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8/7/2019 4TH MODULE-EE
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ECONOMICS ENVIRONMENT
MODULE ± 4
NATIONAL INCOME
ACCOUNTING
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NATIONAL INCOME
LEARNING OBJECTIVES
What is national income?
Importance of national income Concepts of National income
National income estimates in India.
Measuring National income Trends in National income
Difficulties in measuring national
income.
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NATIONAL INCOME
What is National Income?
National Income is the money value of
all goods and services produced in a
country during a year.
J.M Keynes
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National IncomeNational income is generally defined as income of the nation.
It reveals the nature of economic activity in a country.
Alfred Marshall, defines National Income as The labour and
capital of country acting on its natural resources, produced
annually a certain net aggregate of commodities, material
and immaterial including services of all kinds.
NI- expressed with reference to a period of time, namely a
year
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NATIONAL INCOME
While family income reflects the economic
Position of household, national income shows
the economic position of a Nation.
The basic objective of an economy is to achieve
economic Progress.
National income ² help assess & compare the
progress achieved by a country over a period of
time
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DIFFERENT CONCEPTS OF NATIONAL INCOME
There are five concepts of National Income:
1. Gross National Product- TMVFGS/A IG
Acc. Only MVFGS/A to avoid DC.
Ex: Bread & Maida flour or steel for motor
car.2. Gross Domestic Product : AVOGS/A - FI
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DIFFERENT CONCEPTS OF NATIONAL INCOME
3. Net National Product MVFGS/A D
4. National Income (at factor cost & at MP)
NI at factor cost includes only the factor resources taxes depreciation + subsidies.
NI at Market price includes FC +taxes subsidies +
depreciation
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DIFFERENT CONCEPTS OF NATIONAL INCOME
Ex: A motor car costs 1.3 lakhswhich includes excise duty of Rs.30,000. Market price of a caris 1.3 lakhs.
While the factors engaged inproduction get Rs.1.00 lakhs.
Thus the value of national
income at factor would be
Equal to the market pricesminus the indirect taxes plussubsidies.
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NATIONAL INCOME -CONCEPTS
PERSONAL INCOME : PI is that income actually received by
the individuals or households in a country during the year,
from all sources.
DISPOSABLE INCOME: DI is that part of income which is left
behind after the payment of direct taxes is called Disposable
Personal Income.
Disposable income can either be consumed or saved.
Therefore Disosable Personal Income =Consumption +Savings
DPI = PI - TAXES
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IMPORTANCE OF NATIONAL INCOME
1. With national income, we can chart the movement of country from depression to prosperity.
2. The economic welfare of community can bemeasured with national income.
3. It helps in finding standard of living.
4. It helps in determining the pace of economicdevelopment of the economy.
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IMPORTANCE OF NATIONAL INCOME
5. It helps to understand the contribution madeby different sectors to the economy.
6. It helps in development planning of acountry.
7. It provides information of the savings,consumption and investment structure of the economy.
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DIFFERENT CONCEPTS OF NATIONAL INCOME
GNP- -defined as the total market value of final goodsand services produced in a year.
The money value of only final goods to be considerednot the value of intermediate goods.
GDP- aggregate values of output of goods and servicesproduced in a country without adding net factorincomes received from abroad.
NNP means the market value of all final goods andservices after providing for depreciations.
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DIFFERENT CONCEPTS OF NATIONAL INCOME
NNP means the market value of all final goods andservices produced in a year is considered.
It means that in the production of goods & services ,there is the consumption of capital goods such asequipment & machinery.
To get NNP the value of depreciation has to bereduced from GNP.
Hence NNP=GNP-Depreciation
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DIFFERENT CONCEPTS OF NATIONAL INCOME
3. NI at factor cost shows how much it costs tosociety in terms of economic resources for their
contribution of land, labour , capital andentrepreneurial ability which go into the years net production.
NI at factor cost=NI at market prices taxes-depreciation + subsidies
NI at market price = NI at factor cost +taxes subsidies +depreciation
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METHODS OF MEASURING NATIONAL INCOME
National income of an economy can bemeasured in three ways.
y Product Method
y Income Method
y Expenditure Method
Each method gives the same result, there is no question of
appropriate method Application of suitable method depends upon
various factors such as, availability of data, nature of economic
activity, economic and social structure..
So for calculatin national income a combination of all three
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Measurement of national income
Product method Estimation of goods & services produced in 3 sectors.
The sum total of products produced in these three sectorsis the output of the nation.
GNI- Money value of total goods & services + Incomefrom abroad.
This method helps us to find out contributions of varioussectors to national income
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Primary Secondary Tertiary
Agriculture & allied
products
Registered industries Communications
Forest Non registeredindustries
Banking Insurance
Fishing Electricity Public administration
Mining Trade Health
Manufacturing Education
Other services.
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Measurement of national income
Product methodUnder Product method, following categories of production are
added in order to find out GNP(NI)
(a) Product of agricultural sector total value of food grains
produced by the farmers in the country during a year.
(b) Product of Industrial Sector Total market value of all goods
produced in various industries like electronics, cement, steeletc. in a country during a year.
(c) Products of trade: induces income resulting from variousactivities which are connected to internal trade
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Measurement of national income
Product method(e) Service sector incomes: total value of the proceeds of the
service sector namely, the services of government servants,doctors, lawyers, soldiers, singers, players etc.,
(f) Foreign trade: value of exports income earned abroad to beadded and the value of imports or payments made abroadshould be deducted.
(g) Indirect Taxes and Subsidies: indirect taxes which are includedin the price should be deducted to get exact market value of the goods.
Subsidies given by Govt to certain products should be added tocalculate the exact value of the product
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Measurement of national income
Expenditure methodNational income also calculated by adding up theexpenditure incurred for goods and services. Government as
well as individuals spend money for consumption andproduction purposes.
The sum total of expenditure incurred in a country during ayear will be equal to national income.
GNI=Individual expenditure + Government Expenditure
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Measurement of national income
Expenditure methodExpenditure approach following categories of expenditure are added in
order to find out the GNP
(a) Personal Consumption expenditure : on durable goods & non durable goods produced in a country during a year.
Expenditure on services, such as transport , education and medical.
Expenditure on household.
(b) Government purchase of goods and services : goods such as paper,stationery, machinery, equipment etc.,
Services: Govt. incurs expenditure on payment of salaries t Militarypersonnel, police and administration.
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Measurement of national income
Income methodExpenditure made by the people in a country on goods and services
produced in a country during a year becomes the income of the various
Factors.
The factor income is grouped into following categories:
Wages and salaries
Income of Company business
Rental incomes of persons
Corporate profits
Income from net interest
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SIGNIFICANCE OF NATIONAL
INCOME ESTIMATES.
1.The national income of a country reveals the pictureof the economy. Indicates rise in standard of living ±reveals the improvement of economic welfare
2.NI ±reveals overall production in each year ±revealreal growthThe economy- if growth is stagnant ± measures can
be adopted to increase NI
3.NI shows the contribution made by different sectorsof the economy.
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SIGNIFICANCE OF NATIONAL
INCOME ESTIMATES.
3.NI estimates throws light on the three major aspects
of the economy namely , consumption, savings, andinvestment.
4.NI figures used to measure the economic welfare indifferent countries
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SIGNIFICANCE OF NATIONAL
INCOME ESTIMATES.
6.From the NI estimates, we can also see the partplayed by the government in the national
economy.
7.No, development planning is possible withoutcomplete study of national income estimates.
8.NI estimates are very useful in formulating plansfor the development of agriculture, Industry, andinfrastructure etc.,
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TRENDS IN NATIONAL INCOME
1. Trends in Net National Product
2. Trends in distribution of NI by industrial origin
3. Trends in the share of Public sector
4. Urban & Rural break-up
5. Share of organized & unorganised sector in NDP
NI & changes in the structure of national product
analyzed over the Past 50 years
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TRENDS IN NATIONAL INCOME
1. Trends in Net National Product:
The increase in the production of goods & services indicates thegrowth more goods & services are available to people & alsoindex of total productive effort of the community
2. Trends in distribution of NI by industrial origin
1950-51 : Agriculture contributed to 48.6% of GDP & fell to
24.2% in 1997-98
Share of fishing in GDP remained constant throughout the fiveDecades Share of forestery shows continues decline from 5% to1.1%
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TRENDS IN NATIONAL INCOME
Share of secondary sector- include mining , mfrg, construction,
electricity, gas & water supply has shown steady increase from
16.1% of GDP to 27%.
Share of tertiary sector includes trade & transport, communications
banking, insurance, real estate amd community & personal services
improved from 28.5 % to 46.6%
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TRENDS IN NATIONAL INCOME
3. Trends in the share of Public sector: share of the
govt.sector was 7.6% and rose to 23.3% - direct result
of expansion of economic activities.
4.Urban & Rural break-up: Urban rural disparity ratio in
percapita NDP was 2.45 in 1970 -71 & it declined to 2.39
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TRENDS IN NATIONAL INCOME
5. Share of organized & unorganised sector in NDP
Organised enterprises- either registered or come under
the purview of any of the acts and maintain annualaccounts and balance sheets.
Unorganised enterprises include all unincoraporatedenterprises and household industries which are regulatedby any one of the acts & do not maintain annual accountsor balance sheets.
Share of Organised sector has risenShare of unorgnised sector has fallen
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IMPORTANT TRENDS IN NATIONAL NATIONAL INCOME
The rate of growth of GDP since 1950 around 4.5 %.
1950 1980 : Growth rate hovered around a low of 3.5 %
Growth rate remain stuck at the low level for long.
1980-81 to 1991 -92:Break from this trend came in the 1980s
with the growth rate going above 5%.
1992 -93 to 2001-02 : growth rate further accelerated to 6.5%
Thereafter the rise was rapid and large .
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IMPORTANT TRENDS IN NATIONAL NATIONAL INCOME
As for the sectoral contributions to the GDP all the three sectors
have added to the final outcome
However, differences in the contributions of different sectors overTime.
1950 1980 : early low growth phase of three decades
Agriculture was an important contributor, alongside industry and
service sector.
In the recent high growth phase since 1980, the service sector,
with the fastest growth, emerged as the largest contributor
followed by industry and agriculture.
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DIFFICULTIES IN THE MEASUREMENT OFNATIONAL INCOMEMeasurement of national income is not an easytask.
1. Difficulty in defining the Nation NIincludes not only the income produced within
the country, but also income earned in othercountries.
2. Non availability of a data about the incomeof small producers or household enterprises.
3. The error of double counting- failure todifferentiate final and intermediate goods.
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DIFFICULTIES IN THE MEASUREMENT OFNATIONAL INCOME
5. Unpaid services: services performed for love, kindness andmercy and not for money have no money value
But have only economic value. These are excluded from
NI figures and leads to the under estimation of the NI.
6. Individuals do not keep correct account of theirconsumption.
7. Illiteracy and ignorance.
8. Lack of proper criteria for measuring the value of services.
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DIFFICULTIES IN THE MEASUREMENT OFNATIONAL INCOMEThe services of housewives is not included in the NI
because is not sold in the market.
6. Income for illegal activities: black marketing, gambling,smuggling etc., not included in the national income thus
reducing the real value of the national income.
7. The out put of non monetised setor: India- agriculturebased - considerable portion of the out put does not cometo the market for sale.
8. The non co-operation of the people: Major part of thepopulation are illiterate and hence may not co-operate inproviding the information is needed for the estimation of NI.
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CIRCUL AR FLOW OF INCOMEPresent day world- production is carried mainly for the purpose of
sale in the market.
To produce wide variety of goods the business firms combine
various factors of production and try to sell those goods in the
market.
In the economy, the sales made by the business firm generate flowof money income which are used to make payments to the factors
of production for their services.
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CIRCUL AR FLOW OF INCOMEIn a modern capitalist economy the process of production and
exchange generate two kinds of circular flows:
House holds supply various factors of production demanded by
Business firms.
1. Business firms pay rewards in cash for the factor services supplied by the house holds.
Households Firms
Consumption expenditure (money flow)
Payment to factor service(money flow)
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CIRCUL AR FLOW OF INCOME
Consumption expenditure (money flow)
Payment to factor service(money flow)
In an economy Production processes & markets generatestwo types of flows:
1. A supply of factor services by the household to theproduction process of firms.
2. After production goods & services are sending to the
market by firms for selling to house hold.
Some types of flow which is circular in a nature takes place-called real flow.
Another type of flow called- money flow- production firmspay in cash for goods & services they get from house holds.
Money so received by HH will be spent on required goods & services produced by firms.
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Circular flow of incomeIn every economy, irrespective of size of population,
this flow forever.
Circular flow of income in two sector model acts as a
base for measuring national income and expenditure.
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SAVINGS The income received by households will have two channels:
1. Consumption Expenditure
2. Savings
Y=C+S
In a circular flow two situations can occur
1. Withdrawl of money out of income(leakage)
2. Introduction of income into circular flow(injection)
Leakage occurs because savings of the households ,tax paid to
government, payments for imports.
injection form of investment , govt. spending & exports.
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Consumption & Savings relationship
Relationship between savings & consumption implies that every HH do not spend all money received from firms towards consumption & a portion will besaved.
Savings impact on circular flow of money & income .Both decline due to savings.
If HH keeps savings for liquidity purposes leakage occurs.
If savings is kept in a bank or any other financial institutions it becomesproductive.
Thus money withdrawn from circular flow will be coming back to the firms indifferent circuit.
In this process another concept emerged INVESTMENT emerges
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INVESTMENTSWhat is Investment?
Investment is a term referred to capital expenditure made by firms.
This expenditure will be in the form of capital goods like land, building, plant machinery etc., without which firm cannot produce goods for households.
Investment comes from two sources viz., borrowings & retained earnings.
Investment will be an addition to circular flow of income.
S & I in any economy need not be necessarily equal as investment takesplace by firms and savings by the people.
S>I or I>S
Normally investment will be more than savings. There will be leakage incircular flow of income due to savings.
This leakage will be neutralized by injection in the investment.
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MODULE-4
THE END
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DIFFICULTIES IN MEASURING
NATIONAL INCOME
1. The out put of the non-monetized sector.
2. Non-availability of data about the income of small
producers or household enterprises
3. Absence of data on income distribution
4. Unreported illegal income