Download chap 4 National Income(Economics)

Chapter 4
National Income and its
Measurement
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Chapter outline
Meaning and definition.
Significance of National Income
Factors effecting the volume of
National Income.
Various concept of NI.
Three approaches used to measure NI.
1.
2.
3.
Product approach
Income approach
Expenditure approach
Difficulties in measuring NI.
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Definition to National Income
 National Income is the monetary value of all
goods and services produced in a country
during one year, including income derived
from abroad.
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It mainly include the output of the
following sectors:
•
•
•
•
•
•
•
Agriculture
Industry
Natural Resources
Trade
Transport & communication
Health & education
Banking
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Significance of NI
It seeks to measure the level of
production in the country in one
year.
We can know whether the
economy is growing or declining by
comparing it with the previous
years .
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CONT`D
National
income
shows
contributions by various sectors in
the economic development
of
economy.
Living standard and economic
welfare of the people can be
compared with other countries.
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CONT`D
From National Income Data we can
see the employment situation
sector wise.
By Looking the National Income
Data we can see which sector of
the economy is weak so we can
focus on it to improve its
performance.
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Factors influencing the volume of NI:
Natural Resources:A Country having large deposits of natural
resources will have large production and
hence large volume of national income.
Human Resources:If the human resources of a country are
healthy and well-educated, the production
of the country will be large and hence large
volume of national income.
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Man-made Resources:If man-made sources are greater in number,it
will increase the volume of business in the
country and hence volume of national income.
Credit Facilites:Credit facilities in a country will increase the
volume of business activities in a country and
hence volume of national income.
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Technology:A country having advanced technology
will have maximum production and hence
will have large volume of national income.
Political Stability:If a country is politically stable, Local and
foreign investment will be high which
ultimately leads to high production and
high national income.
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GNP or ( Gross National Product)
GNP or Gross national product is the money value of
all final goods and services produced by the people
within and outside the country for one year.
GNP = GDP + (exports – imports)
(Both goods and services)
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MEASUREMENT OF NATIONAL
INCOME
There are three methods which are used
to measure National Income:
PRODUCTION OR OUTPUT METHOD
Income Method
Expenditure Method
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PRODUCTION METHOD
The national income is calculated by adding up the net
values of all production that has taken place in
different sectors of economy during a year.
in this method the economy is divided into various
sectors such as….
 Agriculture
 industry
 Infrastructure
 Banking
 Health
 Education
 Transport and communication etc.
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CONT`D
The net market or money value of all these sectors is
added and the result is coming as national income.
Example…..
production sectors
Net value (billions)
Agriculture
340
industry
210
Trade
290
Transport & communication
200
Health & education
250
Banking
160
NATIONAL INCOME
1450
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INCOME METHOD
In this method the income of all individuals
in a country is calculated which they earn in
return of services they provide for four
factors of production such as,
Land, Labor , Capital and organization.
Thus national income is the sum total of
Rent, Wages, Interest and profit which are
received by people from four factors of
production.
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CONT`D
FOPs = land + Labor + capital + Entrepreneur
and
N.I
= Rent + Wage + Interest+ Profit
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CONT`D
Example:
Source of income
(billions)
Wages and salaries
Rent
Interest
Profit
National income
Amount
400
300
320
450
1470
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EXPENDITURE METHOD
National income can also be measured by adding
the total expenditure made by the people and
government on consumption of goods and
services and investment in a country during a
year.
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Consumption (C):
The spending by households on goods and
services.
Investment (I):
The spending on capital equipment,
inventories, and structures, including new
housing etc
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Government Purchases (G):
The spending on goods and services by
local, state, and federal governments.
Net Exports (NX):
Exports minus imports.
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• NI (Y ) is the sum of the following:
–
–
–
–
Consumption (C)
Investment (I)
Government Purchases or spending (G)
Exports
NI = Y = C + I + G + (X-M)
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CONT`D
Example:
Expenditure
Private consumption exp
Private domestic investment
Government consumption
Government investment
Export minus import
National Income
Amount (billions)
400
200
350
300
150
1400
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Difficulties in measuring NI
Inadequate statistical data:
In under-developed countries since scientific methods
of collecting data are not used, so accurate information
is not obtained and NI is under estimated.
Lack of trained staff:
Most under developed countries do not have trained staff
for data collection which leads to the problem of
estimating exact NI.
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CONT`D
Illiteracy :
Due to illiteracy, most of the producers do not maintain
proper records of production, cost and income which
leads to under estimated NI.
Many sources of income:
Some people get their incomes from many other sources
It is very difficult to compute their income from different
sources and in this way the exact figure of NI is mislead.
No-cooperation of the people:
In most of under-developed countries, people do not
cooperate with data collecting staff.
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CONT`D
Non-marketed goods and services:
In estimating the national income, only those goods
and services are included for which the payment is
made the unpaid or non-marketed goods and
services are excluded such as production for self
consumption, help or volunteer etc
Under-ground economy:
In under-developed countries, about 30% of the
economy is under-ground the officially declared
incomes are less than the actual incomes.
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Some important steps to be
remembered.
National income is measured
for one year.
Only the current year
production will be counted in
the estimation of natioal
income.
National income does not
include the income earned
from illegal activities such as
smuggling, kidnapping, theft
etc.
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THANKS
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