods and
Scvvicc) pvoduccd by a!! activitics duving any Scvvicc) pvoduccd by a!! activitics duving any
timc pcviod, such as a ycav. timc pcviod, such as a ycav.
O O Thc pvoduction appvoach !ooks at GDP Ivom thc Thc pvoduction appvoach !ooks at GDP Ivom thc
standpoint oI va!uc addcd by cach input in thc standpoint oI va!uc addcd by cach input in thc
pvoduction pvoccss. pvoduction pvoccss.
O O majov cha!!cngc majov cha!!cngc -- pvob!cm oI doub!c counting pvob!cm oI doub!c counting
Out put oI many busincss = input oI somc othcv Out put oI many busincss = input oI somc othcv
Eg Eg : Out put oI : Out put oI tyvc tyvc industvy is thc input oI bikc industvy. industvy is thc input oI bikc industvy.
counting thc out put oI both industvics wi!! vcsu!t in doub!c.. counting thc out put oI both industvics wi!! vcsu!t in doub!c..
Real vs. Nominal GDP Real vs. Nominal GDP
GDP is the value of all final goods and services GDP is the value of all final goods and services
produced domestically. produced domestically.
Nominal GDP Nominal GDP measures these values using measures these values using
current prices current prices
Real GDP Real GDPmeasure these values using the prices measure these values using the prices
of a base year. of a base year.
GDP Deflator GDP Deflator
While real GDP captures living standard, While real GDP captures living standard,
cost oI living is measured by general price level. cost oI living is measured by general price level.
One measure oI the general price level is the One measure oI the general price level is the GDP GDP
Deflator Deflator, deIined as , deIined as
GDP deflator 100 ` Nominal GDP/Real GDP GDP deflator 100 ` Nominal GDP/Real GDP
Calculation Overview Calculation Overview
$imple Economy...No $imple Economy...No Govt Govt.no foreign trade .no foreign trade
Cconsumption Iinvestment Ssaving Y Income Cconsumption Iinvestment Ssaving Y Income
Output producedoutput sold Output producedoutput sold i.e i.e, , Y C + I .....(1) Y C + I .....(1)
Introducing Govt. in the above identity Introducing Govt. in the above identity
G G Govt. purchases oI goods and services Govt. purchases oI goods and services
TA TA all taxes all taxes
TR TR transIers to private sector (including interest) transIers to private sector (including interest)
NX NX net exports (exports net exports (exports imports) imports)
YD YD disposable income disposable income
Y C + I + G + NX....(2) Y C + I + G + NX....(2)
YD Y + TR YD Y + TR -- TA .....(3) TA .....(3)
YD C + $ ........(4) YD C + $ ........(4)
Calculation.. Calculation..
C YD C YD -- $ Y + TR $ Y + TR -- TA TA -- $ .......(5) $ .......(5)
Consumption is disposable income less saving Consumption is disposable income less saving
Or consumption is equal to income plus transIers less taxes and Or consumption is equal to income plus transIers less taxes and
saving saving
&sing RHS oI (5) in (2) : &sing RHS oI (5) in (2) :
Y ( Y TR Y ( Y TR TA TA S ) I G NX S ) I G NX
$ $ -- I (TR I (TR -- TA + G ) + NX .....(6) TA + G ) + NX .....(6)
Govt. budget deIicit, Govt. budget deIicit,
i.e., Excess oI private saving over investment total govt. i.e., Excess oI private saving over investment total govt.
expenditure consisting oI govt. purchases oI goods and expenditure consisting oI govt. purchases oI goods and
services(G) Govt. transIer payments (TR) net exports services(G) Govt. transIer payments (TR) net exports
amount oI taxes (TA) received by govt. amount oI taxes (TA) received by govt.
Problems in calculating National Income Problems in calculating National Income
O O Black Money : Black Money : It has created a parallel economy It has created a parallel economy
unreported economy which is equivalent to the size unreported economy which is equivalent to the size
oI oIIicially estimated size oI the economy oI oIIicially estimated size oI the economy
O O Non Non- -Monetization : Monetization : In most oI the rural economy, In most oI the rural economy,
considerable portion oI transactions occurs considerable portion oI transactions occurs
inIormally inIormally
O O Growing $ervice $ector : Growing $ervice $ector : growing Iaster than growing Iaster than
Agricultural and Industrial sectors. value Agricultural and Industrial sectors. value
addition in legal consultancy, health service addition in legal consultancy, health service
,Iinancial and business services is not based on ,Iinancial and business services is not based on
accurate reporting. accurate reporting.
Problems. Problems.
O OHouse Hold $ervices : House Hold $ervices : It ignores domestic It ignores domestic
work and house keeping services work and house keeping services
O O$ocial $ervices : $ocial $ervices : It ignores volunteer and It ignores volunteer and
unpaid social services. (Mother Teresa`s social unpaid social services. (Mother Teresa`s social
service) service)
O OEnvironment Cost : Environment Cost : It does not distinguish It does not distinguish
between environmental between environmental Iriendly and Iriendly and
environmental environmental hazardous industries . cost oI hazardous industries . cost oI
polluting industries is not included in the polluting industries is not included in the
estimate. estimate.
naLlonal lncome serles ln lndla
O O aiional Accouniing sysiem cas iniiiaied in ile mid aiional Accouniing sysiem cas iniiiaied in ile mid- -
sixiies sixiies
O O Indian Sysiem of aiional Accouniing siaiisiics follocs ile Indian Sysiem of aiional Accouniing siaiisiics follocs ile
N systcm N systcm of naiional accounis (i) of naiional accounis (i)
O O ased on ile ased on ile Nationa! Incomc Committcc's Nationa! Incomc Committcc's
iecommendaiion(i), ile iecommendaiion(i), ile Ccntva! Statistica! Ccntva! Statistica!
Ovganization(CSO) Ovganization(CSO) las been esiimaiing ile I las been esiimaiing ile I
O O le CSO ievised iis naiional accouniing seiies by slifiing le CSO ievised iis naiional accouniing seiies by slifiing
ile base yeai io io ile base yeai io io- -i . again io io i . again io io -- i and ilen io i and ilen io
i i- -.. iecenily by impioving ile daiabase and exiended .. iecenily by impioving ile daiabase and exiended
coveiage ile base yeai slified io i coveiage ile base yeai slified io i- -:ooo :ooo
@rends ln naLlonal lncome
iocil of aiional Income in India
(in peiceniage)
.4
9
9.2
8.4
6.2
8.3
4.3
Secioial Composiiion on aiional Income
1
International comparison of National income (2009) International comparison of National income (2009)
Thank You Thank You
Ref. Websites Ref. Websites
Government of India, Ministry of $tatistics Government of India, Ministry of $tatistics
http://mospi.gov.in/ http://mospi.gov.in/ or or http://www.mospi.nic.in/ http://www.mospi.nic.in/
Central Intelligence Agency (CIA) Central Intelligence Agency (CIA)
https://www.cia.gov/library/publications/the https://www.cia.gov/library/publications/the world world Iactbook/geos/in.html Iactbook/geos/in.html
Wikipedia Wikipedia
http://en.wikipedia.org/wiki/Grossdomesticproduct http://en.wikipedia.org/wiki/Grossdomesticproduct
India In Business India In Business
http://www.indiainbusiness.nic.in http://www.indiainbusiness.nic.in