National income accounting 1


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National income accounting 1

  2. 2. Trends in India’s GDP
  3. 3. Methods: <ul><li>Income approach </li></ul><ul><li>Expenditure approach </li></ul><ul><li>Final Output approach </li></ul><ul><li>By the circular flow we know all approaches will give same result </li></ul>
  4. 4. The Income Approach <ul><li>The income approach is shown on one half of the circular flow. </li></ul><ul><li>Firms make factor payments to households for supplying their services as factors of production. </li></ul><ul><li>Households spend the income they earn on goods and services </li></ul>
  5. 5. Output Method; <ul><li>Adds up the market values of all goods and services produced . </li></ul><ul><li>It ignores intermediate goods and second hand sales of goods </li></ul><ul><li>This avoids double counting </li></ul>
  6. 6. Expenditure Method: <ul><li>Consumption </li></ul><ul><li>Investment </li></ul><ul><li>Government purchases </li></ul><ul><li>Net exports: exports less imports </li></ul><ul><li>Consumption involves spending on services, durable goods and non durable goods </li></ul>
  7. 7. Expenditure method: <ul><li>Investment is gross private domestic expenditure on new capital goods , depreciation and inventories. </li></ul><ul><li>Investment excludes : </li></ul><ul><li>household purchases of durable goods </li></ul><ul><li>purchase of existing buildings and machines </li></ul><ul><li>purchase of stock and financial assets. </li></ul>
  8. 8. Expenditure method: <ul><li>Government expenditure includes spending on goods and services but excludes transfer payments. </li></ul><ul><li>Net exports = exports less imports </li></ul><ul><li>GDP = C+I+G+X-M </li></ul><ul><li>C+S+NET TAXES=C+I+G+X-M </li></ul><ul><li>S+M+T=I+G+X </li></ul><ul><li>LEAKAGES = INJECTIONS </li></ul>
  9. 9. Equality of Income and Expenditure <ul><li>GDP is calculated either by adding up all values of final output or by adding up the values of all earnings or income. </li></ul><ul><li>GDP at market prices equals the sum of market values of all goods produced in the economy </li></ul>
  10. 10. Gross vs Net: <ul><li>Depreciation or capital consumption is the amount by which an assets value falls in a given period. </li></ul><ul><li>Net Investment = Gross Investment less depreciation. </li></ul><ul><li>Capital stock at end of period = capital stock at beginning of period +net investment </li></ul>
  11. 11. Qualifications to the Income Accounting Identity <ul><li>To go from GDP to national income: </li></ul><ul><ul><li>Add net foreign factor income. </li></ul></ul><ul><ul><ul><li>National income is all income earned by citizens of a nation and is equal to GNP. </li></ul></ul></ul><ul><ul><ul><li>To move from &quot;domestic&quot; to &quot;national&quot; we add net foreign factor income. </li></ul></ul></ul><ul><ul><li>Subtract depreciation from GDP. </li></ul></ul><ul><ul><li>Subtract indirect business taxes from GDP. </li></ul></ul>
  12. 12. The Income Approach <ul><li>National income is the total income earned by citizens and businesses in a country in one year. </li></ul><ul><li>It consists of employee compensation, rent, interest, and profits. </li></ul><ul><li>NNP at factor cost = National Income </li></ul>
  13. 13. GDP and GNP: <ul><li>GNP is total value of goods and services produced in a year by domestically owned factors of production (only final goods) regardless of where the output is produced </li></ul><ul><li>E.g. German owned car factory in US is a part of German GNP. </li></ul><ul><li>GDP is value of final goods and services produced within a country’s borders. </li></ul>
  14. 14. GDP and GNP: <ul><li>Output of the Honda plant in USA is a part of US GDP but Japanese GNP </li></ul><ul><li>Wages paid to American employees is a part of US GNP </li></ul><ul><li>Profits from the plant are a part of Japanese GNP but not GDP </li></ul>
  15. 15. National income <ul><li>National Income = net national product at factor cost </li></ul><ul><li>NNP at factor cost = GDP at market prices less indirect taxes plus subsidy+ NFIA less </li></ul><ul><li>depreciation </li></ul><ul><li>NFIA can be positive or negative= receipt of factor income from the rest of the world minus the payment of factor income to the rest of the world. </li></ul>
  16. 16. National income: <ul><li>Total of income earned by the factors of production , owned by a country’s citizens. </li></ul><ul><li>=compensation to workers+ proprietors income (income of unincorporated business) </li></ul><ul><li>+ corporate profits+ net interest (paid by business)+ rental income </li></ul>
  17. 17. Personal Income <ul><li>Personal income ( PI ) is national income plus net transfer payments from government minus amounts attributed but not received. </li></ul><ul><li>PI = NI + Transfer payments from government </li></ul><ul><li> + Net non-business interest income </li></ul><ul><li>– Corporate retained earnings </li></ul><ul><li>– Social security taxes </li></ul>
  18. 18. PERSONAL INCOME <ul><li>GDP + NFIA = GNP </li></ul><ul><li>Less depreciation = NNP </li></ul><ul><li>Less indirect taxes plus subsidies </li></ul><ul><li>=national income (NNP at factor cost) </li></ul><ul><li>Less (corporate taxes+ retained profits) </li></ul><ul><li>Plus interest income received from government </li></ul><ul><li>Plus transfer payments </li></ul><ul><li>= Personal Income </li></ul>
  19. 19. Disposable Income: <ul><li>Disposable personal income is personal income minus personal income taxes and payroll taxes. </li></ul><ul><li>Disposable personal income is what people have readily available to spend. </li></ul><ul><li>DPI = PI - Personal taxes </li></ul>
  20. 20. Uses of GDP Accounting: <ul><li>GDP figures are used to make comparisons among countries and to measure economic welfare over time. </li></ul><ul><li>GDP gives a measure of economic size and power. </li></ul><ul><li>Per capita GDP is another measure often used to compare nations' GDP. </li></ul><ul><li>Because of differences in non-market activities, per capita GDP can be a poor measure of the living standards in various nations. </li></ul>
  21. 21. <ul><li>GDP figures leave out the following: </li></ul><ul><ul><li>Illegal drug sales. </li></ul></ul><ul><ul><li>Under-the-counter sales of goods to avoid income and sales taxes. </li></ul></ul><ul><ul><li>Work performed and paid for in cash. </li></ul></ul><ul><ul><li>Unreported sales. </li></ul></ul><ul><ul><li>Prostitution, loan sharking, extortion, and other illegal activities. </li></ul></ul>
  22. 22. GDP as an indicator of economic welfare: <ul><li>GDP excludes unpaid economic activity </li></ul><ul><li>Comparisons between countries are distorted by changes in exchange rates. </li></ul><ul><li>In countries with a large underground economy , underestimation is likely </li></ul><ul><li>GDP does not give indication about standards of living </li></ul><ul><li>It ignores distribution of income. </li></ul>
  23. 23. GDP as an indicator of economic welfare: <ul><li>Nominal GDP values ignore inflation </li></ul><ul><li>High GDP values are often correlated with negative externalities such as pollution </li></ul><ul><li>Natural disasters raise GDP values but does not indicate a healthy economy. </li></ul>
  24. 24. Limitations of National Income Accounting <ul><ul><li>Measurement problems exist. </li></ul></ul><ul><ul><li>GDP measures economic activity, not welfare. </li></ul></ul><ul><ul><li>Subcategories are often interdependent. </li></ul></ul><ul><li>Non market activities are not accounted for. </li></ul>
  25. 25. Real vs nominal GDP <ul><li>Just because GDP rose does not mean welfare rose – it could be only prices rose. </li></ul><ul><li>Comparing output over time is best done with real output which is nominal output adjusted for inflation. </li></ul><ul><li>Nominal GDP is GDP calculated at existing prices. </li></ul><ul><li>Real GDP is nominal GDP adjusted for inflation. </li></ul>
  26. 26. Real GDP <ul><li>Real GDP is arrived at by dividing nominal GDP by the GDP deflator. </li></ul>
  27. 27. GDP DEFLATOR: <ul><li>Ratio of nominal to real GDP </li></ul><ul><li>Prices of current and base year are weighted by quantities of current year. </li></ul><ul><li>Nominal GDP has gone up by 58.7%but GDP at year 1 prices =15.10 .So an increase of 24.8% </li></ul>qty1 qty2 prc1 prc2 gdp1 gdp2 A 6 11 .5 .4 3 4.4 B 7 4 .3 1 2.1 4 C 10 12 .7 .9 7 10.8 12.1 19.2
  28. 28. Purchasing Power Parity: <ul><li>Purchasing power parity is used to get around the problems of per capita GDP. </li></ul><ul><li>Purchase power parity adjusts for different relative prices among nations before making comparisons. </li></ul><ul><li>E.g. McDonald Index </li></ul>
  29. 29. Laspeyre’s Index: <ul><li>Cost of purchasing base year basket at current year prices divided by cost of base year basket at base year prices </li></ul>
  30. 30. New WPI LAUNCHED