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Teaching-Learning Material (On The Basis of Weekly Syllabus For The Month of August' 2011) For Class XII PGT (Economics)
Teaching-Learning Material (On The Basis of Weekly Syllabus For The Month of August' 2011) For Class XII PGT (Economics)
(On the basis of weekly syllabus for the Month of August’ 2011)
For
Class XII
PGT (Economics)
Chief Advisor
Advisor
Co- ordinators
Contributors
1
Support Material
For
Teachers
In
Economics – Class XII
Learning objectives
After going through the material/ unit you will be able to:
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
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.
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
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 =
(-) 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.
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.
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.
DI = C + S
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.
Disposable Income
Consumption (C) 300
Investment (I) 50
Government purchases (G) 70
Taxes (T) 75
Exports (X) 10
Imports (M) 5
Y= C + I + G + (X-M)
Y = 300 + 50+ 5 + 70
Y=425
DI = Y - T + TP
DI = 425 - 75 + 15
DI = 365
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:
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 4000
Transfer Payments 500
Corporate Inc. Taxes 50
Social Sec. Contributions 200
Indirect business Taxes 210
Personal Taxes 250
Undistributed Corp. Profit 25
Depreciation 500
Net Income Earned Abroad 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
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
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-it-
yourself 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:
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.