National Output and Income Concepts and Methods

8/3/2019 National Output and Income Concepts and Methods

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NATIONAL OUTPUT AND

INCOME

The end result of economic activity is the production of goods and services and thedistribution of those goods and services tothe members of the society. All the braches

of economics are concerned in one way or the other with output and income .



Definitions of National IncomeMarshall: ³The labour and capital of acountry acting on its natural resources

produce annually a certain net aggregateof commodities,material and immaterial including services of all kinds´.

Pigou: ³ National income is that part of objective income of the community,including of course income derived fromabroad which can be measured in terms of

money ´.



National income is the measure of

output and income which evaluatesthe performance of the economic

system in terms of

How rapidly it is growing.

How stable it is.How it allocates its productive resources.



The most important pioneer in providingnational income data was prof. Simon

Kuznets , for the National Bureau of Economic Research, a private researchorganization of U.S.A. In the late 1930s andduring World War II, the official nationalincome estimates of the U.S. governmentwere developed in the Department of Commerce, which has continued to provide

annual and quarterly estimates since then. Inthe postwar period the development of systems of national income data has spreadfrom the industrial countries throughout theworld.



THE CIRCULAR FLOW OFECONOMIC ACTIVITY

P roduction creates income and income in turn isused to purchase output.

Each of us has a dual role in the productiveprocess:

A s productive agents

A s consumers

T he business firms also stands in a dual capacity:

P aying out income to the factors of production

Selling of goods and services





Product methodValue added methodFinal product method

Income method Expenditure method

As production leads to income and income

leads to expenditure National Income can be estimated through



Product Method

Number of commodities *Their respective prices.

Ex:

No.of * price of cars.

No.of * price of computers.





Expenditure MethodY = C + I + G + ( X-M)

Where, C = Consumption

I = Investment

G = Government Expenditure

X = Exports

& M = Imports



Methods followed in India

India mainly follows a combination of Product and Income methods due to thedifficulties involved in the estimation of

National Income.National incomeStatistics in India are published in National Accounts statistics , a

publication of Central StatisticalOrganization, Ministry of Statistics andProgramme Implementation,

Government of India.



Different Concepts of National

IncomeEach Analyses the Performance of theEconomy.

They are:GNP & GDPGNP & GDP - Market Prices & Factor CostGNP & GDP - Nominal & RealGNP & GDP - Potential & ActualGNP, NNP, NI, PI, DPI & PCIExchange rate conversion Vs PPP



GNP & GDPGNP: The market value of all final goodsand services produced by a nationseconomy during the course of a year.

GDP: GNP ± Net Income from Abroad,i.e., the total production whatever is

produced with in the boundaries of acountry.



Factor Cost =Market Prices-Indirect Taxes

Nominal & Real GNP is also called as GNP atCurrent and Constant Prices.

Nominal GNP = Current Production * CurrentPrices.

Real GNP = Current Production * ConstantPrices.

Potential is what can be produced and Actual iswhat is being produced. The difference

between the two explains the intensity of depression.



NNP = GNP ± Depreciation

NI or NNP at Factor Cost = NNP ± Indirect Taxes = Rent + Wages + Interest+ ProfitPI = NI ± Retained Corporate Profits ± Profit Taxes ± Contributions to SocialInsurance + Transfer PaymentsDPI = PI ± Personal Taxes =Consumption + SavingPCI = NI / Population



International Comparison of GDP:Exchange rate conversion Vs PPP

The Market Exchange Rate (MER) GDP is more useful for understanding the international economic purchasing power and thetotal value of tradable goods and services of different countries.To compare National income and related data across countries thedata must first be converted in to a common currency. Nominalexchange rates don't reflect international differences in relative

prices. Unlike conventional exchange rates, PPP rates of exchangeallow conversion to take account of price differences betweencountries. By eliminating differences in national price levels, themethod aids comparisons of real value for income, poverty,inequality and expenditure patterns.Using a PPP basis is arguably more useful when comparing

differences in living standards because PPP takes into account therelative cost of living and the inflation rates of the countries, rather than using just exchange rates which may distort the real differencesin income.



GNI & PPP GNI in 2005

CountryGNI $

Billions RankGDP $ Per

Capita RankPPP GNI $

Billions RankPer CapitaPPP GNI $ Rank

USA 12,455,825 1 42,000 8 12,277,583 1 41,399 3

China 2234133 4 1,709 110 94123611 2 7,198 87

Japan 4,567,441 2 35,757 14 3,910,728 3 30,615 16

India 771,951 12 705 135 3,633,441 4 3,320 122

Germany 2,791,737 3 33,854 19 2,521,699 5 30,579 17

France 2,126,719 6 33,918 18 1,830,110 7 29,187 20

Pakistan 110,970 45 728 134 404,592 26 2,653 127

Norway 295,672 25 64,193 2 195,130 42 42,193 2

Luxembourg 36,531 63 80,288 1 31,759 92 69,800 1

Burundi 799 162 107 182 5,538 148 739 178



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National Output and Income Concepts and Methods