National Income and Related National Income and Related

AggregatesAggregates Dr. Roopali Srivastava

Department of ManagementITS, Ghaziabad

Circular Flow Of IncomeCircular Flow Of Income The process of production is a continuous process. The process of production is a continuous process.

In it, various FOP such as land ,labor, capital & In it, various FOP such as land ,labor, capital & entrepreneurship are combined together for the entrepreneurship are combined together for the production of goods & services.production of goods & services.

The supply of these FOP come from these FOP from The supply of these FOP come from these FOP from households. These factors offers their services to households. These factors offers their services to the producers (also known as firms) who in returns the producers (also known as firms) who in returns produce goods &services & make payments as produce goods &services & make payments as reward in the form of rent, wages, interest & reward in the form of rent, wages, interest & profits. profits.

The households spend this money on goods & The households spend this money on goods & services produced by the firms. Thus income or services produced by the firms. Thus income or money first flows n he firms to the households in money first flows n he firms to the households in the form of factor payments & then from the firms the form of factor payments & then from the firms to the households in the form of consumption to the households in the form of consumption expenditure.expenditure.

The income continue to flow in a circular way so it The income continue to flow in a circular way so it is called circular flow of income.is called circular flow of income.

Two Sector ModelTwo Sector Model

Households Producers

Factor Services

Factor Payments

Goods & Services

Payment For Goods & Services

In the previous model ,it is assumed that In the previous model ,it is assumed that household sector and firms do not save at all. But household sector and firms do not save at all. But in actual practice it does not happen so. in actual practice it does not happen so. Households save some part of their income for Households save some part of their income for various reasons like precautionary reasons, various reasons like precautionary reasons, transactionary reasons &speculative reasons. transactionary reasons &speculative reasons.

Similarly firms also save some of their receipts for Similarly firms also save some of their receipts for reasons like-expansion of their business etc.reasons like-expansion of their business etc.

All the banking institutions, insurance companies All the banking institutions, insurance companies & financial houses taken together constitute & financial houses taken together constitute capital market of the economy.capital market of the economy.

From capital market these savings flow to firms From capital market these savings flow to firms as loans for investment.as loans for investment.

Two Sector Model With Two Sector Model With SavingsSavings

Households Producers

Factor Services

Factor Payments

Goods & Services

Payment For Goods & Services

CapitalMarket

SavingsBorrowings

Savings Borrowings

Three-Sector Model With SavingsThree-Sector Model With Savings

Households Producers

Factor Payments

Payment For Goods & Services

CapitalMarket

SavingsBorrowings

Savings Borrowings

Government

Sa

vin

gs

Bo

rro

win

gs

Paym

ents

Direct

Taxe

s

SubsidiesIndirect

Taxes

Four-Sector Model Four-Sector Model

Households Producers

Factor Payments

Payment For Goods & Services

CapitalMarket

SavingsBorrowings

Savings Borrowings

Government

Sa

vin

gs

Bo

rro

win

gs

Tran

sfer

Paym

ents+Fa

ctor

Paym

ent+Socia

l

Service

sDirect

Taxe

sSubsidie

sIndirect Taxes

Rest of the world

P f

E P f

I

Pay.re.on gov.a/cf E

Factor Servicesp.made g.a.

Withdrawals & InjectionsWithdrawals & Injections

In reality, however, there are leakages from and In reality, however, there are leakages from and additions to the circular flows of income and additions to the circular flows of income and expenditureexpenditure

The leakages and additions are also called The leakages and additions are also called

withdrawals and injections, respectivelywithdrawals and injections, respectively..

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WithdrawalsWithdrawals Withdrawal is the amount that is set aside by the Withdrawal is the amount that is set aside by the

households and the firms and is not spent on the households and the firms and is not spent on the domestically produced goods and services over the domestically produced goods and services over the period of time . period of time . Example a household sets aside a Example a household sets aside a part of income for old age or against the loss of job.part of income for old age or against the loss of job.

Saving is a withdrawal.Saving is a withdrawal. When savings are invested, they take a form of When savings are invested, they take a form of

injectionsinjections Firms may also withhold a part of their total receipts Firms may also withhold a part of their total receipts

and may not return it to the circular flows in the form and may not return it to the circular flows in the form of factor payments in anticipation of depressionof factor payments in anticipation of depression

Such withdrawals reduce the size of circular flowsSuch withdrawals reduce the size of circular flows S+T+M S+T+M

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InjectionsInjections Amount that is spent by households and firms in Amount that is spent by households and firms in

addition to their incomes generated within the addition to their incomes generated within the regular economyregular economy

Injection by the household may be in the form of Injection by the household may be in the form of spending inherited savings or the hoardingspending inherited savings or the hoarding

Firms can inject money by spending their Firms can inject money by spending their retained earnings or borrowing from outsideretained earnings or borrowing from outside

Injections increase the size of circular flows Injections increase the size of circular flows I+G+XI+G+X

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Factorpayments

Factorpayments

Consumption ofdomestically

produced goodsand services (Cd)

Consumption ofdomestically

produced goodsand services (Cd)

Investment (I)Investment (I)

Governmentexpenditure (G)

Governmentexpenditure (G)

Exportexpenditure (X)

Exportexpenditure (X)

BANKS, etc

Netsaving (S)

Netsaving (S)

GOV.

Nettaxes (T)

Nettaxes (T)

ABROAD

Importexpenditure (M)

Importexpenditure (M)

The circular flow of incomeThe circular flow of income

WITHDRAWALS

INJECTIONS

National IncomeNational Income

Refers to the money value of all final goods & Refers to the money value of all final goods & services produced by residents of a country while services produced by residents of a country while working both within or outside the domestic working both within or outside the domestic territory in an accounting year.territory in an accounting year.

NI is expressed in monetary terms.NI is expressed in monetary terms. It reflects the value of final goods & services.It reflects the value of final goods & services. NI Is expressed over 1 financial year.NI Is expressed over 1 financial year.

National Income -National Income -Excluded Excluded ItemsItems

NI excludes sale & purchase of second hand goods.NI excludes sale & purchase of second hand goods. It excludes income from illegal activities – smuggling, It excludes income from illegal activities – smuggling,

black marketing, gambling etc.,black marketing, gambling etc., It does not includes transfer payments – old age It does not includes transfer payments – old age

pension, scholarship to students etc.,pension, scholarship to students etc., Transfer payment are those earning for which no Transfer payment are those earning for which no

contribution is made to the flow of goods & services.contribution is made to the flow of goods & services. In other words they are not earned but received only.In other words they are not earned but received only. T.P are received without doing or producing any T.P are received without doing or producing any

commodity or services. commodity or services.

Concepts of National Concepts of National IncomeIncome

GDP GDP GNPGNP NDPNDPMPMP

NDPNDPFCFC

NNPNNPMPMP

NNPNNPFCFC

Private IncomePrivate Income Personal IncomePersonal Income Personal Disposable IncomePersonal Disposable Income National Disposable IncomeNational Disposable Income

GROSS & NET –: DEPRECIATIONGROSS & NET –: DEPRECIATION Gross Product =Net Product + Gross Product =Net Product +

Depreciation Depreciation NATI0NAL PRODUCT & NET PRODUCT -:NFIANATI0NAL PRODUCT & NET PRODUCT -:NFIA

National Product=Domestic Product+ NFIANational Product=Domestic Product+ NFIA PRODUCT at MARKET PRICE & FACTOR PRICE-:NITPRODUCT at MARKET PRICE & FACTOR PRICE-:NIT

Product at Market Factor =Product at Factor Product at Market Factor =Product at Factor Cost+ Net Indirect TaxCost+ Net Indirect Tax

Net Indirect Tax=Indirect Taxes - SubsidiesNet Indirect Tax=Indirect Taxes - Subsidies

Concepts related to National Concepts related to National Income(NNPIncome(NNPFCFC))

GDP : Value of all final goods and GDP : Value of all final goods and services produced within the services produced within the domestic territory of a country during domestic territory of a country during an accounting year.an accounting year.

GNP = GDP + Net factor income from GNP = GDP + Net factor income from abroadabroad

Gross Domestic Product (GDP)

Gross National Product (GNP)

It refers to the money value of all final goods & services produced within the domestic territory of a country .

It refers to the money value of all the final goods & services by the normal residents of a country.

It is a domestic concept as it is concerned with the domestic territory of a country.

It is a national concept because it is concerned with the normal resident of a country.

GDP = P(G) + P(S) GNP = GDP + NFIA

If we add net factor income from abroad to it, we get GNP.

If we subtract NFIA from it we get GDP.

GDP would be greater that GNP, if NFIA is negative.

GNP>GDP if NFIA is positive.

Net Domestic Product at Market Price (NDPMP)

Net National Product at Market Price (NNPMP)

It refers to the money value of all final goods & services produced within the domestic territory in a year.

It refers to the money value of all the final & services by the normal residents of a country.

It is a domestic concept as it does not include NFIA.

It is a national concept because it includes NFIA

NDPMP = GDPMP – Depreciation = NNPMP - NFIA

NNPMP = GNPMP – Depreciation = NDPMP + NFIA

National Domestic Product (NDPMP)

National Domestic Product (NDPFC)/ Domestic income

It refers to the market value of all final goods & services produced both by residents or non-residents within the domestic territory of a country

in an accounting year.

It is the income received by the factors of production while working within the domestic territory of the country in a year.eg-Rent , Inerest , Wages , Profits

Net Indirect Taxes are included in it.

Net indirect taxes are not included in it.

NDPMP = NDPFC + Indirect Taxes - Subsidies

NDPFC = NDPMP – Indirect Taxes + Subsidies

Calculation of National Calculation of National IncomeIncome

There are three successive phases in There are three successive phases in the circular flowthe circular flow

Production Expenditure

Income

Value added method/Product MethodValue added method/Product Method Income methodIncome method Expenditure methodExpenditure method

Methods of Measuring NIMethods of Measuring NI

Steps involved in Product Steps involved in Product MethodMethod

Identification of product units –Identification of product units –1.1. Primary Sector – Agricultural, Forestry, Fishing, Primary Sector – Agricultural, Forestry, Fishing,

MiningMining2.2. Secondary Sector – Manufacturing SectorSecondary Sector – Manufacturing Sector3.3. Tertiary Sector – This sector is also called service Tertiary Sector – This sector is also called service

sector – Banking, Insurance etc.,sector – Banking, Insurance etc., GDPGDPMPMP = 1+2+3+Net Indirect Taxes+ = 1+2+3+Net Indirect Taxes+

Depreciation Depreciation NDPNDPMPMP = GDP = GDPMPMP – Depreciation/Consumption of – Depreciation/Consumption of

Fixed CapitalFixed Capital NDPNDPFCFC = NDP = NDPMPMP – Net Indirect Taxes – Net Indirect Taxes NNPNNPFCFC = NDP = NDPFCFC + NFIA + NFIA

Compensation of Employees

Operating Surplus

Mixed Income of the Self Employed

1.Wages & Salaries in Cash

2. Compensation

3. Private Pension

1. Income from property

(Rent , Interest, Royalty)

2. Income from Entrepreneur---ship (Profits)

1. Profession of Doctors, Lawyers

STEPS INVOLVED IN INCOME STEPS INVOLVED IN INCOME METHODMETHOD

•Identifying the producing units•Classifying the factor income

Factor income from all the three sectors Factor income from all the three sectors are added(NDPare added(NDPFC FC ))

GDPGDPMPMP=Compensation of employees + Rent =Compensation of employees + Rent + Interest+ Profits + Mixed Income + NIT + Interest+ Profits + Mixed Income + NIT + Depreciation + Depreciation

GDPGDPFCFC = GDP = GDPMPMP – NIT – NIT NDPNDPFCFC = GDP = GDPFCFC – Depreciation/Consumption – Depreciation/Consumption

of Fixed Capitalof Fixed Capital NNPNNPFCFC = NDP = NDPFCFC + NFIA + NFIA

Steps involved in Expenditure Steps involved in Expenditure MethodMethod To identify economic units incurring final To identify economic units incurring final

expenditure.expenditure. Classification of final expenditure.Classification of final expenditure. Private final consumption expenditurePrivate final consumption expenditure Govt. final consumption expenditureGovt. final consumption expenditure Gross fixed capital formationGross fixed capital formation Change in stocksChange in stocks Net ExportsNet Exports

GDPGDPMPMP = PFCE + GFFCE + GFCF + Change in = PFCE + GFFCE + GFCF + Change in Stocks + Net ExportsStocks + Net Exports

GDPGDPFCFC = GDP = GDPMPMP – NIT – NIT NDPNDPFCFC = GDP = GDPFCFC – Depreciation/Consumption of – Depreciation/Consumption of

Fixed CapitalFixed Capital NNPNNPFCFC = NDP = NDPFCFC + NFIA + NFIA

Steps involved in the calculation of Steps involved in the calculation of National IncomeNational IncomeAll economic units incurring expenditure All economic units incurring expenditure are classified into:are classified into:

HouseholdsHouseholds

Business sectorBusiness sector

Government SectorGovernment Sector

Rest of the worldRest of the world

Final Expenditure is divided Final Expenditure is divided into:into:Consumption Expenditure : It is Consumption Expenditure : It is incurred by the households.incurred by the households.

Expenditure by the households is Expenditure by the households is divided into three categories:divided into three categories:

•Expenditures on durablesExpenditures on durables

•Expenditure on non durablesExpenditure on non durables

•Expenditure on services like transport, Expenditure on services like transport, medical, etc.medical, etc.

Expenditure is calculated by Expenditure is calculated by multiplying volume of sale in the market multiplying volume of sale in the market by the price.by the price.

Investment ExpenditureInvestment ExpenditureInvestment is an addition to the existing Investment is an addition to the existing stock of capital goods such as machinery, stock of capital goods such as machinery, factories, residential houses and firms factories, residential houses and firms inventories..inventories..Investment expenditure is made on the Investment expenditure is made on the capital goodscapital goodsExpenditure on the purchase of new plants, Expenditure on the purchase of new plants, machines, equipment, factories, etc.machines, equipment, factories, etc.Inventory expenditure includes the change Inventory expenditure includes the change in inventoriesin inventoriesExpenditure on the purchase of new houses Expenditure on the purchase of new houses by households are included.by households are included.

Estimation of Government Expenditure:Estimation of Government Expenditure:

• Defence expenditureDefence expenditure• Expenditure on the maintenance of law and orderExpenditure on the maintenance of law and order• Expenditure on the social welfare activitiesExpenditure on the social welfare activities• Expenditure on health and educationExpenditure on health and education

● Estimation of net exports:Estimation of net exports:

• Exports represents spending of foreigners on our Exports represents spending of foreigners on our goodsgoods

• Imports represents our expenditure on the Imports represents our expenditure on the purchase of foreign goods.purchase of foreign goods.

• The difference between the two give us net The difference between the two give us net exportsexports

Thus,Thus,

National Income = Consumption expenditure + National Income = Consumption expenditure + Investment Expenditure + government Investment Expenditure + government expenditure + Net Exports.expenditure + Net Exports.

● Personal Income : It is the income which an Personal Income : It is the income which an individual earns from all the sources.individual earns from all the sources.

● Personal Disposable Income : Personal Income – Personal Disposable Income : Personal Income – Direct TaxesDirect Taxes

● Per Capita Income = Per Capita Income = National Income National Income Total Population Total Population