National income accounting


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National income accounting

  1. 1. <ul><li>Gross National Product </li></ul><ul><li>Definition : Total market value of all goods and services produced in any given </li></ul><ul><li>year. GNP includes only currently produced goods and services in a year. </li></ul><ul><li>Components </li></ul><ul><li>Value of final consumer goods and services produced in a year and consumed </li></ul><ul><li>by the household which is referred to as consumption by households. </li></ul><ul><li>Value of new capital goods produced and addition to the inventories of goods in a </li></ul><ul><li>year such as raw materials, unfinished goods and consumer goods produced but </li></ul><ul><li>not sold.( Gross Private Investment) </li></ul><ul><li>Purchase of goods and services by the government denoted by G. </li></ul><ul><li>Net Exports i.e X n = X-M. </li></ul><ul><li>Net Factor income from abroad. </li></ul><ul><li>GDP mp = GNP mp – Net factor Income From Abroad </li></ul><ul><li>GNP mp = GDP mp + Net Factor Income From Abroad </li></ul>
  2. 2. Methods of Estimation of GNP <ul><li>Expenditure or Output approach to GNP : Nation’s total expenditure on goods and services produced during the year. Thus its constituents are following </li></ul><ul><li>Personal Consumption Expenditure </li></ul><ul><li>Includes Durable as well as Non durable goods and services produced during the year. Purchase of house not included. </li></ul><ul><li>Gross Domestic Private Investment </li></ul><ul><li>Includes Private Investment in capital goods such as buildings,machineries,plant equipment etc.,expenditure on purchase of house and net addition to business inventories. </li></ul><ul><li>Government’s purchase of goods and Services </li></ul><ul><li>Includes purchase of market consumer goods such as paper, stationary etc., Investment goods and services. </li></ul><ul><li>Net Foreign Investment. </li></ul><ul><li>Exports are included and value of imports is deducted. </li></ul>
  3. 3. 2. Income or allocation approach to GNP <ul><li>Wage and salaries of employees during the year plus certain supplements. </li></ul><ul><li>Income of non company businesses such as proprietors, partners and self employed persons. </li></ul><ul><li>Rental Incomes earned by individuals on agricultural and non agricultural property. </li></ul><ul><li>Corporate profits plus Corporate profits taxes plus dividends paid to the shareholder. </li></ul><ul><li>Net interest earned by the individuals </li></ul><ul><li>Indirect taxes </li></ul><ul><li>Depreciation of capital goods </li></ul>
  4. 4. Net National Product <ul><li>NNP= GNP- Depreciation </li></ul><ul><li>Known as National Income at market prices </li></ul><ul><li>Better index than GNP as depreciation is not included in NNP </li></ul><ul><li>Gives an idea of net increase in production. </li></ul><ul><li>Helpful in analysis of long run problem of maintaining physical supply of goods. </li></ul><ul><li>Highly useful concept for the study of growth economics. </li></ul><ul><li>However fixation of depreciation charges is an issue. </li></ul>
  5. 5. National Income <ul><li>Known as National Income at Factor cost. </li></ul><ul><li>It is the total of all incomes payments received by the factors of production i.e. land, labour and capital. </li></ul><ul><li>National Income = Net national product-Indirect taxes + subsidies- profits accruing to the government. </li></ul><ul><li>It helps us to know the distribution side of the national output that is how the national output is distributed among the various factors of production. </li></ul>
  6. 6. Personal Income <ul><li>It is that income which is actually received by the individuals or households in a country during the year from all sources. </li></ul><ul><li>Personal Income = National income – Corporate Income Taxes – Undistributed Corporate Profits – Social Contributions + Transfer Payments </li></ul><ul><li>It is a useful tool for estimating the potential purchasing power of the households in an economy. </li></ul><ul><li>It helps to measure the general welfare of the people in the country. </li></ul><ul><li>However, it does not tells us the actual amount of money available to the households for spending and saving. </li></ul>
  7. 7. Disposable Personal Income <ul><li>That part of personal income which is left behind after payment of personal direct taxes is called disposable personal income. </li></ul><ul><li>Disposoable Personal Income=Personal Income – Personal direct Taxes. </li></ul><ul><li>Disposoable Personal Income = Consumption + Saving. </li></ul><ul><li>Money burden of Personal direct taxation can be find out with the help of personal income </li></ul>
  8. 8. Difficulties in calculation of National Income <ul><li>Statistics inadequate and unreliable </li></ul><ul><li>Large non-monetized sector in underdeveloped economies. </li></ul><ul><li>Majority of small producers in underdeveloped countries are illiterate and ignorant. </li></ul><ul><li>Occupational specialization is not there in these countries. </li></ul>
  9. 9. Importance of National Income <ul><li>Gives the idea of aggregate production in the country. </li></ul><ul><li>Increasing national Income is an indicator of economic progress. </li></ul><ul><li>Economic welfare is closely connected with the magnitude of National income </li></ul><ul><li>Contribution from various sectors can be known. </li></ul><ul><li>Gives a picture about distribution of income among the various sections. </li></ul><ul><li>Volume of consumption, savings and investment in the country. </li></ul><ul><li>Formulation of economic policies and planning. </li></ul>
  10. 10. Relation between Economic Welfare and National Income <ul><li>The effect of National income on economic welfare an be studied in two ways </li></ul><ul><li>The change in the size of National Income: Positive change in NI increases its volume, as a result people consume more of goods and services, which leads to increase in economic welfare and vice versa. This relationship depends on various factors. </li></ul><ul><li>Only real increase in national income increases economic welfare. </li></ul><ul><li>NI cannot be a reliable index if per capita income is not taken into account. </li></ul><ul><li>Sometimes even with increase in NI and Per capita income economic welfare decreases due to unequal distribution of economic wealth. </li></ul><ul><li>Influence of increase in National Income on economic welfare also depends on the spending habit of the consumers. </li></ul><ul><li>The change in distribution of National Income </li></ul><ul><li>Change can be from rich to poor and from poor to rich and economic welfare is said to increase when former situation is implemented. </li></ul>