Beruflich Dokumente
Kultur Dokumente
2013
II.
III.
The Income Method: The people of country who produce GDP during a year receive
income from their work. Thus GDP by income method is the sum of all factor
income: Wages and Salary (compensation of employees)+ Rent + Interest + Profit
Expenditure Method: This method focuses on goods and services produced within
the country during one year. GDP by expenditure method includes:
i.
Consumer expenditure on services and durable and non-durable
goods (C),
ii.
Investment in fixed capital such as residential and non-residential
building, machinery and inventories (I),
iii. Government expenditure on final goods and services (G),
iv.
Export of goods
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Disposable Income:
Disposable Income = Personal Income Personal Taxes
Disposable income shows the purchasing power of the households.
Concepts Summarized: The following chart summarizes the various concepts of national
income.
GNP
Expenditure
Approach
Personal
Consumption
Expenditure
GNP
Income
Approach
Wages
Rent
Interest
Dividends
NNP
National
Product
Wages
Rent
Interest
Dividends
NI
National
Income
Wages
Rent
Interest
Dividends
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PI
Personal
Income
Wages
Rent
Interest
Dividends
DI
Disposable
Income
Consumption
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2013
Government
Purchases
Gross Private
Domestic
Investment
Net Foreign
Investment
Income of the
unincorporated
business
Corporate
Income Taxes
Income of the
unincorporated
business
Corporate
Income Taxes
Income of the
unincorporated
business
Corporate
Income Taxes
Social Security
contributions
Undistributed
Corporate profits
Indirect Business
Taxes
Depreciation
Social Security
contributions
Undistributed
Corporate profits
Indirect Business
Taxes
Govts Surpluses
Social Security
contributions
Undistributed
Corporate profits
Subsidies
Income of the
unincorporated
business
Subsides
Transfer
Payments
Saving
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200
X 100 = 50
400
By: Mayank Pandey
3
Personal
Taxes
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2013
GNP deflator =
Suppose the current year (2001) price index is 220 while the base year (1981) price index
220
number is 200, then the GNP deflator is 200x= 22/20=11/10=1.1
In order to obtain the real national income or national income of constant prices we divide the
nominal GNP of national income at current prices with the GNP deflator.
Private income
Private income is the income of the private sector obtained from any sources, productive of
otherwise, and the retained income of the corporations.
Private Income includes income from domestic product accruing to the private sector,
transfer earning, undistributed profits and net factor income from abroad.
Private income = Income from Domestic Product Accruing to the Private Sector + Net
Factor Income from Abroad + Net Transfer Payments from the Government + Transfer
Payments from the Rest of the World + Interest on National Debt.
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This method approaches national income from the distribution side. In other words, this
method measure the national income after it has been distributed and appears as income
earned of received by individuals of the country. Thus, according to this method, nation
income is obtained by summing up of the incomes of all individuals in the country.
Following the income approach, national income can be measured by aggregating the annual
flows of factor earnings generated by the production of the final output, say good I (Pi Qi) is
also reflected in the sum of the corresponding factor incomes generated, i.e., Pi Qi = Ri + Wi +
Ii + Pi.
Where Ri , Wi , Ii , Pi denotes flow of rent, wages, interest, and profits generated by the
production of good i. it follows, therefore, that national income can be measured as the sum
of annual flow of different types of factor incomes in the economy.
In this approach, payments for factor, viz., wages, salaries, rents, interest and profits are
directly aggregated together to obtain estimates of value added.
EXPENDITURE MEETHOD
This method arrives at national income by adding up all the expenditure made on goods and
services during a year. Income can be spent either on consumer goods or investment goods.
Thus, we can get national income by summing up all consumption expenditure and
investment expenditure made by all individuals as well as the government of a country during
a year. Hence, the gross national product is found by adding up the following.
(a)Personal Consumption Expenditure: What private individual spend on consumer goods
and services.
(b)Gross Domestic Private Investment: What private businesses spend on replacement,
renewals, and new investment.
(c)Net Foreign Investment: What the foreign countries spend on the goods and services of
the national economy over the above what this economy spends on the output of the foreign
countries, i.e., export minus imports.
(d)Government Purchases: What the government spends on the purchase of goods and
services, i.e., government purchases.
NATIONAL INCOME AS A MEASURE OF ECONOMIC WELFARE
Gross National product (GNP) is not a satisfactory measure of economic welfare because the
quantitative estimates of national income do not include certain production activities and
services which definitely affect the overall welfare of the people. Some of these factors not
taken into consideration in computing GNP are as follows:
1. Leisure
2. Quality of Life
3. Non-market Transactions
4. Structure of Production
5. Availability of Essential Consumer Goods
Engineering and Managerial Economics
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6. Externalities
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1.
2.
3.
4.
Deflation
Reduction
in Demand
Low
Production
Unemploymen
t
Demand
Production
Inflation
Employment
Savings
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So thus see that mild inflation is better than no inflation at all. This is true especially
for a country which is in the take off stage of development.
Business Cycles
Meaning and Definition
The term business cycle for trades cycle refers to the fluctuations in reconnecting activity that
occur in as more or less regular time sequence in all capitalist society
According to Prof. Haberler:
The business cycle in the general sense may be defined as an alternation in the periods of
prosperity and depression of good and bad trade.
CHARACTERISTICS OF BUSINESS CYCLE
Business Cycle possesses the following characteristics:
1. Cyclical fluctuations are wave-like movements.
2. Fluctuations are recurrent in nature.
3. They are non periodic or irregular.
4. They occur in such aggregate variables as output, income, employment and prices.
5. These variables move at about the same time in same direction but at different rate.
6. The durable goods industries experience relatively wide fluctuations in output and
employment and small fluctuation in price. On the other hand non-durable industries
experience relatively wide fluctuation in price and small fluctuation in output and
employment.
7. Business cycles are not seasonal fluctuations such as upswings in retail trade during
Diwali or Christmas.
8. Trade cycles are not secular trends such as long run growth or decline in economic
activity.
9. Upswing and downswings are cumulative in their effects.
PHASES OF THE BUSINESS CYCLE
According to Prof. Schumpeter a trade cycle will have four phases:
1. Expansion or Boom
2. Recession
3. Depression or Trough or Contraction
Engineering and Managerial Economics
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4. Recovery
Expansion or Boom
This phase of trade cycle represent the best stage of prosperity. In this stage hectic economic
activities go on and factors of production are put to optimum use. The main characteristics of
this phase are as under:
i. Income or production is the maximum. On account of the interaction of multiplier
and accelerator, increase in income is many times more than that of increase in
investment.
ii.
iii.
iv.
v.
vi.
vii.
Rate of interest also rises. However, the rise in rate of interest is less than the rise in
rate of profit.
Recession
Under the phase of prosperity, the entrepreneurs make investment in certain ventures which
do not prove to be profitable. The main features of this phase are:
i. There is fall in income, employment and output.
ii.
iii.
Since profits fall, there is no new borrowing despite fall in the rate of interest.
iv.
v.
Fall investment sets in motion the reverse action of the multiplier. Consequently,
income falls many times more than the decline in investment.
vi.
vii.
viii.
Depression or Contraction
Engineering and Managerial Economics
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Once the process of recession starts it becomes almost difficult to stop the trend. Salient
features of this phase are as follows:
i. Level of output and income is low.
ii.
Unemployment increases.
iii.
iv.
Volume of profit falls sharply. Hence despite fall in rate of interest, inducement to
invest is very low.
v.
Cash reserves with the banks pile up and demand for credit falls.
vi.
Old and worn-out machines are not replaced. Hence demand for capital goods falls.
vii.
viii.
ix.
Recovery
During the phase of depression the entrepreneurs do not even replace machine and other
capital goods. The main features of recovery are as follows:
i. Replacement investment results into increase in income and output.
ii.
Employment increases.
iii.
iv.
v.
vi.
Investment increases.
vii.
viii.
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Phase-IV
Recovery
Slowly Rises
Slowly Rises
September
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2. Output
3. Wages
4. Prices
5. Interest
6. Bank Credit
Rise
Rise
High
Fall
Fall Sharply
Begins to fall
Begin to Rise
Begins to Rise
Begins to Rise
Expands
Rises
Suddenly falls
Falls
Falls low
Falls very low
Begins to
Expand
Begins to Rise
Large
Optimism
Fall
Doubt and
Fear
Begins to Rise
Optimism
7. Cost of
Production
8. Stocks
9. Feelings
Features
Phase-II
Recession
Phase-III
Depression
Phase-IV
Recovery
Employment
Phase-I
Expansion or
Boom
Increase
Suddenly falls
Very Low
Slowly Rises
Output
Increases
Falls
Slowly Rises
Wages
Rise
Fall
Begin to Rise
Prices
Rise
Fall Sharply
Begins to Rise
Interest
High
Begins to fall
Very low
Begins to Rise
Bank Credit
Expands
Suddenly falls
Falls low
Begins to Expand
Cost of
Production
Rises
Falls
Begins to Rise
Stocks
Large
Fall
Begins to Rise
Feelings
Optimism
Pessimism
Optimism
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The external factors emphasize the causes of business cycles in the fluctuations of something
outside of the economic system. Such external factors are:
sunspots,
migrations,
wars,
discoveries of new land and
resources,
revolutions,
Over-Saving or Under
Consumption
iii.
Over Investment
v.
Psychological Causes
vi.
Innovations
September
2013
II.
Relief Measures
Of the various measures employed to mitigate the effect of contraction, the following are
worth mentioning:
1. Quick liquidation of inventories.
2. Reduction of costs of manufacture, both direct and indirect.
3. Improvement of quality to enhance demand.
4. Adoption of selling methods based on accurate analysis of the new situation.
5. Development of plant and organization for future business.
6. Part-time operation.
7. Utilization of profits gained in good times for payments to out-of-work employees.
8. Launching new merchandise lines during slack periods. Plans for these new lines are
perfected before the contraction arrives, so that the plant is ready to begin production
at once when the occasion calls for it. Such a policy is particularly appropriate for a
concern manufacturing novelties.
9. Transference of employees from on department to another during contraction. If such
a versatile labour force has been secured. Some of the worst effects of contraction on
the manufacturing firm can be avoided during depression. Such a move not only
benefits the firm concerned but also hastens recovery as a whole through the
maintenance of purchasing power among the working population.
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