PresentationOn

“NATIONAL INCOME IN INDIA”

ByDr. Mohmed Amin Mir

Assistant Professor

Department of Commerce & Management Studies

Islamia College of Science & Commerce, Srinagar

Jammu & Kashmir

Contact No: +91-9797178402 Email ID: aamin.icsc@gmail.com

Topics to be Discussed Macroeconomics? Circular Flow of Income:

Two Sector Economy (Household +Business Firms) Three Sector Economy (H+B+Govt) Four Sector Economy (H+B+G+Foreign Sector)

Meaning of National Income? Concept of N.I National Product National Income in Two Sector Economy National Income in Real Economy Different Concepts of National Income Items Excluded from N.I Accounting Personal Income Disposable Income GDP & Economic Well Being Limitations of N.I/ GDP/GNP

Macroeconomics• Study of how individual households and firms make

decisions• How they interact with one another in markets• Study of the economy as a whole• Goal is to explain the economic changes that affect

many households, firms, and markets at once• Macroeconomics answers questions like the

following: – Why is average income high in some countries and low in others? – Why do prices rise rapidly in some time periods while they are more

stable in others? – Why do production and employment expand in some years and

contract in others?

CIRCULAR FLOW OF INCOME/MONEY

• Modern economy – monetary economy: money used as medium of exchange

• How economy Functions• The equality of income and expenditure can

be illustrated with the circular-flow diagram • Summarizes the transactions between the

different economic agents – Agents: households, firms (business), government,

and foreigners (rest of the world)

CIRCULAR INCOME FLOW IN TWO-SECTOR ECONOMY

1. Household Sector & 2. Business Firms

ASSUMPTIONS:o Neither Household nor Firms Saveo Govt. doesn’t play any part in the economyo No role of foreign trade (Closed Economy)

• Households: Own factors of production, Consume goods and service• Firms: Hire factors of production to Produce goods and services

The Circular-Flow Diagram

Firms Households

Market for Factors

of Production

Market for Goods

and Services

SpendingRevenue

Wages, rent, and profit

Income

Goods & Services sold

Goods & Services bought

Labor, land, and capital

Inputs for production

CIRCULAR INCOME FLOW WITH FINANCIAL MARKETS

1. Household Sector 2. Business Firms & Financial markets

ASUMPTIONS:o All Savings of household come in Financial Marketso No Inter-Households Borrowings

Inclusion of Financial Markets will Result in: Saving Borrowing (Investment Expenditure)

FIRMS HOUSEHOLDS

Good and services bought

Good and services sold

Revenue (=GDP)

Spending (=GDP)

Inputs for Production Land, labor and capital

Wages, rent, interest and profit (=GDP)

Flow of goods & services

Flow of money

Income (=GDP)

THE CIRCULAR FLOW DIAGRAM

CIRCULAR INCOME FLOW IN A THREE SECTOR ECONOMY

1. Household Sector 2. Business Firms3. Government

Government affects the economy in a number of ways:Spending (capital goods, public infrastructure, education, defense etc.)Taxing (from households +Business Firms)Borrowing (from Financial Markets)

Govt. Borrowing Increases demand for credit which causes Rate of Interest to Rise i.e. it crowds out Private Investment.

GOVT

FIRMS HOUSEHOLDS

Good and services bought

Good and services sold

Revenue Spending

Inputs for Production

Land, labor and capital

Wages, rent, interest and profit (=GDP)

Income (=GDP)

THE CIRCULAR FLOW DIAGRAM

Net Tax PaymentsGovt Purchases Goods

Net Tax Payments

Wages & Slaries

CIRCULAR INCOME FLOW IN THE FOUR SECTOR: OPEN ECONOMY

1. Household Sector 2. Business Firms3. Government & 4. Foreign Sector.

ASSUMPTIONS:o It is only the business firms of the domestic countries that

interact with foreign countries and therefore Export & Import.

Foreign Sector affects Domestic economy by way of Exports & Imports:

If EXPORTS – IMPORTs = Trade Surplus Net Capital Outflow

If IMPORTS – EXPORTS = Trade Deficit Net Capital Inflow

GOVT

FIRMS HOUSEHOLDS

Good and services bought

Good and services sold

Revenue Spending

Inputs for Production

Land, labor and capital

Wages, rent, interest and profit (=GDP)

Income (=GDP)

THE CIRCULAR FLOW DIAGRAM

Net Tax PaymentsGovt Purchases Goods

Net Tax Payments

Wages & Slaries

Foreign CountriesForeign Remittances

Export of Manpower

Receipt from Exports

Payment for Imports

NATIONAL INCOME

National Income is the sum of all INCOMES of the people

of a country

or

The INCOME which different people of the society get are

obtained by them for their contribution of Land, Labour,

Capital & Entrepreneurial Services (in the form of interest,

wages, Rents and profits ) to national production.

Therefore, N.I= Rent+Wages+Interest+Profit

CONCEPT OF NATIONAL INCOME: 3 Interpretations

Represents a TOTAL VALUE OF PRODUCTION,

Represents a RECEIPTS (INCOME)TOTAL,

Represents an EXPENDITURE TOTAL

i.e. NATIONAL INCOME = NATIONAL PRODUCT = NATIONAL EXPENDITURE

Thus, 3 measures of N.I:

Sum of all incomes accruing to F.O.P =Sum values of all

final Goods & Services=Sum of all Expenditures

(Consumer’s+Investments+Govt )

NATIONAL PRODUCT

Total value of all final Goods & Services

PRODUCED by various productive

firms/businesses in a year.

N.P= Total Output × Market Prices

Thus, out of N.P (in value terms),

Rent+Wages+Interest+Profit will be paid to

different F.O.P

N.I in Two Sector Economy

•No role of Govt (Indirect Taxes & Subsidies)

•No Depreciation

Thus,

N.P = Value of Final Goods & services Produced =

Rent+Wages+Interest+Profit = N.I

N.I in Real (Open)Economy

•Firms keep a part of some value

created as Depreciation Allowance

•Govt. takes away Indirect Taxes

Thus, incomes of factor owners

are reduced to that extent.

DIFFERENT CONCEPTS OF N.I

GROSS NATIONAL PRODCUT AT MARKET PRICES (G.N.P)

GROSS DOMESTIC PRODUCT AT MARKET PRICES (G.D.P)

NET NATIONAL PRODUCT AT MARKET PRICES (N.N.P)

NET NATIONAL PRODUCT AT FACTOR PRICES (N.N.P)

GROSS NATIONAL PRODCUT AT MARKET PRICES (G.N.P)

Total Market Value of All Final Goods & Services produced in a

country.

Includes only currently produced Goods & services in a year

Includes Net Factor Income From Abroad

NET FACTOR INCOME FROM ABORAD (NFIA)

NFIA = Is the difference between Factor Incomes received

from abroad by normal residents of India for rendering factor

services in other countries MINUS (-) the factor incomes paid to

the foreign residents for factor services rendered by them in the

domestic territory of India.

COMPONENTS OF N.N.P

1. Household Consumption (C): Value of final Goods & Serices

produced in a year and consumed by households

2. Gross Private Investment (I): Value of New Capital Goods

Produced

3. Government Purchases of Goods & Services (G): Value of

output of general govt

4. Net Exports (NX): Value of goods Exported minus the value of

goods Imported

5. NFIA: Difference between relevant income of normal residents

earned from abroad and same type of incomes paid to the non-

residents working in domestic territory of a country.

Therefore,

G.N.P at M.P = C+I+G+NX+NFIA

GDPGDP is the money value of all final goods & services

produced by normal residents as well as non-residents in the domestic territory of a country but

does not include NFIA.Thus, G.D.P at M.P = C+I+G+NXor

G.D.P at M.P=G.N.P at M.P – NFIA

GDP is a measure of the income and expenditures of an economy.

The market value of good (Vi) is equal to Pi × Qi

Measurement of Economy’s Output: GDP

PRECAUTIONS TO BE TAEKEN:1. Output is valued at market prices.2. GDP is usually expressed in the currency of a particular country, e.g.,

Indian Rupees….indicates the market value of the goods and services 3. GDP measures only the value of final goods, not intermediate goods (the

value is counted only once).4. It includes both tangible goods (food, clothing, cars) and intangible

services (haircuts, housecleaning, doctor visits). 5. GDP only measure current production.

Transfer payments & transactions involving goods produced in other periods (past) are not included in the calculation of GDP

6. It measures the value of production within the geographic confines of a country.

7. It measures the value of production that takes place within a specific interval of time, usually a year or a quarter (three months).

NET NATIONAL PRODUCT (N.N.P) or N.I at M.P

“The market value of final goods and services after deducting the depreciation charges”.

Therefore, N.N.P/ N.I at M.P = G.N.P – Depreciation

NATIONAL INCOME / N.I at Factor Cost / N.N.P at Factor Cost

• Simply means sum of all incomes earned by resource suppliers for contribution of land, labour, capital & entrepreneurial ability which go into the years Net Production.

N.N.P at Factor Cost Vs. N.N.P at Market Prices:• N.N.P at Factor Cost = N.N.P at Market Prices – Indirect Taxes + Subsidies

or• N.N.P at Factor Cost = N.N.P at Market Prices – Net Indirect Taxes

Where Net Indirect Taxes= Indirect Taxes-Subsidies

Items excluded from National Income Accounting

Second-hand goodsIntermediate goodsNon-marketed goods / servicesVolunteer work / HouseworkUnreported / Illegal market transactionsitems produced and sold illicitly, such as illegal

drugs.

PERSONAL INCOME (P.I)

• Sum of all incomes ACTUALLY RECIEVED by all individuals or

household during a given a year.

• P.I= N.I - incomes currently earned but not received+incomes

received but not currently earned (Transfer Payments)

• i.e.

P.I =N.I – (Social Security Contributions+Corporate Income

Taxes+Undistributed Corporate Profits)+Old-age

pension+unemployment compensation + relief

payments+interest payment on public debt.

DISPOSABLE INCOME (D.I)

• After a part of P.I is paid to govt. in the form of personal taxes like Income Tax & personal property taxes, what remains of P.I is called D.I.

Therefore, D.I = P.I – Personal Taxes (I.T +P.T) Thus, D.I can either be Saved or Consumed. Hence, D.I = Consumption + Saving

GDP and Economic Well-Being

GDP is the best single measure of the economic well-being of a society.

GDP per person tells us the income and expenditure of the average person in the economy.

Higher GDP per person indicates a higher standard of living Reflecting & comparing the standards of living of different

countries Per capita real GNP standard of living Providing information to the government and firms for

economic planning Reflecting the economic growth of a country Shows % change in real GNP over a period of time

Some Limitations of NI Statistics/ GDP or GNP as Measures of Growth

Factors that may understate the standard of living / the welfare Exclusion of the value of leisure Exclusion of non-marketed / unreported transactions Ignores income distribution Ignores environmental degradation Does not include activities that do not go through the formal markets

sector Does not include “illegal” activities like drug trafficking, prostitution Factors that may overstate the standard of living / the welfare Undesirable Side-effects of Production: Air pollution / traffic congestion /… Understate the real / social costs to society externality /divergence

between social costs & private costs

Thank you

Any Query???