esi measurement of growth national income and per capita ... · esi – measurement of growth –...

ESI – Measurement of growth – National Income and Per Capita Income

Compiled by Prashant for Maggubhai.com

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Economic Growth

An increase in the amount of goods and services produced per head of the

population over a period of time.

Countries measure their economic growth or simply growth from time to time

and keep track of their economic progress. To be most accurate, the measurement

must remove the effects of inflation.

Growth is measured by annual percentage of change of Gross Domestic Product

(GDP).

Even the Sustainable Development Goals have economic growth on priority list. So

let’s study what this chapter contains for us:

Before touching the core economics let’s study some important terms (jargons)

for understanding the concept of economic growth comprehensively.

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These jargons are:

Constant-price: base-year prices

Current-price: prices in the same current year or going-on year

Inflation: a general increase in prices and fall in the purchasing value of money.

National Income (NI):

National income means the value of goods and services produced by a country

during a financial year. Thus, it is the net result of all economic activities of any

country during a period of one year and is valued in terms of money.

Gross Domestic Product (GDP):

GDP stands for "Gross Domestic Product" and represents the total monetary value

of all final goods and services produced (and sold on the market) within a country

during a period of time (typically 1 year).

Net Domestic Product (NDP) = GDP -Depreciation

Gross Value Added (GVA):

It is a measure of total output and income in the economy. It provides the rupee

value for the amount of goods and services produced in an economy after

deducting the cost of inputs and raw materials that have gone into the

production of those goods and services. It also gives sector-specific picture like

what is the growth in an area, industry or sector of an economy.

Gross National Product (GNP):

Gross national product (GNP) is the value of all goods and services made by a

country's residents and businesses, regardless of production location. GNP counts the

investments made by residents of a country and businesses—both inside and outside

the country—and computes the value of all products manufactured by domestic

companies, regardless of where they are made.




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Net National Product (NNP) = GNP – Depreciation

[Depreciation -reduction in the value of an asset over time, due in particular to wear

and tear]

Gross National Income (GNI):

GNI measures all income of a country’s residents and businesses, regardless

of where on earth it is produced.

Nominal GDP:

Nominal gross domestic product is gross domestic product (GDP) evaluated at current

market prices.

Real GDP:

The value of all goods and services produced by an economy in a given year,

expressed in base-year prices, and also called as "constant-price".

Factors of production:

Anything that helps in production is the factor of production. These are the

various factors by mean any resource is transformed into a more useful commodity or

service. They are the inputs for the process of production.

Per Capita Income (PCI):

Per capita means per person. So in this case it will be income per head.

Personal Income:




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Total annual gross earnings of an individual from all income sources, such as: salaries

and wages, investment interest and dividends, employer contributions to pension

plans, and rental properties. (It is calculated before paying taxes)

Personal Disposable Income (PDI):

It is simply called as Disposable income, it is the amount of money that households

have available for spending and saving after income taxes have been paid.

Base Year:

The base period or base year refers to the year in which an index number series begins

to be calculated. This will invariably have a starting value of 100. The chosen year

must have minimum variations in the prices of commodities and minimum ups

and downs w.r.t. economy, in that year.

GDP Deflator:

The GDP deflator measures price inflation in an economy. It is calculated by

dividing Nominal GDP by Real GDP and multiplying by 100.




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Purchasing Powers Parity (PPP):

Purchasing power parity (PPP) is an economic theory that states residents of one

country should be able to buy the goods and services at the same price as inhabitants

of any other nation over time.

Factor cost:

All the costs of factors of production used in producing a good or service.

Market Price:

The price at which is it sold in the market, called the Market Price. It includes all the

factor costs, production taxes imposed and production subsidies that are introduced

by government.

Basic Price:

The amount that is received by the producer and from the purchaser for a good or a

service. The product taxes are added to the price and product subsidy is deducted.

Net foreign factor income (NFFI): It is the difference between the aggregate amount

that a country’s citizens and companies earn abroad, and the aggregate amount that

foreign citizens and overseas companies earn in that country.

NFFI = GNP –

GDP




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Now let’s study the dynamics of economic growth and how it is measured

Measurement of economic growth: National Income

It is measured in the form of National Income of a country.

National Income refers to the money value of all the goods and services produced in

a country during a financial year. In other words, the final outcome of all the economic

activities of the nation during a period of one year, valued in terms of money is called

as a National income.

The national income of a country can be measured by three alternative methods:

Methods

Product Income Expenditure




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National Output = National Expenditure (Aggregate Demand) = National

Income

Product Method or Output Method:

In this method, national income is measured as a flow of goods and services. We

calculate money value of all final goods and services produced in an economy during

a year. Final goods here refer to those goods which are directly consumed and not

used in further production process.

Intermediate goods:

Goods which are further used in production process are called intermediate goods.

In the value of final goods, value of intermediate goods is already included therefore

we do not count value of intermediate goods in national income otherwise there will

be double counting of value of goods.

To avoid the problem of double counting we can use the value-addition method

in which not the whole value of a commodity but value-addition (i.e. value of final good

minus value of intermediate good) at each stage of production is calculated and these

are summed up to arrive at GDP.

Double counting

Double counting in accounting is an error whereby a transaction is counted

more than once. For example, the costs of intermediate goods used by a business

to produce a finished good are included in the computation of a nation’s gross

domestic product.




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Since the final price of a good already includes the value of all the intermediate

goods used to produce it, including the price of intermediate goods when

calculating gross domestic product would involve double counting. Double counting

seriously overstates gross domestic product.

Note:

Product method is prone to double counting errors.




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Income Method:

Under this method, national income is measured as a flow of factor incomes.

Factors of production:

There are generally four factors of production labour, capital, land and

entrepreneurship. Labour gets wages and salaries, capital gets interest, land

gets rent and entrepreneurship gets profit as their remuneration.

And their remuneration is called as factor income.

There are generally four factors of production labour, capital, land and

entrepreneurship. Labour gets wages and salaries, capital gets interest, land gets rent

and entrepreneurship gets profit as their remuneration.

GDP is the sum of the incomes earned through the production of goods and

services.

Gross Domestic product=

Income from people in jobs and in self-employment (e.g. wages and salaries)

+ Profits of private sector businesses + Rent income from the ownership of land

Expenditure Method:

In this method, national income is measured as a flow of expenditure.

Here the GDP is sum-total of expenditure by households, business and the

government.

The full equation for GDP using this approach is




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GDP = C + I + G + (X-M) where

C: Household spending on goods and services

I: Capital Investment spending

G: Government spending

X: Exports of Goods and Services

M: Imports of Goods and Services




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Difference among the three methods of National Income (NI):

National Income in India

Earlier known as CSO (The Central Statistics Office) and now NSO (National

Statistical Office) is responsible for calculating the National income in India. NSO

comes under the Ministry of Statistics and Programme Implementation (MOSPI). GDP

is calculated quarterly and annually.

Let’s learn some formulae:

Basic Price = Factor Cost + Production taxes – Production Subsidy

Market Price = Basic Price + Production taxes – Production Subsidy

GVA at basic prices = GVA at factor cost + Production taxes - Production subsidies

GDP at market prices = GVA at basic prices + Product taxes- Product subsidies




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Gross National Income (GNI) = GDP + (income from citizens and businesses

earned abroad) – (income remitted by foreigners living in the country back to their

home countries).

Gross National Income (GNI) = GNP + (income spent by foreigners within the

country) – (foreign income not remitted by citizens).

Net National Income (NNI) = GNI- Depreciation= NDP+ (income from citizens and

businesses earned abroad) – (income remitted by foreigners living in the country

back to their home countries).

Real GDP

A macroeconomic measure of the value of the economy’s output adjusted for

price changes (inflation or deflation). The value of all goods and services produced

by an economy in a given year, expressed in base-year prices, and also called as

"constant-price". It is an inflation-adjusted measure that reflects the value of all goods

and services produced by an economy in a given year.

Nominal GDP

A macroeconomic measure of the value of the economy’s output that is not adjusted

for inflation and is measured at current prices.

Nominal GDP vs Real GDP

1. Nominal GDP, or unadjusted GDP, is the market value of all final goods

produced in a geographical region, usually a country.

2. That market value depends on the quantities of goods and services

produced and their respective prices. Therefore, if prices change from one

period to the next but actual output does not, nominal GDP would also change

even though output remained constant.

3. Real gross domestic product accounts for price changes that may have

occurred due to inflation.




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4. Real GDP is nominal GDP adjusted for inflation.

5. If prices change from one period to the next but actual output does not, real

GDP would be remain the same.

6. Real GDP reflects changes in real production. If there is no inflation or

deflation, nominal GDP will be the same as real GDP.

GDP vs GNP

GNP and GDP are very closely related concepts, and the main difference

between them comes from the fact that there may be companies owned by

foreign residents that produce goods in the country, and companies owned

by domestic residents that produce products for the rest of the world and

earned income to domestic residents.

For example, there are a number of foreign companies that produce products and

services in the India and transfer any income earned to their foreign residents.

Likewise, many Indian corporations produce goods and services outside of the

Indian borders and earn profits for Indian residents.

If income earned by domestic corporations outside of the India exceeds income

earned within the India by corporations owned by foreign residents, the Indian GNP

is higher than its GDP.

GNP (calculated from GDP) = GDP + (income earned on all foreign assets) –

(income earned by foreigners in the country).

Closed Economy vs Open Economy

Closed Economy is an economy which do not trade with any other economy.

Open Economy is an economy which trades with other economies.

Important pointers:

If an economy was closed GDP = GNP




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When inflow of funds is greater than outflows GDP<GNP

When inflow of funds is less than the outflows GDP>GNP

Per Capita Income (PCI)

Per capita income (PCI) or average income measures the average income earned

per person in a given area and in a specified year. It is calculated by dividing the

area's total income by its total population.

Due to limitations of national income as an indicator of development, economists like

favored the use of per capita income as an index of development.

Limitations:

Per capita income as an indicator of development has the following limitations:

1. Per capita income does not reflect the standard of living of the people. Per

capita income is an average and this average may not represent the

standard of living of the people, if the increased national income goes to the

few rich instead of giving to the many poor. Thus unless national income is

evenly distributed, per capita income cannot serve as a satisfactory indicator of

development.

2. An increase in per capita income may not raise the real standard of living

of people. It is possible that while per capita real income is increasing per

capita consumption of goods and services might be falling. This happens when

the Govt. might itself be using up the increased income for massive

military buildup necessitating heavy production of arms and

ammunitions.

3. Although an increase in output per head is in itself a significant

achievement, yet we cannot equate this with an increase in economic

welfare. Since development is multidimensional education, health, work-leisure

ratio etc. are important considerations which do not get reflected in per capita

income.

Purchasing Power Parity (PPP)




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PPP is needed to compare the purchasing power of currencies of two or more

countries.

PPP is an economic theory that states residents of one country should be able

to buy the goods and services at the same price as inhabitants of any other

nation over time. The theory aims to determine the adjustments needed to be made

in the exchange rates of two currencies to make them at par with the purchasing power

of each other.

In other words, the expenditure on a similar commodity must be same in both

currencies when accounted for exchange rate. The purchasing power of each

currency is determined in the process.

Example: When two country want to know the competitive power of currencies,

they check the PPP. If 5 caps costs $50 in US and same 5 caps cost 70 euros (~$80)

in Germany, we can say that the purchasing power of US dollars is greater than

German Euro.

Economic Inequality

Economic inequality is the difference found in various measures of economic well-

being among individuals in a group, among groups in a population, or among

countries. Economic inequality sometimes refers to income inequality, wealth

inequality, or the wealth gap.

Lorenz curve

The Lorenz curve graphically represents the distribution of wealth in the country. It

also shows income inequality in the country.

The Gini coefficient is calculated using the Lorenz curve and it shows the degree of

income inequality in the country.

A graph on which the percentage of total national income is plotted on y-axis and

the percentage of the corresponding population on the x-axis.

The extent to which the curve sags below a straight diagonal line indicates the

degree of inequality of distribution.




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Gini Coefficient

The Gini coefficient is a statistical measure used to calculate inequality within a

nation.

A high Gini coefficient means that the nation has a high level of income

inequality. So the highest earners in society take home a significant proportion

of the nations income.

The Gini coefficient is calculated on a scale of 0 to 1, with 1 being perfectly

inequal, and 0 being perfectly equal.

When value is 1, it means only one person has the whole wealth of the country.

When value is 0, it means everyone in economy has same amount of money.

Economic Development

Economic development has been defined as the improvement in the social,

political, and economic well-being of a nation and its people. It is also understood

as a process through which simple, low-income economies are transformed into

sophisticated, modern industrial economies.

It is a qualitative phenomenon which focuses on improvement in the quality and

standard of living of the people.

MDGs & SDGs

Millennium Development Goals (MDGs)

Millennium Development Goals (MDGs) are the product of the Millennium

Summit of September 2000.

This summit committed to reduce extreme poverty and setting out a series of time-

bound targets, with a deadline of 2015.

These “time bound targets” are now known as the Millennium Development

Goals (MDGs). According to United Nations MDG are “quantified targets for




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addressing extreme poverty in its many dimensions-income poverty, hunger,

disease, lack of adequate shelter, and exclusion-while promoting gender equality,

education, and environmental sustainability. They are also basic human rights-

the rights of each person on the planet to health, education, shelter, and security.

“The Millennium Development Goals (MDGs) have helped in bringing out a

much needed focus and pressure on basic development issues, which in turn

led the governments at national and sub national levels to do better planning and

implement more intensive policies and programmes.

MDG’s have played a big role in improving the social indicators in India.

India has achieved the target of reducing countries poverty levels by 50% by

Dec, 2015.

The MDGs consists of eight goals:

Target must be reached by: 2015

Goal 1: Eradicate extreme poverty and hunger

Goal 2: Achieve universal primary education

Goal 3: Promote gender equality and empower women

Goal 4: Reduce child mortality

Goal 5: Improve maternal health

Goal 6: Combat HIV/AIDS, malaria, and other diseases

Goal 7: Ensure environmental sustainability

Goal 8: Develop a global partnership for development




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Sustainable Development Goals (SDGs)

The United Nations General Assembly, in 2015, adopted the 2030 Agenda for

Sustainable Development. 193 member countries, including India, got committed to

the 17 Sustainable Development Goals that require efforts to end all forms of

poverty, fight inequalities and tackle climate change while ensuring that no one was

left behind.

The objective was to produce a set of universal goals that meet the urgent

environmental, political and economic challenges facing the world.

The SDGs are a bold commitment to finish what the Millennium Development

Goals (MDGs) started, and tackle some of the more pressing challenges.

Goals: 17

Targets: 169

Targets must be completed by: 2030

SDG India Index

NITI Aayog is measuring India and its States’ progress towards the SDGs for 2030,

culminating in the development of the first SDG India Index-2018.

The SDG India Index is intended to provide a holistic view of the social, economic

and environmental status of the country and its States and UTs.




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It has been designed to provide an aggregate assessment of the performance of all

Indian States and UTs and to help leaders and change makers evaluate their

performance on social, economic and environmental parameters.

The Index has been constructed spanning across 13 out of 17 SDGs (leaving out

Goals 12, 13, 14 and 17).

NITI Aayog Releases SDG India Index and Dashboard 2019

India is the first country in the world with a government-led, sub-national

measure of progress on Sustainable Development Goals

NITI Aayog released the second edition of the Sustainable Development Goals

(SDG) India Index, which comprehensively documents the progress made by

India’s States and Union Territories towards achieving the 2030 SDG targets.

(First edition: 2018)

About The SDG India Index:

The SDG India Index—which has been developed in collaboration with the:

1. Ministry of Statistics and Programme Implementation (MoSPI),

2. United Nations in India

3. Global Green Growth Institute

And was launched by NITI Aayog Vice Chairman Dr Rajiv Kumar.

In 2020, the world enters the final decade for achieving the SDGs—the ‘Decade

for Action’. And the Intergovernmental Panel on Climate Change tells us that we

have 12 years left to save the planet from the worst effects of climate change. So,

the time to act is now.

The SDG India Index 2.0 and the dashboard enables India to both track and

encourage accelerated progress to meet the SDGs across all its States and Union

Territories.

India’s composite score has improved from 57 in 2018 to 60 in 2019, thereby

showing noticeable progress.

The maximum gains been made in Goals

SDG 6 (clean water and sanitation),




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SDG 9 (industry, innovation, and infrastructure) and

SDG 7 (affordable and clean energy).

Three states that were in the ‘Aspirant’ category (with score/s in the range of 0–

49)— have graduated to the ‘Performer’ category (50–64).

1. Uttar Pradesh,

2. Bihar

3. Assam

Five states—moved up from the ‘Performer’ category to the ‘Front Runner’

category (65–99).

1. Andhra Pradesh,

2. Telangana,

3. Karnataka,

4. Goa,

5. Sikkim

First rank (overall) - Kerala

1. Kerala with a score of 70,

2. Himachal Pradesh with a score of 69.

3. Andhra Pradesh, Telangana, and Tamil Nadu ranked at the third position

with the score of 67.

Biggest improvers:

The biggest improvers since 2018 are:

1. UP (which has moved from the 29th position to the 23rd),

2. Orissa (23rd to 15th), and

3. Sikkim (15th to 7th).

Additional information regarding the index:

The world is now in the fifth year of the SDG era. India’s National Development

Agenda is mirrored in the SDGs. India’s progress in the global Goals is crucial

for the world as the country is home to about one-sixth of the world’s population.




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The SDG India Index 2019 tracks progress of all States and UTs on 100 indicators

drawn from the MoSPI’s National Indicator Framework (NIF).

The SDG India Index 2019 is more robust than the first edition on account of

wider coverage of goals, targets, and indicators with greater alignment with

the NIF.

The Index spans 16 out of 17 SDGs with a qualitative assessment on Goal 17.

This marks an improvement over the 2018 Index, which covered only 13 goals.

Additionally, this year, the SDG India Index report has a new section on profiles

of all 37 States and UTs, which will be very useful to analyse their performance

on all goals in a lucid manner.

What does score signify?

A composite score was computed in the range of 0–100 for each State/UT

based on its aggregate performance across 16 SDGs, indicating the average

performance of every State/UT towards achieving 16 SDGs and their

respective targets.

If a State/UT achieves a score of 100, it signifies it has achieved the 2030

national targets.

The higher the score of a State/UT, the closer it is towards achieving the

targets.

Classification criteria based on SDG India Index score is as follows:

Aspirant: 0–49

Performer: 50–64

Front Runner: 65–99

Achiever: 100




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Classical Growth Theory

The classical growth theory argues that economic growth will decrease or end

because of an increasing population and limited resources.

Classical growth theory economists believed that temporary increases in real GDP

per person would cause a population explosion that would consequently

decrease real GDP.

Modern progress has proved classical growth theory wrong.

Importance of SDG 8

Why is this important?




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While developing countries have grown at a rate faster than developed regions,

sustained economic growth everywhere will be critical to fulfilling our international

developmental targets over the next 15 years.

Economic growth – making our world more prosperous – is inextricably linked

to all our other priorities. Stronger economies will afford us more opportunities to

build a more resilient and sustainable world. And economic growth must be inclusive:

growth that does not improve the wellbeing of all sections of society, especially the

most vulnerable, is unequal and unfair.

How can we address this?

‘No one left behind’ is at the core of the sustainable development agenda for 2030

and if economic growth is to build a fairer world, it must be inclusive.

This is the idea behind Goal 8, which aims to sustain an economic growth rate of

7% for the least developed countries by 2030, and achieve full and productive

employment for all men and women everywhere in the next 15 years.

In 2015, nearly 736 million people live below the USD 1.90 poverty line and

that poverty eradication is only possible through stable and well-paid jobs.


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