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National income accounting 1

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