26761588 national income concept and measurement

7/28/2019 26761588 National Income Concept and Measurement

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National Income and its

components

Presented By: Prof Ritesh Lal


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The Economys

Income and Expenditure

When judging whether the economy isdoing well or poorly, it is natural to

look at the total income that everyone

in the economy is earning.


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The Economys

Income and Expenditure

For an economy as a whole, income

must equal expenditurebecause:Every transaction has a buyer and a

seller.

Every rupee of spending by some buyeris a rupee of income for some seller.


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Components of National Income

Gross Domestic Product (GDP)

Gross National Product (GNP)Net National Product (NNP)

Personal Income

Disposable Personal Income


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GDP is the market value of all final

goods and services produced withina country in a given period of time.


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The Measurement of GDP

Output is valued at market prices.

It records only the value offinal goods,

not intermediate goods (the value is

counted only once).

It includes both tangible goods (food,

clothing, cars) and intangible services(haircuts, housecleaning, doctor visits).


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It includes goods and services currently

produced, not transactions involving

goods produced in the past.

It measures the value of production

within the geographic confines of a

country.


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It measures the value of production

that takes place within a specific

interval of time, usually a year.



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What Is Counted in GDP?

GDP includes all items produced in theeconomy and sold legally in markets.


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What Is Not Counted in GDP?

GDP excludes most items that are

produced and consumed at home and

that never enter the marketplace.

It excludes items produced and sold

illicitly, such as illegal drugs.


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The Components of GDP

GDP (Y) is the sum of the following:

Consumption (C)Investment (I)Government Purchases (G)Net Exports (NX)

Y = C + I + G + NX


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Consumption (C):

The spending by households on goods and

services, with the exception of purchases ofnew housing.

Investment (I):

The spending on capital equipment,inventories, and structures, including

new housing.


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Government Purchases (G):

The spending on goods and services by local,

state, and federal governments.Does not include transfer payments because

they are not made in exchange for currently

produced goods or services.

Net Exports(NX):

Exports minus imports.


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To summarise:

GDP= Market value of goods & services

produced by the residents in the country

(+) Incomes earned in the country by

foreigners

(-) Incomes received by residents of a

country from abroad


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Gross National Product

Gross national product (GNP) is the total

income earned by a nations permanent

residents (called nationals).

It differs from GDP by including income

that our citizens earn abroad and

excluding income that foreigners earnhere.


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To Summarise:

GNP= Market value of domestically

produced goods & services

(+) Incomes earned by the residents of a

country in foreign countries

(-) Incomes earned by the foreigners in the

country


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Net National Product (NNP)

Net National Product (NNP) is the

total income of the nations residents

(GNP) minus losses from depreciation.

Depreciation is the wear and tear on

the economys stock of equipment and

structures.


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To summarise:

NNP= GNP - Depreciation


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Personal Income

Personal income is the income that

households and non-corporate businesses

receive.

Unlike national income, it excludes retained

earnings, which is income that corporations

have earned but have not paid out to their

owners.

In addition, it includes households interest

income and government transfers.


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Personal Income & NNP

Personal Income= NNP

(-) Undistributed Company Profits

(-) Surplus of Public Undertaking

(-) Rentals of Public Property


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Disposable Personal Income

Disposable personal income is the income

that household and noncorporate

businesses have left after satisfying alltheir obligations to the government.

It equals personal income minus personal

taxes.


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To Summarise:

Disposable Personal Income= Personal

Income

(-) Personal Taxes


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1.Net Product Method or Value AddedMethod

2. Factor Income method or Factor share

method

3. Expenditure Method

Methods of measuring National

Income


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Net Product Method

(Three stages)

Estimating the gross value of domestic

output in the various branches of

production

Determining the cost of material and

services used and also the depreciation

Deducting these costs and depreciation

from gross value to obtain the net value

of domestic output.


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Net Product Method

The aggregate of all goods and services

from the 3 sectors.

The components are:

Primary sectors- agricultural, mining,

fishing.

Secondary sectors- industrial sectors.Tertiary sectors- service sector.


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Calculation through Net Product Method

The total value of final goods and services from the 3 economic sectors:-(+) Primary sector

(+) Secondary sector

(+) Tertiary sector

= Gross domestic product at Market price (GDPmp)

(-) Income paid abroad(+) Income received from abroad

= Gross national product at Market price (GNPmp)

(+) Subsidies

(-) Indirect taxes or taxes on expenditure

= Gross national product at Factor cost (GNPfc)

(-) Depreciation or capital consumption

= Net national product at Factor cost (NNPfc)

= National Income


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Factor Income Method

This approach looks at the flow of economic

activities from the income point of view.

The components are:Wages and salaries of all employees in every sector.

Interest and dividends from shares.

Rent including inputed rent.

Profits, example- undistributed profits.

Income of self-employed workers such as hawkers.


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Calculation through Factor Income Method

Wages and salaries (including compensation for employees)

(+) Interest and dividends

(+) Rent

(+) Profits (including undistributed profits and income from self-employment/proprietors income)

= Gross domestic income at market price (GDImp)

(-) Income paid abroad

(+) Income received from abroad

= Gross national income at market price (GNImp)

(+) Subsidies


= Gross national income at factor cost (GNIfc)


= Net national income at factor cost (NNIfc)

= National Income


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Expenditure Method

The components are:

Households expenditure or consumer expenditure

Producers expenditure or gross investment such as:- New construction such as housing, factories, etc.

Equipment like machinery tools, etc.

Changes in business stocks or inventories, example goods

produced but unsold.

Government expenditure on goods and services,

excluding transfer payments.


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Calculation through Expenditure Method

Expenditure include household, producer and government:-

(+) Consumption

(+) Investment

(+) Government spending

= Total Domestic expenditure at market price

(+) Exports

= Total final expenditure at market price(-) Imports

= Gross domestic expenditure at Market price (GDEmp)

(-) Income paid abroad

(+) Income received from abroad

= Gross national expenditure at Market price (GNEmp)(+) Subsidies


= Gross national expenditure at Factor cost (GNEfc)


= Net national expenditure at Factor cost (NNEfc)

= National Income


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PROBLEMS IN CALCULATING

NATIONAL INCOME

a.Problem of expertise- The shortage of professional in most developing countries is a major

problem. To estimate national income accurately, the services of

statisticians, analysts, programmers, researches and others. These

professionals will be able to present the national income data with the

minimum technical and human errors.

b.Lack of sophisticated machinery- Developing countries like Indonesia, India and Peru face the problem of

technical know-how and even technical equipment. They need the latest

and most advanced computers to compute the massive volume of data.

c. Problem of false information- Businessman and other self-employed people usually underestimate their

earning primarily to evade paying high taxes. This would of course lower

the national income figures of the country. Perhaps stringent rules and

punishment on taxes evaders should be implemented.


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PROBLEMS IN CALCULATING

NATIONAL INCOME

d. Problem of estimation- Depreciation- machinery can be considered obsolete and loses its value.

But the question is how obsolete is obsolete? The estimation of

depreciation for every country is differ.

- Imputed rent- owner-occupied houses have a value in terms of rent. Some

owner may overestimate and some may underestimate their imputed rent.This will result in a distorted of the actual national income of the country.

e. Problem of measuring quality- In national income accounting we are not merely interested in thequantity

of physical goods and services only, quality is of equal importance. Theproblem that arises is how to measure the quality. Can prices of goodsand

services reflect accurately the quality of product? There is no absolute

indicator of quality.


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THANK YOU

26761588 national income concept and measurement

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