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Needs
5. To help Govt. to formulate suitable
development plans and policies to
increase growth rates.
6. To fix various development targets for
different sectors of economy on the
basis of there performance.
7. To help business firms in forecasting
future demand for there products
8. To make international comparison of
peoples living standards.
NATIONAL INCOME
AGGREGATES
National Income at Current Price
Current Prices refer to the prices prevailing in the
market during the year for which estimates are
made.
National Income at Constant Price
Constant Prices refer to the prices prevailing in the
market in the base year. National income is
measured at both the levels in order to enable a
comparison.
GDP Deflator
Definition:
Measure of the price level calculated
as the ratio of nominal GDP to real
GDP times 100.
It tells us what portion of the rise in
nominal GDP that is attributable to a
rise in prices rather than a rise in the
quantities produced.
GDP Deflator = (Nominal GDP/Real GDP) x 100
Formula:
7
Public
real flow
money flow
Households /
Consumers
Business
Circular Flow
of Income
(Goods & Services)
Supply of Commodities
(Commodity Price)
Firms /
Producers
11
Intermediate goods
Goods that produced by one firm for the usage in
further processing by another firm.
The value of intermediate goods is not counted in
GDP because to avoid double counting.
Value Added
The difference between the value of goods as
they leave a stage of production and the cost
of the goods as they entered that stage.
Double counting can also be avoided by
counting only the value added to a product by
each firm in its production process.
(or)
GNP= (GDP (+) factor income received
from
abroad ()factor income paid
abroad)
16
Expenditure Method
Expenditure or outlay on final
products takes place in three
ways
Expenditure by consumers on goods
and services
Expenditure by entrepreneurs on
capital or investment goods
Expenditure by government on
consumption and capital goods
17
Definition:
Calculating GDP:
(1)The Expenditure Approach
GDP = C + I + G + NX
Durable good + Non-durable goods + Services (C)
(+) Residential Investment + Non-residential
Investment + Changes in inventories (I)
(+) Federal gov. + State gov. + Local gov. (G)
(+) (Export Import) (NX)
Gross Domestic Product (GDP)
20
Personal Consumption
Expenditures (C)
Precautions :
25
National Income= W + R + I + P
(i) (W)Wages: It is the largest component of
national income. It consists of wages and
salaries along with fringe benefits and
unemployment insurance.
(ii)(R) Rents: Rents are the income from
property received by households.
(iii) (I) Interest: Interest is the income private
businesses pay to households who have lent the
business money.
(iv)(P) Profits: Profits are normally divided
into two categories
(a) profits of incorporated businesses and
(b) profits of unincorporated businesses (sole
proprietorship, partnerships and producers
cooperatives)
Personal Income
The total income of households before
paying personal income tax.
31
Problems In Calculating
National Income
Black Money : It has created a parallel
economy - unreported economy which is
equivalent to the size of officially estimated
size of the economy
Non-Monetization : In most of the rural
economy, considerable portion of transactions
occurs informally
Growing Service Sector : growing faster than
Agricultural and Industrial sectors value
addition in legal consultancy, health service
,financial and business services is not based
on accurate reporting.
Problems
House Hold Services : It ignores domestic work
and house keeping services
Social Services : It ignores volunteer and
unpaid social services. (Mother Teresas social
service)
Environment Cost : It does not distinguish
between environmental-friendly and
environmental-hazardous industries cost of
polluting industries is not included in the
estimate.
DIFFICULTIES IN
MEASUREMENT OF
NATIONAL INCOME
IMPORTANCE OF NATIONAL
INCOME
Topics
Introduction
Definition
Types of Inflation
Causes of Inflation
Effects of Inflation
How is Inflation Measured
Consequences of Inflation
Measures Of Inflation
INTRODUCTION
In economics inflation means, a rise in general level of
prices of goods and services in a economy over a period
of time.
When the general price level rises, each unit of currency
buys fewer goods and services. Thus, inflation results in
loss of value of money.
Another popular way of looking at inflation is "too much
money chasing too few goods". The last definition
attributes the cause of inflation to monetary growth
relative to the output / availability of goods and services in
the economy.
In case the price of say only one commodity rise sharply
but prices of other commodities fall, it will not be termed
as inflation. Similarly, in case due to rumours if the price of
a commodity rise during the day itself, it will not be termed
as inflation.
DEFINITION
According to C.CROWTHER, Inflation
is State in which the Value of Money
is Falling and the Prices are rising.
In Economics, the Word inflation
Refers to
General rise in Prices
Measured against a
Standard Level
of Purchasing Power.
What is Stagflation :
Stagflation refers to economic condition where
economic growth is very slow or stagnant and
prices are rising.
The term stagflation was coined by British politician
Iain Macleod, who used the phrase in his speech to
parliament in 1965, when he said: We now have
the worst of both worlds - not just inflation on the
one side or stagnation on the other. We have a sort
of stagflation situation.
The side effects of stagflation are increase in
unemployment- accompanied by a rise in prices, or
inflation.
Stagflation occurs when the economy isn't growing
but prices are going up. At international level, this
happened during mid 1970s, when world oil prices
rose dramatically, fuelling sharp inflation in
developed countries.
What is Deflation ? :
Deflation is the opposite of inflation.
Deflation refers to situation, where there is
decline in general price levels. Thus,
deflation occurs when the inflation rate falls
below 0% (or it is negative inflation rate).
A general decline in prices, often caused by
a reduction in the supply of money or credit.
Deflation can be caused also by a decrease
in government, personal or investment
spending.
The opposite of inflation, deflation has the
side effect of increased unemployment since
there is a lower level of demand in the
economy, which can lead to an economic
depression.
What is Disinflation
Disinflation is commonly used by the
Federal Reserve to describe situations of
slowing inflation. Instances of disinflation
are not uncommon and are viewed as
normal during healthy economic times.
Although sometimes confused with
deflation, disinflation is not considered to
be as problematic because prices do not
actually drop and disinflation does not
usually signal the onset of a slowing
economy.
TYPES OF INFLATION
(a) DEMAND - PULL INFLATION: In this type of
inflation prices increase results from an excess of
demand over supply for the economy as a whole.
Demand inflation occurs when supply cannot expand
any more to meet demand; that is, when critical
production factors are being fully utilized, also called
Demand inflation.
(b) COST - PUSH INFLATION: This type of inflation
occurs when general price levels rise owing to rising
input costs. In general, there are three factors that
could contribute to Cost-Push inflation: rising wages,
increases in corporate taxes, and imported inflation.
[imported raw or partly-finished goods may become
expensive due to rise in international costs or as a
result of depreciation of local currency ]
Demand Pull:
This type of inflation happens when
the aggregate demand increases more
than
the supply
Price Level
AS
P1
P0
Y Y
A
D0
A
D1
X
Price Level
AS
0
P1
P0
AD
O
0
Quantity
1
OTHER TYPES OF
INFLATION
Hyper Inflation -:
CAUSES OF INFLATION
FACTORS ON DEMAND SIDE:
o Growth of population
o Rise in employment and income
o Increasing pace of urbanization
Contd
Monetary and Fiscal factors:
o Rising levels of government
expenditure
o Deficit financing
EFFECTS OF INFLATION
Effect on Economic Development : Rapid rise in prices is
detrimental to the process of growth and development
as, it adversely impacts the rate of saving and
investment.
Effect on Foreign Investment : Price rise has an adverse
effect on the foreign investment in the country. Foreign
investors do not invest in those countries where the
value of money tends to constantly eroding.
Adverse Effect on the People with Fixed Income : Price
rise has an adverse effect on the people with fixed
income. On account of rise in price level, the real value
of their monetary income goes down. They can buy less
goods than before.
MEASURES OF
INFLATION
Other measures:
Control prices
Wages Freeze
Dividend freeze
Population control measures
Increase in supply of goods
Public distribution of essential goods
POLICY OF GOVERNMENT TO
CHECK INFLATION
Monetary Policy
Fiscal Policy
Price Policy
MONETARY POLICY
Monetary policy refers to that policy through
which the government or Reserve Bank of India
controls the supply of money , availability of
money and the rate of interest in order to
attain a set of objectives focusing on the price
stability and economic growth of the country.
Monetary measures focuses on controlling the
supply of money as the most patent means of
checking inflation.
Bank Rate
Open Market Operation
Cash Reserve Ratio (CRR)
Statutory Liquidity Ratio (SLR)
Bank Rate
The interest rate at which a nation's central bank
lends money to domestic banks.
Often these loans are very short in duration.
Managing the bank rate is a preferred method by
which central banks can regulate the level of
economic activity.
Lower bank rates can help to expand the economy,
when unemployment is high, by lowering the
cost of funds for borrowers. Conversely, higher
bank rates help to reign in the economy, when
inflation is higher than desired.
The bank rate can also refer to the interest rate
which banks charge customers on loans.
FISCAL POLICY
The policy of Govt. related to the Revenue
and Expenditure is known as Fiscal Policy.
Fiscal policy is the means by which a
government adjusts its levels of
spending in order to monitor and
influence a nation's economy.
Taxation Policy
Government Expenditure Policy
Deficit Financing
Taxation Policy
Taxation forces the people to save for
the government. The government uses
taxation as a powerful instrument to
increase or decrease the real
purchasing power of the people.
Deficit Financing
deficit financing,It is a practice in which a
government spends more money than it receives as
revenue, the difference being made up by
borrowing or minting new funds.
Although budget deficits may occur for numerous
reasons, the term usually refers to a conscious
attempt to stimulate the economy by lowering tax
rates or increasing government expenditures.
PRICE POLICY
Price policy refers to the policy of
directing, regulating and controlling the
relative price structure of the economy
in such a manner that it favorably
impacts the macro economic parameters
like ; consumption , saving, investment,
production, etc.
BUSINESS
CYCLES
Cyclical nature:
Bo
o
GDP
Peak
Do
wn
tu
n
ur
t
Up
rn
Trough
time
growth
trend
Business Cycle
Boom
Recovery
Recession
Depressio
n
en d
r
T
wth
o
r
G
RECOVERY:
Business confidence returns
Production, sales and profits
increase
Employment increases
Price levels start increasing
New technology is adopted
BOOM:
Output levels increase to go
beyond the trend to a boom.
RECESSION:
Consumer demand falls
Investment already undertaken
appears unprofitable
New investment is unlikely
Production and employment fall
General price level likely to fall
DEPRESSION:
In the absence of any stimulus, to
aggregate demand, depression sets
in.
Three Attributes of
Economic Indicators
Procyclic: A procyclic (or procyclical) economic
indicator is one that moves in the same
direction as the economy.
So if the economy is doing well, this number is
usually increasing, whereas if we're in a
recession this indicator is decreasing. The
Gross Domestic Product (GDP) is an example of
a procyclic economic indicator.
Countercyclic: A countercyclic (or
countercyclical) economic indicator is one that
moves in the opposite direction as the
economy.
The unemployment rate gets larger as the
economy gets worse so it is a countercyclic
economic indicator.
Indicators:
indicator
recovery
boom
Industrial
production.
Gradual
increase
high
Commodity
prices
-do-
-do-
Cost of
production
Increases but
slower than
commodity
prices
Increase
faster than
recovery
profits
satisfactory
high
Investment
Replacement High
Employment Gradual
increase
Bank loans
Liberal
Speculation
Increases
Rapid
increase
High demand
for advances
high
Inventory
stocks
Business
failures
Business
expectations
Fall
Zero
Rare
Zero
Indicators:
Leading indicators include the following:
Average workweek for production workers in
manufacturing.
Unemployment claims.
New orders for consumer goods and materials.
Stock prices
Residential construction
Capacity utilization
Interest rate spread.
Changes in the money supply.
Procyclical vs
countercyclical
Variables which move in the same
direction as the GDP over the
business cycles are procyclical.
E.g consumption
Variables which move in the opposite
direction to GDP are countercyclical
E.g unemployment
Variables:
Pro-cyclical
Industrial production
Commodity prices
Cost of production
Profits
Investment
Wages
Bank loans
Countercyclical
Unemployment
Inventory stocks
Business failures