Download National Income and Related Aggregates

National Income and Related
Aggregates
Dr. Roopali Srivastava
Department of Management
ITS, Ghaziabad
Circular Flow Of Income
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The process of production is a continuous process. In it,
various FOP such as land ,labor, capital &
entrepreneurship are combined together for the
production of goods & services.
The supply of these FOP come from these FOP from
households. These factors offers their services to the
producers (also known as firms) who in returns produce
goods &services & make payments as reward in the form
of rent, wages, interest & profits.
The households spend this money on goods & services
produced by the firms. Thus income or money first flows
n he firms to the households in the form of factor
payments & then from the firms to the households in the
form of consumption expenditure.
The income continue to flow in a circular way so it is
called circular flow of income.
Two Sector Model
Goods & Services
Factor Services
Households
Producers
Factor Payments
Payment For Goods & Services
In the previous model ,it is assumed that household
sector and firms do not save at all. But in actual practice
it does not happen so. Households save some part of
their income for various reasons like precautionary
reasons, transactionary reasons &speculative reasons.
 Similarly firms also save some of their receipts for
reasons like-expansion of their business etc.
 All the banking institutions, insurance companies &
financial houses taken together constitute capital market
of the economy.
 From capital market these savings flow to firms as loans
for investment.
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Two Sector Model With Savings
Goods & Services
Factor Services
Savings
Borrowings
Capital
Market
Households
Producers
Savings
Borrowings
Factor Payments
Payment For Goods & Services
Three-Sector Model With Savings
Borrowings
Savings
Government
Savings
Borrowings
Capital
Market
Households
Producers
Savings
Borrowings
Factor Payments
Payment For Goods & Services
Four-Sector Model
Pay.re.on
gov.a/cf E
Factor Services
p.made
g.a.
Borrowings
Borrowings
Capital
Market
Households
Producers
Savings
Borrowings
Factor Payments
Payment For Goods & Services
PfI
Savings
PfE
Savings
Government
Rest of the world
Withdrawals & Injections
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In reality, however, there are leakages from and
additions to the circular flows of income and expenditure
The leakages and additions are also called withdrawals
and injections, respectively.
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Dr. Roopali Srivastava
8
Withdrawals
 Withdrawal
is the amount that is set aside by the
households and the firms and is not spent on the
domestically produced goods and services over the
period of time . Example a household sets aside a part of
income for old age or against the loss of job.
 Saving is a withdrawal.
 When savings are invested, they take a form of injections
 Firms
may also withhold a part of their total receipts and
may not return it to the circular flows in the form of
factor payments in anticipation of depression
 Such
withdrawals reduce the size of circular flows
 S+T+M
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Dr. Roopali Srivastava
9
Injections
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Amount that is spent by households and firms in addition
to their incomes generated within the regular economy
Injection by the household may be in the form of
spending inherited savings or the hoarding
Firms can inject money by spending their retained
earnings or borrowing from outside
Injections increase the size of circular flows
I+G+X
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Dr. Roopali Srivastava
10
The circular flow of income
INJECTIONS
Export
expenditure (X)
Investment (I)
Factor
payments
Consumption of
domestically
produced goods
and services (Cd)
Government
expenditure (G)
BANKS, etc
Net
saving (S)
GOV.
ABROAD
Import
Net
expenditure (M)
taxes (T)
WITHDRAWALS
National Income
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Refers to the money value of all final goods & services
produced by residents of a country while working both
within or outside the domestic territory in an accounting
year.
NI is expressed in monetary terms.
It reflects the value of final goods & services.
NI Is expressed over 1 financial year.
National Income -Excluded Items
NI excludes sale & purchase of second hand goods.
 It excludes income from illegal activities – smuggling,
black marketing, gambling etc.,
 It does not includes transfer payments – old age
pension, scholarship to students etc.,
 Transfer payment are those earning for which no
contribution is made to the flow of goods & services.
 In other words they are not earned but received only.
 T.P are received without doing or producing any
commodity or services.
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Concepts of National Income
GDP
 GNP
 NDPMP
 NDPFC
 NNPMP
 NNPFC
 Private Income
 Personal Income
 Personal Disposable Income
 National Disposable Income
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GROSS & NET –: DEPRECIATION
Gross Product =Net Product + Depreciation
NATI0NAL PRODUCT & NET PRODUCT -:NFIA
National Product=Domestic Product+ NFIA
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PRODUCT at MARKET PRICE & FACTOR PRICE-:NIT
Product at Market Factor =Product at Factor Cost+
Net Indirect Tax
 Net Indirect Tax=Indirect Taxes - Subsidies
Concepts related to National
Income(NNPFC)
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GDP : Value of all final goods and services
produced within the domestic territory of a
country during an accounting year.
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GNP = GDP + Net factor income from
abroad
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 Income
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There are three successive phases in the
circular flow
Income
Production
Expenditure
Methods of Measuring NI
Value added method/Product Method
 Income method
 Expenditure method
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Steps involved in Product
Method
Identification of product units –
1. Primary Sector – Agricultural, Forestry, Fishing, Mining
2. Secondary Sector – Manufacturing Sector
3. Tertiary Sector – This sector is also called service sector
– Banking, Insurance etc.,
 GDPMP = 1+2+3+Net Indirect Taxes+ Depreciation
 NDPMP = GDPMP – Depreciation/Consumption of Fixed
Capital
 NDPFC = NDPMP – Net Indirect Taxes
 NNPFC = NDPFC + NFIA
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STEPS INVOLVED IN INCOME METHOD
•Identifying the producing units
•Classifying the factor income
Compensation
of Employees
Operating
Surplus
Mixed Income
of the Self
Employed
1.Wages &
Salaries in Cash
1. Income from
property
(Rent , Interest,
Royalty)
1. Profession of
Doctors, Lawyers
2. Compensation
3. Private
Pension
2. Income from
Entrepreneur--ship (Profits)
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Factor income from all the three sectors are
added(NDPFC )
GDP =Compensation of employees + Rent +
Interest+ Profits + Mixed Income + NIT +
Depreciation
GDP = GDP – NIT
NDP = GDP – Depreciation/Consumption of
Fixed Capital
NNP = NDP + NFIA
MP
FC
MP
FC
FC
FC
FC
Steps involved in Expenditure Method
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To identify economic units incurring final expenditure.
Classification of final expenditure.
Private final consumption expenditure
Govt. final consumption expenditure
Gross fixed capital formation
Change in stocks
Net Exports
GDPMP = PFCE + GFFCE + GFCF + Change in Stocks +
Net Exports
GDPFC = GDPMP – NIT
NDPFC = GDPFC – Depreciation/Consumption of Fixed
Capital
NNPFC = NDPFC + NFIA
Steps involved in the calculation of
National Income
All
economic units incurring expenditure are
classified into:
Households
Business
sector
Government
Rest
Sector
of the world
Final Expenditure is divided into:
Consumption
Expenditure : It is incurred by
the households.
Expenditure
by the households is divided into
three categories:
•Expenditures
on durables
•Expenditure
on non durables
•Expenditure
on services like transport,
medical, etc.
Expenditure
is calculated by multiplying
volume of sale in the market by the price.
Investment Expenditure
Investment
is an addition to the existing stock of
capital goods such as machinery, factories,
residential houses and firms inventories..
Investment
goods
expenditure is made on the capital
Expenditure
on the purchase of new plants,
machines, equipment, factories, etc.
Inventory
inventories
expenditure includes the change in
Expenditure
on the purchase of new houses by
households are included.
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Estimation of Government Expenditure:
Defence expenditure
• Expenditure on the maintenance of law and order
• Expenditure on the social welfare activities
• Expenditure on health and education
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Estimation of net exports:
Exports represents spending of foreigners on our goods
• Imports represents our expenditure on the purchase of
foreign goods.
• The difference between the two give us net exports
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Thus,
National Income = Consumption expenditure +
Investment Expenditure + government expenditure +
Net Exports.
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Personal Income : It is the income which an individual
earns from all the sources.
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Personal Disposable Income : Personal Income – Direct
Taxes
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Per Capita Income =
National Income
Total Population