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NATIONAL INCOME COMPUTATION
This document provides an overview of national income accounting. It defines key terms like gross national product (GNP), gross domestic product (GDP), real GNP, and per capita GNP. It also describes the three approaches to measuring national income: the income approach, output approach, and expenditure approach. Finally, it discusses the merits and limitations of using national income statistics to analyze and compare economic performance across countries.
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NATIONAL INCOME COMPUTATION
- 1. AMITY BUSINESS SCHOOL PRESENTED BY: SAKSHITIWARI MBA (GEN)
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- 3. INTRODUCTION National income accountingprovides us with ex-post data about national income, it cannot explain the level and determinants of national income. The following identities are true for any level of income. In order to explain and predict the level of national income, models are constructed.
- 4. Firm ConsumersFactor Owners FactorMarket Product Market Factor services Goods & services ExpenditureRevenueCostFactor Income Real Flow Money Flow The flow of economic activities in a 2-sector economy
- 5. GNP VS. GDP •Gross National Product (GNP): The total value at market prices of final goods and services produced by the citizens in an economy in a specified period. • Gross Domestic Product (GDP) The total value at market prices of final goods and services produced within the domestic boundary of a territory in a specified period.
- 6. GNP & GDP •NOT INCLUDED Resale of existing houses Sale of used cars / existing shares • INCLUDED Commission / Brokers’ fee Imputed rents of owner-occupied dwellings • Capital gain is not income (Irving Fisher) Only the interest earned from the capital gain is considered as income 6
- 7. REAL GNP &NOMINAL GNP & PER CAPITA GNP • Real GNP=(Nominal GNP/GNP Deflator)*100 • Per capita GNP = GNP / Population size
- 8. MEASUREMENT OF NATIONAL INCOME •Income Approach ⇒ NNP at factor cost OR National Income • Output Approach ⇒ GDP at factor cost • Expenditure Approach ⇒ GDP at market Prices
- 9. GDP at marketprice - Indirect sales tax + Indirect subsidies ⇓ GDP at factor cost + Net income from abroad ⇓ GNP at factor cost - Depreciation ⇓ NNP at factor cost Expenditure Approach Income Approach ⇐ W+I+R+P ⇐ Output Approach Factor Income- from abroad Factor Income paid abroad ⇒
- 10. NNP at factorcost - Retained profits - Social insurance / Mandatory Provident Fund - Direct business Tax + Transfer payments ⇓ Personal income - Direct personal taxes ⇓ Disposable personal income - Consumption = Saving
- 11. INCOME APPROACH • W+I+R+P= NNP at factor cost • Profits are stated net of depreciation / capital consumption allowances • If the figures exclude net income from abroad, NDP at factor cost can be obtained. • NDP at factor cost + Net income from abroad =
- 12. OUTPUT APPROACH • Thetotal value of the final goods and services produced by the primary / secondary / tertiary industries • In order to avoid double counting, the value-added method is adopted to exclude intermediate goods. • GDP at factor cost + Indirect Taxes – Indirect Subsidies = • Distinguish between Indirect / Direct / Business / Personal Taxes
- 13. EXPENDITURE APPROACH • Peoplespend their income.Thus, the total expenditure on final goods and services must be equal to the total value of final goods and services produced domestically. • Any output that is not sold to consumers is bought by producers in the form of unintended inventory investment. • C+I+G+(X-M) = Aggregate / Total expenditure
- 14. EXPENDITURE APPROACH • PrivateConsumption Expenditure (C) • Gross Investment Expenditure (I) Firms : plant (in progress) / unused raw materials Households : residential building Inventory investment : intended unintended (reduce information cost) - gross domestic fixed capital formation* - change in stocks & work in progress *gross national fixed capital formation ⇒GNP at market prices
- 15. Government Expenditure (G) roads/education/medical& health services/law & order/public works/… salary to civil servants, NOT transfer payments at the cost to taxpayers, NOT at market prices •Net Exports (X-M) the value of imports is included in C, I, G, X Exports include domestic exports & re-exports
- 16. ITEMS EXCLUDED FROMNATIONAL INCOME ACCOUNTING • Second-hand goods • Intermediate goods • Non-marketed goods / services Volunteer work / Housework • Unreported / Illegal market transactions
- 17. MERITS & USESOF NATIONAL INCOME STATISTICS • Reflecting & comparing the standards of living of different countries Per capita real GNP ⇒ standard of living • Providing information to the government and firms for economic planning • Reflecting the economic growth of a country % change in real GNP over a period of time
- 18. LIMITATIONS OF NATIONAL INCOMESTATISTICS • Factors that may understate the standard of living / the welfare • Exclusion of the value of leisure Same Q produced with fewer working hours ⇒ higher welfare • Exclusion of non-marketed / unreported transactions
- 19. LIMITATIONS OF NATIONAL INCOMESTATISTICS • Factors that may overstate the standard of living / the welfare • Undesirable Side-effects of Production Air pollution / traffic congestion /… Understate the real / social costs to society ⇒ externality /divergence between social costs & private costs
- 20. WHEN COMPARING ECONOMIC PERFORMANCESUSING NATIONAL INCOME STATISTICS, • Price Level use real GNP ⇒ eliminate the effect of inflation • Size of Population ⇒ use per capital GNP • Income Distribution more even distribution ⇒ higher welfare • Composition of National income more consumption, less national defence ⇒ higher welfare • Exchange Rates expressed in the same currency whether the exchange rates reflects the purchasing power of the 2 currencies