Economic Trends National Income and Its Components

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BUSINESS ENVIRONMENT

UNIT II

ECONOMIC TRENDS:

OVERVIEW

SUBJECT EXPERT

CA. AMITA BISSA



OBJECTIVE OF THE LECTURE

• METHODS OF COMPUTATION OF NATIONAL

INCOME

• THE CONCEPT OF NATIONAL INCOME AS AWHOLE

• TO KNOW NATIONAL INCOME OF OUR

COUNTRY



NATIONAL INCOME

National Income

The sum total of the values of all goods and

services produced in a year & it also includes

net earned foreign income. It is the money

value of the flow of goods and services

available in an economy in a year. National

income is a flow not a stock.



NATIONAL INCOME

National Income: DEFINTION

National Income Committee of India 1951defines National Income as follows:

“ A national income estimate measures the

volume of commodities and services turned outduring a given period counted without

duplication.”



National Income concepts



Gross DomesticProduct - GDP

Gross NationalProduct – GNP

Net NationalProduct – NNP

NATIONAL INCOME CONCEPTS

PersonalIncome – PI

DisposablePersonal Income

– DPI

Per capita

Income – PCI



GROSS DOMESTIC PRODUCT



GROSS DOMESTIC PRODUCT

Gross Domestic Product (GDP) is a measure

of the income and expenditures of aneconomy. It is the total market value of all

final goods and services produced within a

country in a given period of time.



MEASURE OF GROSS DOMESTIC

PRODUCTOutput is valued at market prices . It records only

the value of final goods , not intermediate goods

(the value is counted only once). It includes both

tangible goods (food, clothing, cars) and intangible

services (haircuts, housecleaning, doctor visits).



MEASURE OF GROSS DOMESTIC

PRODUCTIt includes goods and services currently produced ,

not transactions involving goods produced in the

past. It measures the value of production within

the geographic confines of a country. It measures

the value of production that takes place within aspecific interval of time , usually a year or a quarter

(three months)



WHAT IS COUNTED IN GROSS

DOMESTIC PRODUCT



COUNTED IN GROSS DOMESTIC

PRODUCT

GDP includes all items produced in the economy

and sold legally in markets

BUT

GDP excludes most items that are produced and

consumed at home and that never enter the

market - place. It excludes items produced and

sold illegally, such as illegal drugs.



National Income – Valuation

method



DOUBLE COUNTING- NATIONAL

INCOMEIf steel has been evaluated in industrial production, it should

not be included while calculating the value of steel products,

viz, machines and motor cars.

To avoid double counting or multiple counting, two methods

are used

Final products method

Value added method



Final Product Method

Adding the value of final products only

Value added method:

Go on adding the values created at each stage in the

manufacture of a commodity .Then all such values createdare added up together to arrive at the national income of

the country



GROSS NATIONAL PRODUCT

Gross National Product

Gross National Product (GNP) is the total income

earned by a nation’s permanent residents

(called nationals). It differs from GDP by

including income that our citizens earn abroad

and excluding income that foreigners earn here.



GROSS NATIONAL PRODUCT IN

EQUATION FORMGNP=GDP+X-M

X=Income earned & received by nationals within the

boundary of foreign countries.

M=Income received by foreign nationals from with in

the country.

If X=M ; then GNP=GDP

Similarly, in a closed economy X=M=O, then also

GNP=GDP



NET NATIONAL PRODUCT



NET NATIONAL PRODUCT

Net National Product (NNP) is the total income of

the nation’s residents (GNP) minus losses from

depreciation.

Depreciation is the wear and tear on the economy’s

stock of equipment and structures Therefore

NNP=GNP-Depreciation



National Income



NATIONAL INCOME

National Income is the total income earned by a

nation’s residents in the production of goods

and services. It differs from NNP by excluding

indirect business taxes (such as sales taxes) and

including business subsidies.

NI = NNP- Indirect Tax + Subsidy



Personal Income



PERSONAL INCOME

Personal Income earned by all the individuals

and institutions during a year in a country .

The entire national income does not reach

individuals and institutions

- A part of it goes by way of corporate taxes

- Undistributed profits

- Social security contributions.



PERSONAL INCOME

Persons sometimes gets income without any

productive activities. They are called transfer

payments. Example

Unemployment benefits, old age pensions etc.

such transfer payments are not included in

National Income but they are included in

personal income



PERSONAL INCOME

PI is computed using the following formula

PI = NATIONAL INCOME- ( CORPORATE TAXES,UNDISTRIBUTED PROFITS, SOCIAL SECURITY

CONTRIBUTIONS) + TRANSFER PAYMENTS



Disposable Personal

Income



DISPOSABLE PERSONAL INCOME

Disposable Personal Income is the income that

household and non-corporate business is left

after satisfying all their obligations to the

government. It equates personal income minus

personal taxes and certain non tax payments.

DIP = Personal Income(PI) - Direct Taxes



Per Capita Income



PER CAPITA INCOME

If National Income is divided by total

population , we get per capita income

Per Capital Income = NATIONAL INCOME

POPULATION



COMPUTATION

OF NATIONAL

INCOME

PRODUCTION METHOD

OR

CENSUS METHODINCOME METHOD

EXPENDITURE METHOD



Production Method



PRODUCTION METHOD

WHERE ,

O = OUTPUT

C = CONSUMPTION OF GOODS

I = INVESTMENT GOODS

O= C +I



INCOME METHOD

According to this method, net

income of individuals andbusiness houses during a year are

added to know the national

income.



INCOME METHOD

Only those incomes earned and received forproducing goods and for rendering services are to

be counted

Transfer payments such as old age pensions ,

widow pensions and unemployment benefits etc

should not be counted as these are the incomes

received without contributing to the production



INCOME METHOD

People get incomes in the form of Rents,

wages or salaries, interest and profit

The formula is

Y = C + S

Here Y stands for Total Income

C stands for consumption and

S stands for Savings



Expediture Method



EXPENDITURE METHOD

One man’s income is another man’s

expenditure Therefore, national income can be

arrived at by adding the total expenditure of

individual and business firms during a year.



EXPENDITURE METHOD

Expenditure or outlay on final products takes place in

three ways

1. Expenditure by consumers on goods and services.

2. Expenditure by entrepreneurs on capital and

investment goods.

3. Expenditure by government on consumption and

capital goods



EXPENDITURE METHOD

WHERE ,

Y = TOTAL EXPENDITURE

C = CONSUMPTION EXPENDITUREI = INVESTMENT EXPENDITURE

Y= C +I



DIFFICULTIES IN COMPUTING

NATIONAL INCOME

The following are the practical difficulties in the

measurement of national income

1. The statistics are not fully available

2. Non-monetized sector is dominant

3. Most people take out their livelihood from more than

one activity



DIFFICULTIES IN COMPUTING

NATIONAL INCOME

4. In backward economies like India, particularly in the rural

sector.

5. In developing economics like India, particularly in the

rural sector, the cultivators and small producers are

illiterate and they do not keep books of account. This is the

serious difficulty in the calculation of national income.

6. Avoidance of double counting becomes complicated.



GDP real Growth Rate

( in percentage)

4.30%

8.30%

6.20%

8.40% 8.20%

9%

7.40%

2003 2004 2005 2006 2007 2008 2009





CURRENT ECONOMIC

PROFILE OF INDIA

Gross Domestic Product during 2011-12 [at

current prices] : US$ 1680.69 billion

(Rs 82.8 trillion)



CURRENT ECONOMIC

PROFILE OF INDIA

Gross Domestic Product during 2011-12 [at

constant (2004-05) prices]: US$ 1060.42 billion

(Rs 52.2 trillion)

Gross Domestic Product growth rate during 2011-

12 : 6.9 per cent



CURRENT ECONOMIC

PROFILE OF INDIA

Per capita income during 2011-12

[at current prices] : US$ 1237.13

A (Rs 60972 )


[at constant (2004-05) prices] : US$ 771.72 (Rs 38005



CURRENT ECONOMIC

PROFILE OF INDIA


[at current prices] : US$ 1237.13 (Rs 60972 )


[at constant (2004-05) prices] :

US$ 771.72 (Rs 38005)



SUMMARY

Documents

Economic Trends National Income and Its Components