2. 2
Gross National Product (GNP)
Money value of all goods and services that are:
1. Currently produced
2. Sold through an official market
3. Not resold or used in further production during the
measurement period
4. Produced by nationally owned resources ( factors
of production)
5. Valued at market prices
3. 3
Expressed in money terms
Goods and services are non-additive in physical
quantities due to differences in units of measurement
“You cannot add apples and haircuts !!”
Quantities of various goods multiplied by their
respective prices added up give GNP
4. 4
Time
GNP includes only those items that are
produced during the period of time for
which the GNP stands.
5. 5
Official Market transactions
GNP accounts only for those goods that are
traded through the official market.
E.g. housework of a housewife is not
included.
BUT!
Payment of a house maid is included!
Why?
6. 6
Double counting
Raw materials and intermediate goods (I.e.
goods resold or used further for production
during the measurement period) are not
included in GNP so as to avoid double
counting of production.
E.g. wheat used in making bread, tyres used
in newly sold cars are not included.
7. 7
Following are not included in
GNP…….
Goods and services rendered free of charge.
Sale and purchase of old goods, shares, bonds
and assets of existing companies.
Social Security like unemployment insurance
allowance, old age pension and interest on public
loans.
Profits earned or losses incurred on account of
changes in capital assets as a result of
fluctuations in market prices.
Income earned through illegal activities.
8. 8
Gross Domestic Product (GDP)
GDP is the value of goods and services
produced within the nation’s geographical
territory, irrespective of the ownership of the
resources.
E.g. Citibank’s income in India is a part of
India’s GDP
9. 9
Net Factor Income from Abroad
(NFIA) = Exports – Imports
Market Price is when the value of goods and
services are calculated according to the prevailing
price.
Factor Cost is when the value of goods and
services is calculated as per the income received by
the factors of production
10. 10
Market price and factor cost
GNP at market price is inclusive of indirect taxes,
net of subsidies as it values the goods and
services at the prices paid by their end users.
To get GNP at factor cost, one must deduct net
indirect taxes from GNP at market prices.
Net Indirect Tax = Indirect Tax - Subsidy
Thus,
GNPFC= GNPMP - NIT
11. 11
GNP belongs to the nation and thus, it must
be produced by its owned factors of
production only.
E.g. Citibank’s profits are not a part of India’s
GNP
For GNP location of production is immaterial.
12. 12
Other income concepts
Corresponding to GNP and GDP, there are
NNP and NDP. The difference between the
gross and the net is the capital consumption,
called depreciation. Thus ,
NNP = GNP – depreciation
NDP = GDP – depreciation
13. 13
Relation between Gross & Net, MP & FC
Gross = Net + Depreciation
Market Prices = Factor Cost + Net Indirect
tax
National = Domestic + Net Factor Income
from Abroad
14. 14
GNPmp
=GNPfc
=GDPfc
=GDPmp
=NNPfc
=NDPfc
=NDPmp
=NNPmp
- Depreciation - Net Indirect Taxes
- NFIA- NFIA
-- Net Indirect
Taxes
- Depriciation- Depriciation
- NFIA- NFIA
- Net Indirect- Net Indirect
TaxesTaxes- Depreciation
- NFIA- NFIA
- Depreciation- Depreciation- Net Indirect- Net Indirect
TaxesTaxes
- NFIA- NFIA
15. 15
Private, Personal & Disposable Income
Private Income : The Income obtained by
Private Individuals from any source,
productive or otherwise and the retained
Income of corporations.
Personal Income : The spendable Income
available to individuals before Personal taxes
are deducted. It excludes undistributed profits
of companies, co-operatives etc.
Disposable Income : Income available with
individuals after paying the personal taxes.
16. 16
Some important terms which we use :
Business Transfer Payments : Corporate gifts to non
profit institutions.
Indirect Taxes : All forms of Business Taxes except
those on net Business Income.
Subsidies : Government compensation to business for
selling its goods and services below the market price.
Government Transfer Payments : Retirement pensions,
social security etc.
Supplement to labour Income : Employer’s contribution
to pension fund and employee welfare institutions.
Direct Personal Taxes : Taxes on Income paid by
individuals.
18. 18
Interrelations between NI concepts
NNPFC
( + ) Government Transfer Payments and
Business Transfer payments
( - ) Profits of government enterprises and from
government property
( = ) Private Income.
Private Income
( - ) Corporate savings (retained profits) before
taxes
( = ) Personal Income
19. 19
Interrelations between NI concepts
Personal Income
( - ) Employee contributions to Social Security
and Pension Funds and Direct Personal Tax
( = ) Disposable Income
Disposable Income = Consumer Expenditure
(+) net savings of Individuals.
20. 20
Real versus Nominal GDP
GDP valued at current price is Nominal GDP.
We calculate it by multiplying the quantity of
output by its current selling price.
This GDP usually increases every coming
year. This can be because of the increase in
the price level or the increase in the quantity.
To understand the real increase in GDP, we
have to multiply the current output by a Base
year’s price.
21. 21
Real versus Nominal GDP
2001 :
100 kgs of wheat X Rs.10 / kg = 1,000
+ 200 kgs of iron X Rs. 20 / kg = 4,000
------------
Nominal GDP = 5,000
------------
2005 :
120 kgs of wheat X Rs.15 / kg = 1,800
+ 250 kgs of iron X Rs. 25 / kg = 6,250
------------
Nominal GDP = 8,050
------------
22. 22
Real versus Nominal GDP
Real GDP of 2005 would be :
120 kgs of wheat X Rs.10 / kg = 1,200
+ 250 kgs of iron X Rs. 20 / kg = 5,000
------------
Real GDP = 6,200
------------
23. 23
Real Income
When the GDP is expressed in terms of a
general level of prices of a particular year
taken as base, it is called as Real GDP.
Base year should be :
A non election year.
A Normal Year where there were no Natural
calamities.
Should not be too far in the past.
India’s Base year was changed in Jan 2015
from 2004 / 5 to 2011/12.
24. 24
Per Capita Income
Per Capita Income = National Income
Total Population
Real Per Capita Income = Real NI
Total Population
25. GDP deflator
25
A deflator is used to convert data compiled over a period into prices
prevailing at an earlier point in time.
E.g. the current price of a television can be deflated to what it would cost
say three years ago.
Essentially, a deflator removes the effect of inflation from data, making it
comparable across periods.
It gives the percentage change in the price of a good as compared to the
cost in the base year.
26. 26
Methods of measuring national
income
Product method
Income method
Expenditure method
If done correctly, the following equation must hold:
Production = income = expenditure
27. 27
Product Approach
Under this approach, GDP at factor cost is
measured as the sum of the values of the flows of
value added from various production centers or of
the production of final goods and services.
Production sectors are conveniently classified into
a. Primary – agriculture and allied activities
b. Secondary- manufacturing, electricity, gas,
construction etc.
c. Tertiary – all items under services.
28. 28
The Product / Output (Value Added)
Method
The agricultural and extractive industries
Plus Manufacturing industries
Plus Services and construction
Equals Gross Domestic Product at Factor Cost
Plus Net factor income from abroad ( = income
received from abroad – income paid abroad)
Equals Gross National Product at Factor Cost
Less Capital consumption or depreciation
Equals Net National Product at Factor Cost or
National Income
29. 29
Income approach
Under the income approach, national income equals
the sum of the costs of production of goods and
services which equals the earnings that household
receive for their factors of production.
Thus,
NDPFC= wages+ interest + rent + profit
Transfer payments are not included such as unemp.
benefits and pensions
30. 30
Expenditure approach
Under this method national income is measured as
the sum of all final expenditure. Final expenditure
consists of expenditure on pvt. Consumption, gross
investment, expenditure on government
consumption, foreigners expenditure on exports net
of our expenditure on goods and services from
abroad.Thus,
GNPMP = C + I + G + X - M
31. 31
Expenditure Approach
Consumption (C)
Plus Gross private domestic investment (Ig)
Plus Government purchases (G)
Plus Net exports (NX) + Net factor income from abroad
Gross National product at market price
Less Net indirect taxes
Equals Gross National Product at factor cost
Less Depreciation
Equals Net National Product at factor cost (National
Income)
32. 32
Limitations of the GDP Concept
Society is better off when crime decreases,
but a decrease in crime is not reflected in
GDP.
An increase in leisure is an increase in social
welfare, not counted in GDP.
Nonmarket and domestic activities are not
counted even though they amount to real
production.
33. 33
Difficulties in measurement of
national income
Ignores the non-market and unofficial market economy
Erroneous measurement of output of services sector
Ignores quality of products
Is valued at official exchange rate; hence changes in
exchange rates affect NI
Ignores benefits due to leisure
Equates goods(education) and bads (weapons)
Ignores income distribution
34. 34
Contd …..
Ignores weather
Includes income generated through non-
productive activities such as defense, police,
courts etc.
Ignores qualities of life influenced by education,
health, living together, human freedom and so on
Ignores ethics, customs, traditions, habits. All
these factors have positive values for economic
welfare.
35. 35
Uses of National Income Statistics
National income statistics acts as :
a) An instrument of economic planning and
review
(b) A means of indicating changes in a
country’s standard of living
(c) A means of comparing the economic
performance of different countries
(d) An indicator to appraise the changes in
the economic growth of a country.
