National income accounting

GROUP MEMBERS:-
BIKRAM PAL
MANVEER SINGH
NATASHA LUTHRA
SAGAR DWIVEDI
SILKY GUPTA
RAHUL GUPTA
 Background and introduction
National income Accounts:-

Provide the formal structure for our macro
economic models.
Aggregate Demand.....aggregate
income..consumed or invested

Aggregate Supply...total output..paid as wages ,
interest and dividends
In equilibrium.....
Aggregate Demand = Aggregate Supply
Basic Measures:-

Gross Domestic Product(GDP) = C + I + G + NX


Gross National Product(GNP) = GDP +
Receipts from abroad made as factor payments to
domestically owned factors of production


Net Domestic Product = GNP – Depriciation


National income = NDP – Indirect Taxes
GDP AT FACTOR COST AND AT
MARKET PRICE
The term factor cost or basic price is used in the
national accounts to refer to the prices of
products as received by producers.Market
prices are the prices as paid by
consumers.Factor costs or basic prices are
equal to market prices minus taxes on products
plus subsidies on products.Thus if a consumer
pays Rs.100 for a meal in a Restaurant the
owner may receive only Rs.85.10,the remaining
Rs.14.90 will go to the government in the form
of VAT.
 How to measure GDP ?

There are three approaches to the measurement

of GDP :-

Spending

Income,

And production
 Spending Approach

The spending approach divides GDP into four

areas:
Households (consumption) (C)
Businesses (investment) (I)
Government (G) and
Foreigners (net exports) (X-IM).
 Investment vs. Capital
§ Capital is one of the factors of production.
At any given moment, the economy has a certain
overall stock of capital.

§ Investment is spending on new capital.

Investment vs. Capital

Example (assumes no depreciation):
§ 1/1/2002: economy has $500b worth of capital

§ during 2002: investment = $37b

 The income approach

The income approach divides GDP according to

who receives the income from the spending
flow.
In addition to aggregate income, national income
and personal income are also used as
measures of income.
 Income approach

The Income Components Include:

Wages and salaries

Corporate profits
Proprietors income (the profits of partnerships and soley
owned businesses, like a family restaurant)
Farm income
Rent
Interest
Sales taxes
Depreciation (the amount of capital that has worn out during
the year)
 The production approach

The production approach looks at GDP from the

standpoint of value added by each input in the
production process.
The three approaches--spending, income, and
production– (should) result in equivalent values
for GDP.
 The following is information from the national
income accounts for 2007-08 Rs.(in crores)
GDP 42,83,040
Gross investment 16,25,914
Consumption 26,04,380
Govt. Final consumption exp. 4,73,862
Exports 6,55,864
Imports 10,12,312
Indirect Taxes 27,90,31
 Real vs. Nominal GDP

§ GDP is the value of all final goods and

services

produced domestically.
§ Nominal GDP measures these values using
current prices
.
§ Real GDP measure these values using the
prices of a base year.
 Real GDP and living standard

Changes in nominal GDP can be due to:

§ changes in prices
§ changes in quantities of output
produced

Changes in real GDP can only be due to

changes in quantities, because real GDP is
constructed using constant base-year
prices. Therefore, changes in real GDP
measure changes in living standard.
 International comparisons of GDP

In any attempt to compare GDP between countries, some

account must be taken of differences in prices.

Adjustment for GDP based on exchange rates makes some

improvement in the comparison of GDP figures.

However, if we wish to determine the value of GDP in

another country, some information on the price differences
of goods is needed.