National income concepts


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GDP, GNP, NY at factor cost, at market price, Personal income, Disposable Income, PCY

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National income concepts

  1. 1. 1 Prof. Prabha Panth, Osmania University NATIONAL INCOME
  2. 2. 2 National Income Concepts 1. Gross Domestic Product: GDP: The total value of all final goods and services accruing to an economy in one accounting year GDP = C+ GI + G + (X – M), C = Consumption expenditure of HHs. GI = Gross Investment by Firms, G = Government expenditure, X – M = Value of exports – value of imports. 2
  3. 3. 3 • GDP includes the value of all expenditure within the economy regardless of who earns it. • GDP includes the value of all final goods, not intermediate goods. • Final goods: e.g. Cars, not steel to produce cars. • Not unfinished goods. • Including intermediate goods leads to double counting.
  4. 4. 4 2. Gross Domestic Product or GNP: GNP = GDP + FA FA is Net foreign income from abroad. It includes income earned by Indians from other countries, Deducts income earned by foreigners working in India. If FA is positive, GNP > GDP. If FA is negative, GNP < GDP. 4
  5. 5. 5 3. Net National Product at market prices NNP = GNP – Depreciation Depreciation value of capital, buildings and other assets. Also called NNP at market prices, since the value of all goods and services is taken at the market prices.
  6. 6. 6 4. NNP at factor cost or NY NY = NNP at market prices – taxes + subsidies. Subsidies reduce the market price, undervalue output. Indirect taxes such as excise duties and sales taxes, increase the market price, over value output. These have to be adjusted to get NNP at factor cost or NY. NY = C + S 6
  7. 7. 7 5. Personal Income: PY = NY at factor cost + transfer payments – (corporate taxes + undistributed profits + SS payments) All income earned is not received by HH, and all income received may not be earned. • SS = social security payments such as life insurance premiums, provident fund payments • Transfer payments include gifts, bequeaths, bonus, dividends, pensions, scholarships
  8. 8. 8 6. Disposable Income: DY = PY – direct personal taxes Households pay income tax, deducted from PY to get DY. DY = C + S 7. Per capita income: PCY = NY/Population The size of PCY is taken as an index of the standard of living of the population, and the level of development of an economy. 8. Real Income = NY/Price Index Inflation raises the money value of all goods and services. To show real increase in output, the NY has to be deflated with the price index. 8