Module 4 National Income Accounting

Click to edit Master subtitle style

Reference : Ahuja Pg 15-35

4/30/12

National Income
v

According to J.R Hicks, National

income consists of a collection of goods and services reduced to a common basis by being measured in terms of money.
v

According to the National Income Committee of India-1951, A national income estimate measures the volume of commodities and services turned out during a given period, counted without duplication.
4/30/12

Important Points
National income refers to the income of a country, Ex: India Its measurement refers to a specified period of time, say 1year National income includes all goods and services which have exchange value, counting each one of them only one.
4/30/12

Different Concepts of National Income

1. 2. 3. 4. 5. 6. 7.

Gross Domestic Product (GDP) Net Domestic Product (NDP) Gross National Product (GNP) Net National Product (NNP) National Income at Factor Cost (NI) Personal Income (PI) Disposable Personal income (DPI)
4/30/12

Gross Domestic Product

GDP is the aggregate money value of all final goods and services produced by normal residents as well as non-residents in the domestic territory of a country during a year. It is a geographical or territorial concept. GDP = GNP net factor income from abroad
4/30/12

Net Domestic product

NDP

refers to the market value of all final goods and services produced during a period of one year after making allowance for depreciation changes. NDP = GDP Depreciation
4/30/12

Gross National Product

GNP is defined as the total market value of all final goods and services produced during a year in a country. GNP is a monetary measure. GNP includes the market value of only final goods and services.
4/30/12

Continued
It is a flow measure of output of goods and services during a year / currently produced goods. GNP refers to the value of goods and services currently produced by normal residents of a country. The depreciation or replacement value of the fixed assets is not deducted.
4/30/12

Net National Product

This

refers to the net production of goods and services in a country during a year. NNP = GNP the value of capital depreciated during the year. NNP is a highly useful concept in the study of
4/30/12

National Income at Factor Cost It refers to the total of all income payments earned by the factors of production in the form of rent, wages, interest, and profit during a given year. NI = NNP Indirect Taxes +
subsidy
4/30/12

Personal Income
It is that income which is actually received by the individuals and households in a country during a year from all sources. PI = NI Corporate income tax -- social security contributions -- undistributed corporate profits + transfer payments This concept is useful in estimating the potential purchasing power of the individuals in an economy.

4/30/12

Disposable personal Income

It

is that part of personal income which is left behind after the payment of personal direct taxes is called disposable personal income. DPI = PI Personal direct taxes DPI = Consumption +
4/30/12

Uses / Practical Importance of National Income Estimates Economic Position Contribution of Different Sectors Distribution of National Income among the Factors of Production Economic Planning International Comparison
4/30/12

Continued
International Payments Help to Backward Countries Role of Public and Private Sectors Grant-in Aids to States Anti-Inflationary and Deflationary Measures Reveals the Cyclical behavior of an economy
4/30/12

Difficulties in the Measurement of National income

Treatment of Non-monetary Transactions Treatment of Government activities in national income accounts Treatment of income generated by foreign firms Illiteracy

4/30/12

Continued
Non- availability of statistical data Existence of barter transactions Difficulty in calculating depreciation Lack of professional competency Problem of consideration of goods and services Commodities of self4/30/12

Difficulties of Measuring National Income in Developing countries

Prevalence of non-monetized transactions Illiteracy Incomplete Occupational specialisation Agricultural and industrial production is unorganized Lack of adequate statistical data
4/30/12

Trends in National Income Growth and Structure

I. II. III. IV. V. VI.

Trends in net national product and per capita income Annual growth rates during the plans Trends in distribution of national income by industrial origin Trends in the share of the public sector Urban and rural income break-up Share of organised and unorganised sector in NDP

4/30/12

National Income Estimates in India

According to the National Income Committee, A national income estimate measures the volume of commodities and services turned out during a given period, counted without duplication. Pre-independence period estimates Post-independence period estimates National income committee and C.S.O estimates

4/30/12

Circular Flow of Income

v v

v v v

Two Sector Model Without Savings Households and Firms Two Sector Model With Savings S=YC Where Y = income S = savings C = consumption Case 1 : S > I Case 2 : S = I Case 3 : S < I

4/30/12

Continued
v Three

Sector Model (Government) T = T1 + T2

Sector Model Firm + Household + Government income and Expenditure + Exports and Imports S+T+M=I+G+X
4/30/12

v Four

METHODS OF MEASURING NATIONAL INCOME:

There are four methods of measuring national income. 1. Product Method: According to this method, the total value of final goods and services produced in a country as calculated at market prices. To find out the GNP, the data of all productive activities, such as agricultural products, wood received from forests, minerals received from mines, commodities produced by industries, the contributions to production made by transport, communication, insurance companies, lawyers, doctors, teachers, etc. are collected and assessed at market prices. Only the final goods and services are included and the intermediary goods and services are left out.

4/30/12

Income Method: According to this method, the net income payments received by all citizens of a country in a particular year are added up, i.e., net incomes that accrue to all factors of production by way of net rents, net wages, net interest and net profits are all added together but incomes received in the form o transfer payments are not included in it. The data pertaining to income are obtained from different sources, for instance, from income tax department in respect of high income groups and in case of workers from their wage bills.
2.

4/30/12

3. Expenditure Method: According to

this method, the total expenditure incurred by the society in a particular year is added together and includes personal consumption expenditure, net domestic investment, government expenditure on goods and services, and foreign investment. This concept is based on the assumption that national income equals national expenditure.

4/30/12

4. Value Added Method: Another

method of measuring national income is value added by industries. The difference between the value of material outputs and inputs at each stage of production is the value added. If all such differences are added up for all industries in the economy, we arrive at the gross domestic product.

4/30/12

Uses of National Income Estimates or Practical Significance of the study of National Income Estimates.
Economic position of a Country Contribution of different sectors Distribution of National Income among factors of production International Comparison

4/30/12

Economic

Planning International Payments Help to backward countries Role of Public and Private sectors Grants In-aid to states Reveals the cyclical behavior of the economy Anti Inflationary and Deflationary measures

4/30/12

TRENDS IN NATIONAL INCOME GROWTH AND STRUCTURE Net National Product at Factor
cost and Per Capita NNP

Year 1950 51 to 1980 81 1980 81 to 2000 01 2000 01 to 2008 -

Rate of Per capita Growth Growth 3.5 5.6 7.5 1.4 3.2 5.9

4/30/12

Share of Gross Domestic Product by industry of Origin (1999 00 series)

1950 - 1980 2008 51 - 81 09 55.4 15.0 29.6 38.0 24.0 38.0 16.9 25.8 57.3
4/30/12

Agricultur e & Allied Services Industry Services

Average Annual Growth Rate: Rural GDP

Agricult Service Year Industry Total ure s 1970 1.2 5.0 4.8 2.3 80 1980 3.8 5.5 7.4 4.8 93 1999 - 0.5 9.0 2.1 2.1 00 2007 3.8 7.4 4.5 5.0 08 2008 3.4 6.3 3.4 4.3 - 09 4/30/12

Sectoral Share of Rural GDP (percent)

Service Year Agriculture Industry s 1970 73.8 11.3 14.9 71 1980 66.2 14.7 19.2 81 1993 58.0 15.8 26.2 94 1999 51.4 20.0 28.6 00 2007 42.0 29.6 28.4 08 4/30/12