Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

National income


Published on

Published in: Economy & Finance, Business
  • Be the first to comment

National income

  1. 1. National Income Accounting Shanku Kumar Kundan Kumar Sonu kumar Pooja Verma Namrata Jyoti Rani Saurabh Pintu
  2. 2. Meaning of national income accounting  The concept of National Income Accounting (NIA) was formulated by Sir William petty and Gregory king in the 17th century. Gregory king is known as the father of modern national income accounting. Later, Prof. Simon kuznet developed national income accounting more systematically. Also, United nations, world bank, International monetary fund (IMF) started playing a leading role in developing a uniform national income accounting system. In 1968,UNO developed Standard National Accounts (SNA).  NI accounting is defined as the method or technique used in the construction of NI accounts. First estimate on national and per capita income was prepared in India by Dadabhai Naoroji in 1876. The first scientific estimate was made by Prof. V.K. Rao for the year 1931-1932.  In NI accounting, there is a separate account for each section of the economy like production sector account .household sector, government sector, rest of the world sector account, etc. National income accounting clearly distinguishes between productive and non-productive activities. The non productive activities are excluded from national income accounts.
  3. 3. FUNCTIONS OF NATIONAL INCOME ACCOUNTING Two basics functions of national income accounting are:  To identify specific economic achievements of a country.  To provide an objective basis for evaluation and review of policies.
  4. 4. Uses of National Income Accounting The national income accounts have wide applications and serve as an effective tool of analysis. NI accounts are extremely useful in:  Estimating national income of the country.  Comparing national income of different countries.  Describing and explaining the level of economic growth of a country.  Estimating the contribution of each factor of production in the national income.  Estimating the contribution of each sector in the national income.  Planning especially for economically backward countries.  Suggesting effective policies for altering the levels of production and employment.  Implementing and testing economic theories or models that aim to explain or forecast economic behaviour.
  5. 5. SOME CONCEPTS (DEFINITIONS)  Good: In economics a good is defined as any physical object ,natural or man-made, that could goods which help in production. These goods are used for generating income.  Intermediate Goods: refers to those goods which are used either for final consumption or for resale. These goods do not command a price in the market.  Consumption Goods: Those goods which satisfy human wants directly.  Capital Goods: Those final fulfil needs of mankind directly.  Investment: Addition made to the stock of capital during a period is called investment. It is also called capital formation.
  6. 6. DEFINITIONS:  Depreciation: is expected fall in value of fixed capital goods due to normal wear and tear and obsolescence.  Gross Investment: Total addition of capital goods to the existing stock of capital during a time period at market price.  Net Investment: is a measure of net availability of new capital or new addition to capital stock in an economy. Net Investment =Gross investment- Depreciation  Stocks: Variables whose magnitude is measured at a particular point of time are called stock variables.
  7. 7. DEFINITIONS:  Flows: Variables whose magnitude is measured over a period of time are called flow variable.  Economic Territory: Economic (or domestic) Territory is the geographical territory administrated by a government within which persons, goods, and capital circulate freely.  Normal Resident of a country: is a person or an institution who ordinarily resides in a country and whose centre of economic interest lies in that country.
  8. 8. NOTES:  Basis of distinction between GROSS and NET is DEPRECIATION. Gross = Net + Depreciation  Basis of distinction between NATIONAL and DOMESTIC is Net factor income from abroad. National = Domestic + Net factor income from abroad.  Basis of distinction between MARKET PRICE and FACTOR COST is NET INDIRECT TAXES. (i.e., Indirect taxes-Subsidies) Market Price = factor cost + Net indirect taxes
  9. 9. NATIONAL INCOME AGGREGATES Domestic Aggregates  Gross domestic Product at Market Price (GDPmp) is the market value of all the final goods and services produced by all producing units located in the domestic territory of a country during a financial year.  Net Domestic Product at Market Price (NDPmp) NDPmp = GDPmp – Depreciation
  10. 10. National Aggregates  Gross National Product at Market price (GNPmp): is the market value of all the final goods and services produced by all producing units (in the domestic territory and abroad) of a country during a financial year. GDPmp + NFIA = GNPmp  National Income (NNPfc): is a measure of factor earnings of the residents of a country both from economic (Domestic) territory and from abroad during an accounting year. NNPfc = NDPfc + NFIA =National Income
  12. 12. INCOME METHOD  According to this method, NI is measured in terms of payments made to primary factors of production. So it is also called Factor payment method or distributed share method. The components of NI are given by the formula: NI or NNPfc = 1.Compensation of employees + 2. Operating surplus (rent+royality+interest+profit) + 3. Mixed income of self-employed ( NDPfc OR Domestic Factor Income = 1+2+3) + 4.Net factor income from abroad
  13. 13. VALUE ADDED METHOD (OR PRODUCT OR OUTPUT METHOD) It is defined as that method, which measure the national income by estimating the contribution of each producing enterprise to production in the domestic territory of the country in an accounting year. Value of Output = Quantity X Price = sales + Change in stock Value added = value of output – value of intermediate consumption. National income = sum total of net value added at factor cost across all producing units of an economy.
  14. 14. Estimation of national income 1.Gross value added in primary sector + 2.Gross value added in secondary sector + 3.Gross value added in tertiary sector = Gross Value Added (GVAmp) or GDPmp (1+2+3) Subtract(-) 4. Depreciation = Net Value Added (NVAmp) or NDPmp(1+2+3-4) Subtract(-) 5.Net Indirect Taxes = Net Domestic Income or NVAfc (1+2+3-4-5) Add(+) 6.Net Factor Income From Abroad =National Income or NNPfc (1+2+3-4-5+6)
  15. 15. EXPENDITURE METHOD The expenditure method of measuring National Income is also called Income disposal Method or consumption and Investment method. Expenditure method is a method which measures the final expenditure on gross domestic product at market price during an accounting year. According to expenditure method, GDPmp is the aggregate of all the final expenditure in an economy during a year, i.e., Y= C+ I + G + (X-M) Where, Y=National income C=Private Final Consumption Expenditure I =Final Investment expenditure or Capital formation G=Government Final Consumption Expenditure X-M=Net exports
  16. 16. RELATED AGGREGATES OF NATIONAL INCOME  PRIVATE INCOME: it is the income which accrues to the private sector from all sources. PRIVATE INCOME= Income from Net domestic product accruing to the private sector + Net factor income from abroad + Net transfer payments from the government + Transfer payment from rest of the world + Interest on National debt.  PERSONAL INCOME=It is the sum total of income actually received by a person from al sources including factor income and transfer income. Personal income= Private income – Corporation tax – Corporate saving or undistributed profit.
  17. 17.  Real National Income: It is defined as the value of current output at some base year price.  Nominal National Income: It is defined as the value of current output at current year price.  The GNP Deflator = Nominal GNP X 100 Real GNP
  18. 18. Green GNP Green GNP is defined as, GNP which would attain a sustainable use of natural environment and equitable distribution of benefits of development.
  19. 19. Some Limitations of GDP or GNP as measures of growth  Ignores income distribution  Ignores environmental degradation  Does not include activities that do not go through the formal markets sectors  Does not include “illegal” activities like drug trafficking, prostitution, moonlighting
  20. 20. Circular flow diagram  summarizes the transactions between the different economic agents  agents: households, firms (business), government, and foreigners (rest of the world)
  21. 21. Circular flow diagram  Assumption: The economy composed of households and firms only  Households: own factors of production, consume goods and service  Firms: hire factors of production to produce goods and services
  22. 22. The Circular Flow Wages, rents, interest, profits Factor services Household Goods Firms nt (production) e ernm g Taxes Government Gov endin Sp t Savin stmen gs Financial markets Inve I mp orts Personal consumption Other countries s xport E