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NNP at factor cost = NNP at market price – Net Indirect taxes
The Net National Product ( NNP) at factor cost is also commonly known as National Income
Thus National Income i.e Net National Product at factor cost can be calculated from GDP using following formula
NI = GDP Market Price + Net factor Income – Depreciation – Net Indirect tax Difference between Market Price and Factor Cost is Net Indirect Taxes
GDPmp GDPfc NDPmp GNPmp GNPfc NNPmp (-) Net Indirect Taxes (+) Depreciation (-) Depreciation (+) NfIA *NfIA: Net Factor Income Earned from Abroad (+) Net Indirect Taxes Relationship Between Macro Indicators (+) NfIA (+) NfIA
Components of National Income And its relation with each other
Y = C + I + G + NX The Components of GDP Government purchases of goods and services Total demand for domestic output ( GDP ) is composed of Consumption spending by households Investment spending by businesses and households Net exports or net foreign demand
Typical GDP Components of Measurement Consumption 59% Investment 18% Government Purchases 22% Net Exports 1% = 15 -14
Now let us presume Tax is function of Y, and import is also function of Y
i.e T = t Y
M = m Y; m is marginal propensity to Import
C = Ca + mpc (Y – t Y)
Y = Ca + mpc (Y-tY) + I + G + X – m Y
Y = Ca + mpc Y – t. mpc. Y + I + G + X – m.Y
Y (1 + t.mpc – mpc + m) = Ca + I + G + X
As we know Aggregate Income = Aggregate Expenditure C + I + G + X - M = C + S + T Remove C from both sides I + G + X S + T + M So, we can rewrite this as (S - I) = (G - T) - (M – X) Y = C + I + G + X - M budget deficit Trade deficit Saving-investment gap So difference between private domestic saving and investment is equal to the difference between the budget deficit (BD) and the trade deficit (TD). Relation between various deficits
Let us see where we are Source: RBI website Macro-economic Aggregates (At Constant Prices): New series (Base : 1999-2000 ) Compare to other countries and Over the years
Let us compare National Income with other countries
Cross Border Comparison:
For this GDP is required to be converted in national currency according to either the current currency exchange rate, or the purchase power parity exchange rate.
Current currency exchange rate is the exchange rate in the international currency market.
Purchasing power parity exchange rate is the exchange rate based on the (PPP) of a currency relative to a selected standard (usually the US $).
The ranking of countries may differ significantly based on which method is used.
For example, India ranks 12 th by nominal GDP, but 4 th by PPP.
The PPP method of GDP conversion is more relevant to non-traded goods and services.
Countries with largest GDP in 2005 Country GDP (millions of USD) World economy 44,433,002 European Union 13,446,050 1 United States 12,485,725 2 Japan 4,571,314 3 Germany 2,797,343 4 People's Republic of China 2,224,811 5 United Kingdom 2,201,473 6 France 2,105,864 7 Italy 1,766,160 8 Canada 1,130,208 9 Spain 1,126,565 10 South Korea 793,070 11 Brazil 792,683 12 India 775,410 13 Mexico 768,437 14 Russia 766,180
For the year 2007-08 (Rs in Crores) Difference between National and Domestic is Net factor income from abroad Difference between Gross and Net is Depreciation Difference between Market Price and Factor Cost is Net Indirect Taxes GDP at Market Prices 3402716 Indirect Taxes less Subsidies 272999 Consumption of Fixed Capital 350068 Net factor income from abroad -14853 GNP at Market Prices = 3402716 + (-14853) = 3387863 NDP at Market Prices = 3402716 - 350068 = 3052648 NNP at Market Price =3387863-350068= 3037795 GDP at Factor Cost = 3402716 – 272999= 3129717 NDP at Factor Cost = 3052647 – 272999= 2779648 GNP at Factor Cost = 3387863 – 272999= 3114864 NNP at Factor Cost = 3037794 – 272999= 2764795
Let us see Trend over the years What is this difference Net Indirect Taxes This ranges between 5 to 9.5 % of GDP at Market price in last 50 years
Let us see Trend over the years Why only one line? Net factor income from abroad: very negligible and ranged between 0 to 1.5% in last 50 years
Let us see Trend over the years What is this difference Depreciation This was 8.5 to 10.5 % of GNP at Market price in last 30 years
Let us see Trend over the years What is this difference This is (Depreciation + indirect taxes – net factor income) range between 11 to 20% of GDP at Market Price
Let us see Trend over the years Now let us compare Change in GDP Deflator with Change in WPI with previous year
Let us see Trend over the years While WPI both are moving very closely, GDP deflator is smoother compared to WPI, which is abrupt
Let us see the trend of mpc and mps over the years
For this data of GDP at market price and Private Final Consumption Expenditure has been taken
Then year wise change of GDP and change in PFCE is calculated
Then ratio of change in PFCE to GDP is obtained.
These figures plotted to see the trend of mps and mps over the years
Again PFCF is plotted against GDP at Market price to see the trend of Consumption-GDP curve
Let us see the trend of mpc over the years Peak: June 1972, April 1979, March 1991, May 1996, 2005-06 Trough: February 1975, March 1980, September 1991, November 1996, Sept 2008
Let us see the trend of mps over the years Number on peak are prevailing interest rates
Let us see trend over the years Consumption- GDP curve
C = Ca + mpc * Y
Ca = 11816 crores
Mpc = 0.56: This is average value over last 60 years
Regression Coefficient: 0.993 showing strong correlation between consuption and GDP
Let us see the trend of Import and GDP over the years M = slope =0 .10 M = slope = 0.36 Why sudden increase since 2002-03? Increased foreign investment, Increased crude oil cost What is the meaning of –ve intercept on import axis?
Business cycles are a type of fluctuation found in the aggregate economic activity
a cycle consists of expansions followed by contractions and revivals which merge into the expansion phase of the next cycle;
this sequence of changes is recurrent but not periodic;
duration of business cycles vary from more than one year to ten or twelve ears;
Generally contraction are sharp and last for 12 to 16 months while
Expansion are gradual and last even up to 6-7 years.
There are many economic indicator indicating change of phase
Change in GDP is one of such indicator (Not very strong) use in this study.
Business Cycle Expansion Contraction Does war is anything to indicate?
Is National Income is the reflection of Human Development? HDI, HPI, GNH
Is National Income is the reflection of Human Development?
What Are Some Problems with the GDP?
1.) Doesn't measure per capita to determine the most accurate standard of living
2.) Doesn't measure how the goods are distributed to the population
3.) Doesn't include unpaid household work
4.) Doesn't include the barter system, which is still used by many undeveloped countries
5.) Doesn't measure the quality of items produced
6.) GDP counts remedial and defensive expenditures (such as the costs of security, police, pollution clean up, etc.) as positive contributions to commerce.
Is National Income is the reflection of Human Development?
Therefore environmental degradation is rarely accounted for in GDP calculation.
A better measure of economic well-being would deduct such costs, and add in other non-market benefits (such as volunteer work, unpaid domestic work, and unpriced ecosystem services) in arriving at an indicator of well-being
Because of all these, GDP can not be said as true measure of Human Development
The Human Development Index (HDI) measures poverty using a combination of life expectancy, literacy, and amount of education, along with the domestic purchasing power of GDP (how much citizens of a country are able to buy based on the country's gross domestic product).
The HDI combines three dimensions:
Life expectancy at birth, as an index of population health and longevity
Knowledge and education, adult literacy rate (2/3 rd ) school gross enrollment ratio (1/3rd)
Standard of living, as measured by the natural logarithm of gross domestic product per capita at purchasing power parity.
The percentage of a population likely to die before the age of forty;
The percentage of people over age fifteen who are illiterate;
The percentage of children under age five who are underweight; and
The percentage of people without access to public and private services such as health care and clean water.
HPI 2: Its variables are:
The percentage of people likely to die before the age of sixty;
The percentage of adults living with functional illiteracy (a degree of illiteracy that does not allow people to function at a basic level in reading and writing);
The proportion of people living with long-term unemployment and below the poverty line, which is set at 50% of the median disposable household income.
The social alienation that can accompany persistent unemployment and poverty.
The Human Development Index measure how well a country is progressing toward development, whereas the Human Poverty Index measures the level of poverty and suffering experienced in a country at any given time.
Human Poverty Index Source: http://earthtrends.wri.org/text/economics-business/variable-1419.html
The concept of gross national happiness (GNH) was developed in an attempt to define an indicator that measures quality of life or social progress in more holistic and psychological terms than gross national product or GDP.
The term was coined in 1972 by Bhutan's former King Jigme Singye Wangchuck , who has opened up Bhutan to the age of modernization
GNH value is proposed to be an index function of the total average per capita of seven measures