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# Measuring national income

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• There are there three main methods of calculating a country’s national income (Y): Income method adds up the factor incomes earned from the current production of goods and services Expenditure method adds up the money spent on all current finished goods and services , less the cost of imports (AD= C+I+G+X-M) Output method adds up the value of final current UK output . Intermediate output is ignored and value added (output less cost of inputs) is counted
• Gross Domestic Product (GDP) measures the value of economic activity , ie output produced, within the geographical boundaries of the UK in a given period Resource Cost or Income Approach: Sum the total wages and profit paid by firms for resources (see the circular flow). Value Added or Production Method Sum the value added at each stage of production process Expenditure Approach : Sum the total expenditures by households (from the top portion of the circular flow). of time, usually one year. GDP includes the value of products made by overseas-owned UK factories
• Factor income is the returns received on factors of production: rent is return on land, wages on labor, interest on capital, and profit on ...
• Gross Domestic Product (GDP) measures the value of economic activity , ie output produced, within the geographical boundaries of the UK in a given period of time, usually one year. GDP includes the value of products made by overseas-owned UK factories Part of this capital gets consumed during the year due to wear and tear i.e. depreciation
• Gross Domestic Product (GDP) measures the value of economic activity , ie output produced, within the geographical boundaries of the UK in a given period of time, usually one year. GDP includes the value of products made by overseas-owned UK factories Part of this capital gets consumed during the year due to wear and tear i.e. depreciation
• Gross Domestic Product (GDP) measures the value of economic activity , ie output produced, within the geographical boundaries of the UK in a given period of time, usually one year. GDP includes the value of products made by overseas-owned UK factories Part of this capital gets consumed during the year due to wear and tear i.e. depreciation
• Consumption (C): Is the spending by households on goods and services e.g. buying clothing, food, movie tickets Investment (I) : Is the purchases of capital equipment and structures e.g. factory, houses, etc. Government Purchases (G) : Includes spending on goods and services by local, provincial and federal governments (e.g. roads, police, etc.). Does not include transfer payments , because it is not made in exchange for currently produced goods or services. Net Exports (NX): Exports minus imports.
• Consumption (C): Is the spending by households on goods and services e.g. buying clothing, food, movie tickets Investment (I) : Is the purchases of capital equipment and structures e.g. factory, houses, etc. Government Purchases (G) : Includes spending on goods and services by local, provincial and federal governments (e.g. roads, police, etc.). Does not include transfer payments , because it is not made in exchange for currently produced goods or services. Net Exports (NX): Exports minus imports.
• Marginal propensity to import is change in import to change in Income
• Why sudden increase since 2002-03? Increased foreign investment, Increased crude oil cost
• ### Measuring national income

1. 1. Measuring National Income PVS CHANDRASEKHAR PAVAN KUMAR JAIN PRAVIN AGARWAL RAJESH ROY RAMAN PRASAD SINGH
2. 2. Structure of Presentation <ul><li>What is National Income </li></ul><ul><li>GDP/GNP/NNP etc </li></ul><ul><li>Its relation </li></ul><ul><li>Indian Trend over the years </li></ul><ul><li>Its comparison with other countries </li></ul><ul><li>Components of National Income </li></ul><ul><li>Multipliers </li></ul>
3. 3. What is National Income? <ul><li>National income measures the total value of goods and services produced within the economy over a period of time </li></ul><ul><li>National Income can be denoted in different ways with different meaning attached to it. </li></ul><ul><ul><li>Gross Domestic Product (GDP) </li></ul></ul><ul><ul><li>Gross National product (GNP) </li></ul></ul><ul><ul><li>Net National Product (NNP) </li></ul></ul><ul><ul><ul><ul><li>All these at Market Price/ Factor cost </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Also at current price and at fixed price </li></ul></ul></ul></ul><ul><ul><li>Let us see meaning of each of these </li></ul></ul>
4. 4. Gross Domestic Product (GDP) <ul><li>GDP measures the value of output produced within the domestic boundaries of the country </li></ul><ul><li>GDP includes the output of the foreign owned firms with production plants located in the country </li></ul><ul><li>There are three ways of calculating GDP - all of which should sum to the same amount since by identity: </li></ul><ul><li>National Output = National Expenditure = National Income </li></ul>
5. 5. Think about me! <ul><li>Indian working in US ask, what about my Income? </li></ul><ul><li>Korean working in Bangalore questions, why my income is part of your National Income? </li></ul><ul><li>To adjust this, we need to know </li></ul><ul><li>Net Factor Income from Abroad = </li></ul><ul><ul><li>Factor income sent to the domestic economy by the citizens of the country working abroad </li></ul></ul><ul><ul><ul><li>Minus </li></ul></ul></ul><ul><ul><li>Factor income sent abroad by the foreigners working in the domestic economy </li></ul></ul><ul><li>By adjusting Net Factor Income from Abroad, we get another unit of National Income, i.e. Gross National Product </li></ul>
6. 6. Gross National Product (GNP) <ul><li>GNP is the market value of all goods and services produced by the residents of a particular country. </li></ul><ul><li>It includes the income of those residents earned by corporations owned overseas and from working abroad. </li></ul><ul><li>It is also one of the measure of National Income </li></ul><ul><li>GNP = GDP + Net Factor Income from Abroad </li></ul>Difference between National and Domestic is Net factor income from abroad <ul><li>This income is at the cost of some capital </li></ul><ul><li>What about its depreciation; need to be adjusted </li></ul><ul><li>This leads to Net National Product </li></ul>
7. 7. Net National Product (NNP) <ul><li>NNP is defined as GNP minus Depreciation. </li></ul><ul><li>i.e. NNP = GNP - Depreciation </li></ul><ul><li>NNP is the most complete measure of productive activity by a country's nationals, though it is measured at market price </li></ul><ul><li>I.e. it includes, Indirect taxes and sometimes even subsidies </li></ul><ul><ul><ul><li>How can Nations Income from goods and services include indirect taxes and subsidies?. </li></ul></ul></ul><ul><ul><ul><li>This need to be adjusted to get actual values of National Income </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Adjusted NNP will be at factor cost </li></ul></ul></ul></ul></ul>Difference between Gross and Net is Depreciation
8. 8. Net National Product (NNP) at factor Cost <ul><li>For this, first find Net Indirect taxes </li></ul><ul><li>Net Indirect Taxes = Indirect taxes – subsidies </li></ul><ul><li>NNP at factor cost = NNP at market price – Net Indirect taxes </li></ul><ul><li>The Net National Product ( NNP) at factor cost is also commonly known as National Income </li></ul><ul><li>Thus National Income i.e Net National Product at factor cost can be calculated from GDP using following formula </li></ul>NI = GDP Market Price + Net factor Income – Depreciation – Net Indirect tax Difference between Market Price and Factor Cost is Net Indirect Taxes
9. 9. 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
10. 10. Components of National Income And its relation with each other
11. 11. 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
12. 12. Typical GDP Components of Measurement Consumption 59% Investment 18% Government Purchases 22% Net Exports 1% = 15 -14
13. 13. KEYNESIAN MULTIPLIERS <ul><li>Our consumption is not equal to our income </li></ul><ul><li>Similarly our change is income is not equal to change in consumption </li></ul><ul><li>However, change in consumption is proportional to change in income </li></ul><ul><li>Ratio of change in consumption to change in income is called as Marginal Propensity of Consumption. </li></ul><ul><li>Similarly Marginal Propensity of save = 1- mpc </li></ul>
14. 14. SIMPLE KEYNESIAN MULTIPLIERS <ul><li>Y = C + I + G + X – M </li></ul><ul><li>  C = Ca + mpc (Y), where mpc is marginal propensity to consume </li></ul><ul><li>Assuming T = 0, and assuming I, G & X is autonomous and M is also given </li></ul><ul><li>  Y = Ca + mpc (Y) + I + G + X – M </li></ul><ul><li>Y ( 1- mpc) = Ca + I + G + X – M </li></ul>is called as spending multiplier
15. 15. SIMPLE KEYNESIAN MULTIPLIERS <ul><li>Y = C + I + G + X – M </li></ul><ul><li>Assuming ‘T’ as Total Direct Tax  </li></ul>Y = Ca + mpc (Y-T) + I + G + X – M Y = (Ca + I + G + X – M) + mpc Y – T . mpc Y ( 1-mpc) = (Ca + I + G + X – M) - mpc .T Spending multiplier Tax multiplier
16. 16. SIMPLE KEYNESIAN MULTIPLIERS <ul><li>Now let us presume Tax is function of Y, and import is also function of Y </li></ul><ul><li>i.e T = t Y </li></ul><ul><li>M = m Y; m is marginal propensity to Import </li></ul><ul><li>C = Ca + mpc (Y – t Y) </li></ul><ul><li>Y = Ca + mpc (Y-tY) + I + G + X – m Y </li></ul><ul><li>Y = Ca + mpc Y – t. mpc. Y + I + G + X – m.Y </li></ul><ul><li>Y (1 + t.mpc – mpc + m) = Ca + I + G + X </li></ul>
17. 17. 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
18. 18. 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
19. 19. Let us compare National Income with other countries <ul><li>Cross Border Comparison: </li></ul><ul><ul><ul><li>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. </li></ul></ul></ul><ul><ul><ul><li>Current currency exchange rate is the exchange rate in the international currency market. </li></ul></ul></ul><ul><ul><ul><li>Purchasing power parity exchange rate is the exchange rate based on the (PPP) of a currency relative to a selected standard (usually the US \$). </li></ul></ul></ul><ul><ul><li>The ranking of countries may differ significantly based on which method is used. </li></ul></ul><ul><ul><li>For example, India ranks 12 th by nominal GDP, but 4 th by PPP. </li></ul></ul><ul><ul><li>The PPP method of GDP conversion is more relevant to non-traded goods and services. </li></ul></ul>
20. 20. 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
21. 21. Comparative GDP
22. 22. 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
23. 23. 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
24. 24. 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
25. 25. 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
26. 26. 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
27. 27. Let us see Trend over the years Now let us compare Change in GDP Deflator with Change in WPI with previous year
28. 28. Let us see Trend over the years While WPI both are moving very closely, GDP deflator is smoother compared to WPI, which is abrupt
29. 29. Let us see the trend of mpc and mps over the years <ul><li>For this data of GDP at market price and Private Final Consumption Expenditure has been taken </li></ul><ul><li>Then year wise change of GDP and change in PFCE is calculated </li></ul><ul><li>Then ratio of change in PFCE to GDP is obtained. </li></ul><ul><li>These figures plotted to see the trend of mps and mps over the years </li></ul><ul><li>Again PFCF is plotted against GDP at Market price to see the trend of Consumption-GDP curve </li></ul>
30. 30. 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
31. 31. Let us see the trend of mps over the years Number on peak are prevailing interest rates
32. 32. Let us see trend over the years Consumption- GDP curve <ul><li>C = Ca + mpc * Y </li></ul><ul><li>Ca = 11816 crores </li></ul><ul><li>Mpc = 0.56: This is average value over last 60 years </li></ul><ul><li>Regression Coefficient: 0.993 showing strong correlation between consuption and GDP </li></ul>
33. 33. 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?
34. 34. Business Cycle <ul><li>Business cycles are a type of fluctuation found in the aggregate economic activity </li></ul><ul><li>a cycle consists of expansions followed by contractions and revivals which merge into the expansion phase of the next cycle; </li></ul><ul><li>this sequence of changes is recurrent but not periodic; </li></ul><ul><li>duration of business cycles vary from more than one year to ten or twelve ears; </li></ul><ul><li>Generally contraction are sharp and last for 12 to 16 months while </li></ul><ul><li>Expansion are gradual and last even up to 6-7 years. </li></ul><ul><li>There are many economic indicator indicating change of phase </li></ul><ul><li>Change in GDP is one of such indicator (Not very strong) use in this study. </li></ul>
35. 35. Business Cycle Expansion Contraction Does war is anything to indicate?
36. 36. Is National Income is the reflection of Human Development? HDI, HPI, GNH
37. 37. Is National Income is the reflection of Human Development? <ul><li>What Are Some Problems with the GDP? </li></ul><ul><li>1.) Doesn't measure per capita to determine the most accurate standard of living </li></ul><ul><li>2.) Doesn't measure how the goods are distributed to the population </li></ul><ul><li>3.) Doesn't include unpaid household work </li></ul><ul><li>4.) Doesn't include the barter system, which is still used by many undeveloped countries </li></ul><ul><li>5.) Doesn't measure the quality of items produced </li></ul><ul><li>6.) GDP counts remedial and defensive expenditures (such as the costs of security, police, pollution clean up, etc.) as positive contributions to commerce. </li></ul>
38. 38. Is National Income is the reflection of Human Development? <ul><li>Therefore environmental degradation is rarely accounted for in GDP calculation. </li></ul><ul><li>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 </li></ul><ul><li>Because of all these, GDP can not be said as true measure of Human Development </li></ul><ul><li>Visit http://hdr.undp.org/en/statistics/data/hdi_gdp </li></ul><ul><li>As such, to measure Human Development, other index are being used like </li></ul><ul><li>Human Development Index; Human Poverty Index, Gross National Happiness etc </li></ul>
39. 39. The Human Development Index (HDI) <ul><li>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). </li></ul><ul><li>The HDI combines three dimensions: </li></ul><ul><ul><li>Life expectancy at birth, as an index of population health and longevity </li></ul></ul><ul><ul><li>Knowledge and education, adult literacy rate (2/3 rd ) school gross enrollment ratio (1/3rd) </li></ul></ul><ul><ul><li>Standard of living, as measured by the natural logarithm of gross domestic product per capita at purchasing power parity. </li></ul></ul><ul><li>Indias Rank is 134 th with HDI = 0.612 in 2007 </li></ul><ul><li>Norway tops the list with HDI = 0.971 </li></ul>
40. 40. Human Poverty Index <ul><li>In its Human Development Report 1997 the United Nations Development Program added another element to the standard definitions of poverty: the Human Poverty Index (HPI). </li></ul><ul><li>The Human Poverty Index frequently is divided into two measures. </li></ul><ul><ul><li>HPI-1 is used to measure absolute poverty in less developed countries. </li></ul></ul><ul><ul><li>HPI-2 is used to measure relative poverty in industrialized (more developed) countries </li></ul></ul>
41. 41. Human Poverty Index <ul><li>HPI 1: Its variables are: </li></ul><ul><ul><li>The percentage of a population likely to die before the age of forty; </li></ul></ul><ul><ul><li>The percentage of people over age fifteen who are illiterate; </li></ul></ul><ul><ul><li>The percentage of children under age five who are underweight; and </li></ul></ul><ul><ul><li>The percentage of people without access to public and private services such as health care and clean water. </li></ul></ul><ul><li>HPI 2: Its variables are: </li></ul><ul><ul><li>The percentage of people likely to die before the age of sixty; </li></ul></ul><ul><ul><li>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); </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>The social alienation that can accompany persistent unemployment and poverty. </li></ul></ul><ul><li>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. </li></ul>
42. 42. Human Poverty Index Source: http://earthtrends.wri.org/text/economics-business/variable-1419.html
43. 43. Gross National Happiness (GNH) <ul><li>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. </li></ul><ul><li>The term was coined in 1972 by Bhutan's former King Jigme Singye Wangchuck , who has opened up Bhutan to the age of modernization </li></ul><ul><li>GNH value is proposed to be an index function of the total average per capita of seven measures </li></ul>
44. 44. Gross National Happiness (GNH) <ul><ul><li>Economic Wellness: Indicated by economic metrics such as consumer debt, average income to consumer price index ratio and income distribution </li></ul></ul><ul><ul><li>Environmental Wellness: Indicated by environmental metrics such as pollution, noise and traffic </li></ul></ul><ul><ul><li>Physical Wellness: Indicated by physical health metrics such as severe illnesses </li></ul></ul><ul><ul><li>Mental Wellness: Indicated by mental health metrics such as usage of antidepressants and rise or decline of psychotherapy patients </li></ul></ul>
45. 45. Gross National Happiness (GNH) <ul><ul><li>Workplace Wellness: Indicated by labor metrics such as jobless claims , job change, workplace complaints and lawsuits </li></ul></ul><ul><ul><li>Social Wellness: Indicated by social metrics such as discrimination, safety, divorce rates, complaints of domestic conflicts and family lawsuits, public lawsuits, crime rates </li></ul></ul><ul><ul><li>Political Wellness: Indicated by political metrics such as the quality of local democracy, individual freedom, and foreign conflicts. </li></ul></ul><ul><li>This is more qualitative than quantitative measure </li></ul><ul><li>Still under development </li></ul>