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STATE COUNCIL OF EDUCATIONAL RESEARCH &TRAINING
VARUN MARG, DEFENCE COLONY, NEW DELHI
Teaching- Learning Material
(On the basis of weekly syllabus for the Month of August’ 2011)
For
Class XII
PGT (Economics)
Chief Advisor
Ms. Rashmi Krishnan, Director, SCERT
Advisor
Dr. Pratibha Sharma, Joint Director, SCERT
Mohammad Zamir, Principal, DIET Keshav Puram
Co- ordinators
Dr. Seema Srivastava, Sr. Lecturer, DIET, Moti Bagh
Ms. Meenakshi Yadav, Sr. Lecturer, SCERT
Contributors
Dr. Seema Srivastava, Sr. Lecturer, DIET, Moti Bagh
Ms. Meenakshi Yadav, Sr. Lecturer, SCERT
Mr Bharat Thakur, PGT (Economics) RPVV, Surajmal Vihar
1
Support Material
For
Teachers
In
Economics – Class XII
Co-ordinators : Dr. Seema Srivastava
Ms. Meenakshi Yadav
Contributors : Dr. Seema Srivastava
Ms. Meenakshi Yadav
Mr.Bharat Thakur
Technical Support :
Sh. Mukesh Yadav
Ms. Radha
Class – XII
Teaching -Learning Material for PGT (Economics)
Based on “Week wise Distribution of Syllabus 2011 -2012
Content Covered:
Unit-6 (Contd)
National Disposable Income
Learning objectives
After going through the material/ unit you will be able to:
•
Explain the concept of Disposable Income.
•
Define the term National Disposable Income.
•
Describe Gross and National Disposable Income.
•
Explain Private Income, Personal Income and Personal Disposable Income.
•
Calculate Private Income, Personal Income and Personal Disposable Income.
•
Define Real and Nominal GDP.
•
Integrate welfare with change in GDP.
Abstract
The present content deals with National Disposable income which stands for amount of
money that household have for spending and saving. The content also discusses the concept
of Private Income, Personal Income and Personal Disposable Income. The concept of
calculating these incomes have been explained with the help of numerical example. Nominal
and Real GDP are also the part of the content. The integration of welfare of the economy
with reference to GDP has also been described in the Present module. GDP per capita (per
person) is often used as a measure of a person's welfare. Countries with higher GDP may be
more likely to also score highly on other measures of welfare, such as life expectancy.
Teaching Points
The present unit deals with the following:
•
National Disposable Income
•
Gross National Income
•
Net National Income
•
•
Private Income, Personal Income and Personal Disposable Income
Real and Nominal GDP.
•
GDP and Welfare
National Income
National Income is an important dimension of Economy within the Global Project on Measuring
the Progress of Societies and one of the key factors for Material Well-Being and, in turn, for
Human Well-Being and progress of society. As almost every intermediate goal, it has different
impacts, direct and indirect, on those that are defined final goals of progress in the Global
Project. Moreover, depending on the definition given to such dimension, the impacts "direction"
caused by variation in National Income on final goals of progress might be ambiguous as there
could be both positive and negative associations.
National income is the sum of factor incomes. In other words, it is the income which individuals
receive for doing productive work in the form of wages, rent, interest and profits.
Note: Social security payments, welfare payments are received by households but these are not
elements of National Income because they are transfer payments
Disposable income
It is the amount of money that is available to households for spending and saving after income
taxes have been accounted for.Disposable income is the amount that remains after all deductions
(taxes, Medicare, pension contributions, etc.) have been made.
It is the portion of an individual's income over which the recipient has complete discretion.
To assess disposable income, it is necessary to determine total income, including not only
wages and salaries, interest and dividend payments, and business profits, but also transfer
income such as social-security benefits, pensions, and alimony. From this subtract Obligatory
payments, including personal income taxes and compulsory social-insurance contributions.
*
Disposable
income
may
be
used
for
consumption
or
saving.
National Disposable Income
Gross (or net) national disposable income is the sum of the gross (or net) disposable incomes of
the institutional sectors. Gross (or net) national disposable income equals gross (or net) national
income (at market prices) minus current transfers (current taxes on income, wealth etc., social
contributions, social benefits and other current transfers) payable to non-resident units, plus
current transfers receivable by resident units from the rest of the world.
National disposable income is the sum of the disposable incomes of all resident institutional
units/sectors.
National Disposable Income may be derived from National Income by adding all
current transfers in cash receivable by resident institutional units from non-resident
units and subtracting all current transfers in cash payable by resident institutional
units to non-resident units
National Disposable income can be categorized into:
o Gross National Disposable Income
o Net National Disposable Income
Gross National Disposable Income
Gross National Disposable Income may be derived from gross national income by adding all
current transfers in cash or in kind receivable by resident institutional units from non-resident
units and subtracting all current transfers in cash or in kind payable by resident institutional units
to non-resident units.
Gross (or net) National Disposable Income measures the income available to the nation for final
consumption and gross (or net) saving. It equals gross (or net) national income (at market prices)
minus current transfers in cash (taxes on income and wealth, etc., social contributions, social
benefits other than social transfers in kind, and other current transfers) payable to non-resident
units, plus transfers receivable by resident units from the rest of the world.
Gross National Disposable Income =
Gross National Income (at market prices)
(-) minus current transfers (current taxes on income, wealth etc., social contributions, social
benefits and other current transfers) payable to non-resident units,
(+) plus current transfers receivable by resident units from the rest of the world
Gross (or net) national disposable income is the sum of the gross (or net) disposable incomes
of the institutional sectors. Gross (or net) national disposable income equals gross (or net)
national income (at market prices) minus current transfers (current taxes on income, wealth etc.,
social contributions, social benefits and other current transfers) payable to non-resident units,
plus current transfers receivable by resident units from the rest of the world.
Net Disposable Income
It is the gross earnings less ONLY ONE Mandatory Deduction i.e. State and Federal taxes
Private Income
It is an income from sources other than employment, such as investment. It is also income from
private means. It is the money that someone gets regularly, not from working but because they
own part of a business or have money which earns INTEREST.
Private income is either of the two :
•
•
any type of income received by a private individual or household, often derived from
occupational activities, or
Income of an individual that is not in the form of a salary (e.g. income from
investments).
Income separate from salary income from dividends, interest, or rent which is not part of a
salary are called as Private Income
Personal Income
Personal income includes all income which is actually received by all individuals in a year. It
includes income which is not directly earned but is received by individuals.
For example, undistributed profits, employee’s contribution for social security corporate income
taxes etc. are elements of national income but are not received by individuals. Hence they are to
be deducted from national income to estimate the personal income.
Formula for Personal Income:
PI = National income + Transfer Payments - Corporate retained earnings, income taxes,
social security taxes
Disposable income
The concept of disposable personal income is very important for studying the consumption and
saving behavior of the individuals. It is the amount which households can spend and save.
Disposable Income = Consumption + Saving
DI = C + S
Disposable Personal Income
Disposable personal income is the amount which is actually at the disposal of households to
spend as they like. It is the amount which is left with the households after paying personal taxes
such as income tax, property tax, national insurance contributions etc.
Formula for Disposable Personal Income:
Disposable personal income = Personal Income - Personal Taxes
DPI = PI - Personal Taxes
Disposable Income
Consumption (C) 300
Investment (I) 50
Government purchases (G) 70
Government transfer payments (TP) 15
Taxes (T) 75
Exports (X) 10
Imports (M) 5
To find Disposable Income (DI) first find GDP (Y).
Y= C + I + G + (X-M)
Y = 300 + 50+ 5 + 70
Y=425
Disposable Income= Gross Income - Taxes + Transfer Payments
DI = Y - T + TP
DI = 425 - 75 + 15
DI = 365
Nominal GDP vs. Real GDP
GDP or Gross Domestic Product is the value of all the goods and services produced in a country.
GDP is a measure of the market or money value of all final goods and services produced by the
economy in a given year. We use money or nominal values as a common denominator in order to
sum that heterogeneous output into a meaningful total.
Since market value is measured by money, it is hard to compare the market values of GDP from
year to year if the value of money itself changes in response to inflation and deflation. To solve
this problem, we deflate GDP when prices rise and inflate GDP when prices fall according to a
base year
Nominal GDP
It is the GDP evaluated at current market prices. The Nominal Gross Domestic Product measures
the value of all the goods and services produced expressed in current prices. Therefore, nominal
GDP will include all of the changes in market prices that have occurred during the current year
due to inflation or deflation.
Inflation is defined as a rise in the overall price level, and deflation is defined as a fall in the
overall price level
Nominal GDP is unadjusted for inflation which refers to GDP based on the prices of a product
in the year it was produced i.e. not inflated or deflated.
Real GDP
Real Gross Domestic Product measures the value of all the goods and services produced
expressed in the prices of some base year.
Real GDP is adjusted for inflation which refers to a GDP that has been adjusted for inflation
or deflation to accurately show the increase or decrease in production for comparison of
economic growth from year to year. It is measured in relation to the price index of a given year.
Nominal GDP represents the current prices of all types of services, and goods produced
whereas Real GDP is the costs of the services rendered, and goods produced, that is indicated by
various base years.
Example -1
Suppose in the year 2000, the economy of a country produced $100 billion worth of goods and
services based on year 2000 prices. Since we're using 2000 as a basis year, the nominal and
real GDP are the same. In the year 2001, the economy produced $110B worth of goods and
services based on year 2001 prices. Those same goods and services are instead valued at
$105B if year 2000 prices are used. Then:
Year 2000 Nominal GDP = $100B, Real GDP = $100B
Year 2001 Nominal GDP = $110B, Real GDP = $105B
Nominal GDP Growth Rate = 10%
Real GDP Growth Rate = 5%
Nominal GDP
Nominal GDP is the calculation of national output using the quantity of the produced goods
multiplied by the prices of that year.
Real GDP is the same calculation of national output but is adjusted for inflation. Inflation is the
rate of change of the level of prices of goods. The reason inflation has to be accounted for is
because if the same number of goods is produced in a subsequent year but the prices increase,
then the Nominal GDP will be skewed to be larger than it really is.
Example-2
Calculate Personal Income, Disposable Income, National Income, and Net Domestic
Product from the following;
Rs.
GDP
Transfer Payments
Corporate Inc. Taxes
Social Sec. Contributions
Indirect business Taxes
Personal Taxes
Undistributed Corp. Profit
Depreciation
Net Income Earned Abroad
4000
500
50
200
210
250
25
500
0
Solution
NI = GDP + NR - IBT - CC
NI = National income
NR = + or - Net income from assets abroad (net income receipts)
IBT = Indirect business taxes
CC = Depreciation
NI = 4'000 + 0 - 210 - 500 = 3'290
NDP = GDP - CC
NDP = Net domestic product
NDP = 4'000 - 500 = 3'500
Personal Income = NI - corporate taxes - retained earnings - social security + transfer payments
+ net interest
PI = 3'290 - 50 - 25 - 200 + 500 = 3'515
Disposable Income = PI - Personal taxes
DI = 3'515 - 250 = 3'265
GDP and welfare
Another cross-cutting dimension as equity/inequality is found to be particularly relevant for "life
satisfaction": from the perspective of living standards, what matters is that the distribution of
income, consumption and wealth determines who enjoys access to the goods and services
produced within a society. Since the most popular average measures of per-capita income and
wealth give no indication of how the available resources are distributed across persons or
households (similarly, average consumption gives no indication of how people effectively
benefit from these resources), it is necessary to look at disposable income, consumption and
wealth information for different groups to understand if the increase in national income is
effectively beneficial in terms of progress: indeed, average income per capita can remain
unchanged while the distribution of income becomes less equal and so, by negatively affecting
many other dimensions of the Global Project framework.
To begin with, gross domestic product excludes a great deal of production that has economic
value. Neither volunteer work nor unpaid domestic services (housework, child rearing, do-ityourself home improvement) make it into the accounts of calculating GD. But all these affect our
standard of living, our general level of economic well-being. Nor does it include the huge
economic benefit that we get directly, outside of any market, from nature. For example: If you let
the sun dry your clothes, the service is free and doesn't show up in our domestic product; if you
throw your laundry in the dryer, you burn fossil fuel, increase your carbon footprint, make the
economy more unsustainable -- and give G.D.P. a bit of a bump.
GDP per capita (per person) is often used as a measure of a person's welfare. Countries with
higher GDP may be more likely to also score highly on other measures of welfare, such as life
expectancy.
Although GDP is often used to measure how well off people are in a material sense, it has
serious deficiencies as a measure of economic welfare. There are serious limitations to the
usefulness of GDP as a measure of welfare because:
•
Measures of GDP typically exclude unpaid economic activity, most importantly
domestic work such as childcare. This leads to distortions; for example, a paid
nanny's income contributes to GDP, but an unpaid parent's time spent caring for
children will not, even though they are both carrying out the same economic activity.
•
GDP takes no account of the inputs used to produce the output. For example, if
everyone worked for twice the number of hours, then GDP might roughly double, but
this does not necessarily mean that workers are better off as they would have less
leisure time. Similarly, the impact of economic activity on the environment is not
measured in calculating GDP.
•
Comparison of GDP from one country to another may be distorted by movements in
exchange rates. Measuring national income at purchasing power parity may
overcome this problem at the risk of overvaluing basic goods and services, for
example subsistence farming.
•
GDP does not measure factors that affect quality of life, such as the quality of the
environment (as distinct from the input value) and security from crime. This leads to
distortions - for example, spending on cleaning up an oil spill is included in GDP, but
the negative impact of the spill on well-being (e.g. loss of clean beaches) is not
measured.
•
GDP is the mean (average) wealth rather than median (middle-point) wealth.
Countries with a skewed income distribution may have a relatively high per-capita
GDP while the majority of its citizens have a relatively low level of income, due to
concentration of wealth in the hands of a small fraction of the population.
Technical Terms
National Disposable Income is the sum of the disposable incomes of all resident institutional
units/sectors.
Gross national disposable income may be derived from gross national income by adding all
current transfers in cash or in kind receivable by resident institutional units from non-resident
units
Private Income: It is an income from sources other than employment, such as investment
Personal Income: Personal income includes all income which is actually received by all
individuals in a year
Disposable Personal Income: Disposable personal income is the amount which is actually at the
disposal of households to spend as they like
Nominal GDP represents the current prices of all types of services, and goods produced
whereas
Real GDP is the costs of the services rendered, and goods produced, that is indicated by various
base years.