Course: Economics and Econometrics

Unit-4: National Income and Related Concepts

Table of Contents
4.1. Learning Objectives .................................................................................................................... 3 4.2. Introduction ................................................................................................................................. 3 4.3. National Income Measurement ................................................................................................... 5 4.4. Gross Domestic Product (GDP) and Gross National Product (GNP)........................................ 8 4.4.1. Computing GDP .................................................................................................................. 10 4.4.2. Components of GDP ............................................................................................................ 11 4.4.3. Real GDP vs. Nominal GDP ................................................................................................ 12 4.4.4. GDP Deflator ....................................................................................................................... 14 4.4.5. GDP per Capita .................................................................................................................... 15 4.4.6. Net Domestic Product .......................................................................................................... 15 4.5. Gross National Product (GNP) and Gross National Income (GNI) ......................................... 16 4.6. Gross National Income (GNI) and Net National Income (NNI)............................................... 17 4.6.1. NNI at Market Prices (NNIMP) Net National Income at Factor Cost (NNIFC) ..................... 19 4.7. National Income (NI), Personal Income (PI), Disposable Income (DI) ................................... 20 4.8. Methods of Measurement .......................................................................................................... 22 4.9. Equilibrium Output................................................................................................................... 27 4.10. Other Related Concepts .......................................................................................................... 28 4.10.1. Inventory goods ................................................................................................................. 28 4.10.2. Real and Nominal Income (Y) ............................................................................................ 29 4.10.3. Deflator and rate of inflation .............................................................................................. 30 4.10.4. Growth Rate of Income and Per Capita Income .................................................................. 32 4.11. Construction of Index Number and CPI ................................................................................ 33 4.11.1. Problems with the CPI ....................................................................................................... 36 4.12. Wholesale Price Index (WPI) .................................................................................................. 37 4.13. Summary .................................................................................................................................. 37 4.14. References ................................................................................................................................ 38 4.14.1. Book references ................................................................................................................. 38 4.14.2. Web References ................................................................................................................. 38

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4.1. Learning Objectives

By the end of this unit, you will be able to: Explain how the economy as a whole functions and changes over time. Describe different methods of measuring the output of an economy. Identify how spending in economy affects national output. Analyse the relevance of equilibrium output to policy measures particularly in goods market.

The Global Economy

Developing countries are expected to grow by only 1.2% this year, after 8.1% growth in 2007 and 5.9% growth in 2008. When China and India are excluded, GDP in the remaining developing countries is projected to fall by 1.6%, causing continued job losses and throwing more people into poverty. Global growth is also expected to be negative, with an expected 2.9% contraction of global GDP in 2009. Global GDP growth is expected to rebound to 2% in 2010 and 3.2% by 2011. In developing countries, growth is expected to be higher, at 4.4 % in 2010 and 5.7 % in 2011, albeit subdued relative to the robust performance prior to the current crisis.
Source: Global Development Finance, World Bank (www.worldbank.org)

We come to know about growth recorded by various countries on news channels and read it in financial magazines and newspapers. But we may not know, what is the relevance of these figures and how do various countries compile the data. We may even dont know how these figures are useful to us. This unit discusses on how the national income is computed and also about various other macro aggregates and their measurement.

4.2. Introduction
There is a fine distinction between micro and macroeconomic branches of analysis. Microeconomics mainly deals with individual and small units of economic activities. Macroeconomics is more concerned with aggregate economic activity at the social and national levels. Macroeconomics deals with the aggregate quantities and the problems arising out of activities, such as the once mentioned below. Supply of money National consumption Investment Page 3 of 38

Level of effective demand Government spending National savings Annual growth of the economy Foreign trade Balance of payments Exchange rates These aggregates can be quantified easily subjected to a mathematical approach. Expectations of future changes and uncertainties about these components create a dynamic environment for analysis which has fascinated economists for a long time. The simplest way of understanding how economy functions, would be through personal experience. In a localised situation like functioning of a production unit, this method works out well. However, when we scale up the activity, it may not accurately reflect the changes in the economy. Moreover, the reliability of this method becomes constrained considering the fact that economy incorporates thousands of activities. So, economists and social scientists have designed different models in an effort to study and explain how the economy as a whole functions and changes over time. By-andlarge they rely on observational methods. Exhibit: 4.1 India's GDP in 2008-09 India's gross domestic product (GDP) has increased by 7.5%, 9.5%, 9.7% and 9% in the first four years from fiscal year 2004-05 to 2007-08 recording a sustained growth of over 9 per cent for three consecutive years for the first time. According to Pranab Mukherjee, India is the second fastest growing economy in the world with 7.1 per cent GDP in 2008-09. With per capita income growing at 7.4 percent per annum, this represented the fastest ever improvement in living standards over a four-year period. The gross domestic savings rate increased from 29.8 % to 37.7 % during this period. The growth drivers for the period were agriculture, services, manufacturing along with trade and construction. The Indian economy witnessed moderation in growth in 2008-09 in comparison with the robust growth performance in the preceding five years. The deceleration in growth was broad based, across three major constituent segments of GDP, i.e. agriculture, industry and services. Moreover, deceleration in industry and services sector also persisted over four consecutive quarters of the year. Reflecting the contraction in global demand, exports declined. Domestic aggregate demand also moderated due to sharp deceleration in the growth of private consumption demand.
(Cont. on next page)

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(Cont. from previous page)

Exhibit: 4.1 India's GDP in 2008-09 Reflecting the expansionary fiscal policy response to the slowdown in growth, government consumption demand increased by 20.2 per cent. The contribution of government consumption expenditure to overall growth accordingly increased to 32.5 per cent from an average contribution of 5.9 per cent in the preceding five years. Corporate performance remained dampened, with significant fall in sales growth in the second half of the year, and decline in profits in last three consecutive quarters of the year. In 2009-10 so far, emerging signs of recovery are yet to indicate any clear trend, and the deficient monsoon and the depressed export performance have to be seen along with the improving growth in core infrastructure sector, recovering industrial production and more optimistic business outlook. Recognising the balance of risks to growth, the First Quarter Review of Monetary Policy for 200910 placed the projection for GDP growth at 6.0 per cent, with an upward bias. The inflation environment remained highly volatile during 2008-09; WPI inflation rose to a high of 12.9 per cent in August 2008 and declined sharply thereafter to below 1 per cent by the end of the year, before turning negative since June 2009. The currently observed negative inflation essentially reflects the impact of the high base of the previous year, and this transitory trend may not persist beyond few months. Within WPI, essential commodities continue to exhibit high inflation. Moreover, inflation expectations have not abated as much as the overall decline in WPI inflation and inflation as per different consumer price indices remain stubbornly high. The adverse impact of the deficient monsoon on food prices, notwithstanding the record food grains production in 2008-09 and the high buffer stocks, also indicates upside risks to inflation, besides the evidence from the Reserve Banks Survey of inflation expectations suggesting increase in inflation over the coming three months to one year. The First Quarter Review of Monetary Policy for 2009-10 took into account the emerging outlook on inflation and revised the inflation projection upwards from the earlier 4.0 per cent to 5.0 per cent, while reiterating 3.0 per cent as the medium term inflation objective
Source: Rediff News, February 2009 (http://www.rediff.com) Summary of the Annual Report of RBI for the year ended June 2009 (www.rbi.org.in)

4.3. National Income Measurement

The basic elements have to be measured, to prepare a database of statistics which provides information about the entire economy, rather than simply about a single household or firm.

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Two key factors which serve as object of the study for any macroeconomists involve: 1. Measuring the output of the economy 2. Measuring the cost of living in the economy The most basic and publicised tools of measuring the output and cost of living used by macroeconomists, policy makers, and consumers to understand and describe the economy are mentioned below: Gross domestic product (GDP): An indicator used to measure the output of the economy. Consumer Price Index (CPI): An index constructed to measure the cost of living in the economy. Gross domestic product, or GDP, is an indicator of economic performance that measures the market value of goods and services produced within a country and equals the total income within an economy. The consumer price index, or CPI, is a cost of living indicator; it measures the total cost of goods and services purchased by a typical consumer within a country. GDP and CPI show how much income exists within an economy and how much this income can purchase. The concepts of GDP and CPI open the door to a scientific understanding of the functioning of the economy on a large, or macro, level. By understanding the concepts of GDP and CPI, the world of macroeconomics begins to unfold. Exhibit 4.2 Need for the Study of National Income A national income measure serves various purposes regarding economy, production, trade, consumption, policy formulation. A study of national income is needed to: To measure the size of the economy and level of countrys economic performance To trace the trend of the economic growth in relation to previous year(s) and to compare it with other countries To make international comparison of peoples living standards To know the structure and the composition of the national income in terms of various sectors and industries To make projections about the future development trends of the economy To help government formulate development plans and policies to increase growth rates To fix various development targets for different sectors of the economy To help business firms in forecasting future demand for their products Page 6 of 38

The following are some definitions of national income by famous economists. The labour and capital of the country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds This is the net annual income or revenue of the country, or the national dividend. Alfred Marshal The national dividend or income consists solely of services as received by ultimate consumers, whether from their material or from their human environment. Irving Fisher National Income is the money value of all goods and services produced in a country during a year. J.M. Keynes Gross national product (GNP) is the most comprehensive measure of a nations total output of goods and services. It is the sum of the dollar (money) value of consumption, gross investment, government purchase of goods and services and net exports. Paul A. Samuelson The national income can be simply defined as the money value or market price value of all the final goods and services produced by the national citizens of a country during every financial year. The definition makes use of several terms such as- 'money value', 'market price', 'all final goods and services', 'national citizens'. Moreover, the statistical methods remain error prone creating a possibility of arriving at an approximate and a less exact value of national income. All these national aggregates are however mutually related and serve the purpose of a self correcting device of aggregative values to make them as accurate as possible. In other words, National Income = National Product = National Expenditure

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Figure 4.1
Three measures of national income of a country

The sum of all final goods and services produced

Sum of all incomes (in cash and kind) accruing to factors of production in a year.

Sum of consumers expenditure, net investment expenditure and govt. expenditure on goods and services.

4.4. Gross Domestic Product (GDP) and Gross National Product (GNP)
The first pair of the national aggregates is in the form of Gross Domestic Product (GDP) and Gross National Product (GNP) values. The value of GDP is the result of all productive activities carried out within the country. GDP is the monetary value of all final goods and services produced by normal residents as well as non-residents in the domestic territory of a country. This makes the GDP value important for measuring national income. However, in modern times, there are large-scale international transactions taking place between countries as well. Citizens of a country like technicians, doctors, lawyers, bankers etc. go abroad and earn considerable incomes. Questions arise whether this income should form part of national income or not. One school of thought suggests that this should genuinely form part of the national income of a country. But it is not earned within the territory of the country. GDP, being a geographic concept does not include the overseas earning by the domestic citizens; but these earnings form a part of GNP. GNP is the total market value of all final goods and services produced in a year in a country. In computing GNP such income (N) earned by domestic residents abroad is added to GDP. Non domestic residents like foreign citizens may be working inside the country and contributing to the value of the GDP. Since they are not the nationals their contributions (F) are deducted to arrive at an accurate value of the GNP. In other words net of the income earned abroad (N-F) when adjusted to the GDP gives the GNP. GNP = GDP + (N F) Where, (N-F) = Net Factor Income from Abroad (NFIA) This can be strengthened by Caselet1 given below. Page 8 of 38

Caselet 1 If a U.S. based company runs its production operations in India, whatever goods and services it produces in India is a contribution towards Indian GDP. But if the MNC, being of U.S. origin, have U.S. residents being a part of operations in India, then those employees income will be a part of U.S. GNP and not Indian GNP. It is the same in case of Indian employees working in U.S. for Indian based companies. The goods/services produced by Indian companies will be a part of U.S. GDP. But, in the case of income accrued by Indian employees working in U.S., it will be a part of Indian GNP. Lets assume some values for GDP and try to understand the relation between GDP and GNP. Let GDP India, income earned by Indian citizens in U.S. (N) and income earned by U.S. citizens in India (F) be Rs. 1780, Rs. 230, and Rs. 310 respectively. Then, using equation. 4.1, we find GNP as follows:

GNP GDP (N F) Rs.1,780 (Rs.230 Rs.310) GNP Rs.1,700

On the other hand, if we begin with GNP, then:

GDP GNP (N F) Rs.1,700 (Rs.230 Rs.310) GDP Rs.1,780

(Cont. in topic Gross National Income (GNI) and Net National Income (NNI))

A point to note here is that GNP will be more or less than GDP according to relative amounts of N and F. If N will be greater than F then GNP would be greater than GDP. That is; If N > F GNP > GDP

If N will be less than F, GNP will be smaller than GDP. That is; If N < F GNP < GDP

For all practical purposes, the distinction between GDP and GNP remains by-and-large inconsequential. Since the majority of production within a country is by citizens of that country, GDP and GNP are usually very close together. This has resulted in economists and policymakers adopting GDP as the measure of a country's total output. Page 9 of 38

4.4.1. Computing GDP Production of goods and services in an economy always refers to the total quantity of goods and services produced in an economy. It does not take in to consideration the demand from the economy. For e.g., if we produce 1000 bikes in the current year but the demand in the economy for current year turns out to be 800 bikes. GDP computation involves production and thus 1000 bikes will be taken as the output and not the number that is actually sold. We know that in an economy, GDP is the monetary value of all final goods and services produced. Illustration: 4.1 Let's say a country only produces apples and oranges. Table 4.1. Price and Quantity of Oranges and Apples in a Country Year Quantity of Price of Quantity of Price of Oranges Oranges (in Apples Apples (in Rs.) Rs.) 1 5 10 5 25 2 10 10 7 25 3 10 20 9 25 In year 1 the production is 5 oranges that are worth Rs.10 each and 5 apples that are worth Rs. 25 each. The GDP for the country in this year equals (quantity of oranges x price of oranges) + (quantity of apples x price of apples) or (5 x Rs.10) + (5 x Rs.25) = Rs.175. As more goods and services are produced, the equation lengthens. In general, GDP = (quantity of a x price of a) + (quantity of b x price of b) + ... + (quantity of n x price of n) Where, a, b and n shows the goods and services produced within the country. (Cont... in topic Real GDP vs. Nominal GDP) In the real world, the market values of many goods and services must be calculated to determine GDP. While the total output of GDP is important, the breakdown of this output into the large structures of the economy can often be just as important. In general, a standard set of categories is used to decompose an economy into its major constituent parts. Page 10 of 38

Thus, GDP is the sum of consumer spending (C), investment (I), and government purchases (G), and net exports (Nx), as represented by the equation: Y = C + I + G + Nx In this equation Y captures every segment of the countrys economy. So, Y represents both the GDP and the national income. When money changes hands, it is expenditure for one and income for the other, and Y, captures all these values, thus represents the net of the entire economy. 4.4.2. Components of GDP

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Figure 4.2
Government spending (G): sum of expenditures by all government bodies on goods and services, such as naval ships and salaries to government employees.

Consumer spending (C): spending on durable goods, nondurable goods, clothing, food, and health care.

GDP of a country is a sum of 4 elements

Investment (I): expenditures on capital equipment, inventories, and structures, such asmachinery, unsold products, housing.

Net exports (Nx): Difference between the exports and the imports

4.4.3. Real GDP vs. Nominal GDP Exhibit 4.3 Real GDP growth rates
Year 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04
Source: http://rbidocs.rbi.org.in

Growth Rate (%) 7.1 9.0 9.6 9.0 7.5 8.5

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GDP can be distinguished further as nominal GDP and real GDP. Nominal GDP is the total value of all final goods and services at current price, produced in a year. This is the GDP that is explained in the sections above. Nominal GDP is more useful than real GDP when comparing absolute output, rather than the value of output, over time.

Real GDP is the total value of all final goods and services at constant price, produced in a year. The prices used in the computation of real GDP are collected from a specified base year. By keeping the prices constant in the computation of real GDP, it is possible to compare the economic growth from one year to the next in terms of production of goods and services rather than the market value of these goods and services. In this way, real GDP enables year-to-year comparisons of output from the effects of changes in the price level.

The first step to calculating real GDP is choosing a base year. Lets understand how to calculate real GDP through the illustration 4.1. (Cont. From topic Computing GDP) Illustration 4.1 If we need to calculate the real GDP for year 3 follow the steps shown below: Use year 1 as the base year. Use the GDP equation with quantities of year 3 and prices of year 1. The real GDP is (10 Rs.5) (9 Rs.25) Rs.275 . For comparison, the nominal GDP in year 3 is (10 Rs.10) (9 Rs.25) Rs.325. Because the price of oranges increased from year 1 to year 3, the nominal GDP increased more than the real GDP over this time period. (Cont... in topic GDP Deflator)

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4.4.4. GDP Deflator When comparing GDP between years, nominal GDP and real GDP capture different elements of the change. Nominal GDP captures both changes in quantity and changes in prices. Real GDP captures only changes in quantity and is insensitive to the price level. After computing nominal GDP and real GDP, a third useful statistic GDP deflator can be computed because of the above said difference. The GDP deflator is the ratio of nominal GDP to real GDP for a given year. To get the GDP deflator in percentage term deduct one from the deflator ratio and multiply it with hundred. In effect, the GDP deflator illustrates how much of the change in the GDP from a base year is reliant on changes in the price level.

(Cont... from topic Real GDP vs. Nominal GDP) Illustration 4.1 Let's calculate, the GDP deflator for Country X in year 3, using year 1 as the base year. In order to find the GDP deflator, we first must determine both nominal GDP and real GDP in year 3 Nominal GDP in year 3 = (10 Rs.10) (9 Rs.25) Rs.325 Real GDP in year 3 = (10 Rs.5) (9 Rs.25) Rs.275 (with year 1 as base year) The ratio of nominal GDP to real GDP is

Rs.325 1 18.18%. Rs.275

This means that the price level rose 18.18% from year 1, the base year, to year 3, the comparison year.

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The GDP deflator allows for the calculation of nominal GDP by multiplying real GDP and the GDP deflator. This equation demonstrates the unique information shown by each of these measures of output. Figure 4.3 Nominal GDP captures both changes in prices and changes in quantities

Real GDP catures changes in quantities

GDP deflator captures changes in price level

Deflators can be calculated for NDP, NNP, GNP, etc. along the same lines but usually are not publicised. 4.4.5. GDP per Capita While GDP may be useful in capturing the size and growth of a country's economy, it will not provide the linkage to the standard of the living in the economy. After all, the economy itself is less important to the citizens of a country, than the standard of living that the economy provides. GDP per capita is the total GDP divided by the size of the population. GDP per capita is the amount of GDP that each individual gets on an average. So, it provides a reasonable measure of standard of living within an economy. GDP per capita indicates by its very definition the average income of an individual in the economy. As a general rule, higher the GDP per capita, higher is the standard of living. GDP per capita is of greater importance due to the fact that there are huge differences in population across countries. If a country has a large GDP and a very large population, each person in the country may have a low income and thus may live in poor conditions. On the other hand, a country may have a moderate GDP but a very small population and thus a high individual income. GDP per capita attempts to counter the problem of division of GDP among the inhabitants in the country and serves to compare standard of living across countries. 4.4.6. Net Domestic Product The net domestic product (NDP) equals the gross domestic product (GDP) minus depreciation on a country's capital goods. Page 15 of 38

Net domestic product accounts for capital that has been consumed over the year in the form of housing, vehicle, or machinery deterioration. The depreciation is also known as capital consumption allowance and represents the amount needed in order to replace those depreciated assets. This is an estimate of how much the country has to spend to maintain the current GDP. If the country is not able to replace the capital stock lost through depreciation, then GDP will fall. In addition, a growing gap between GDP and NDP indicates increasing obsolescence of capital goods, while a narrowing gap would mean that the condition of capital stock in the country is improving.

4.5. Gross National Product (GNP) and Gross National Income (GNI)
Exhibit 4.4 Gross National Product at Factor Cost for India Year At Current Prices GNP (Rs. in cr) 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07* 2007-08** * Quick Estimate ** Revised Advance Estimate
Source: www.rbi.org.in

Per Capita GNP (Rs.)

17,71,094 19,02,284 20,77,658 22,44,725 25,19,921 28,55,331 32,49,554 37,60,285 42,81,795

17,693 18,668 19,977 21,257 23,507 26,220 29,381 33,514 37,457

At Constant Prices (1999-2000) GNP Per (Rs. in Capita cr) GNP (Rs.) 17,71,094 17,693 18,41,755 18,074 19,51,935 18,769 20,29,482 19,219 22,04,913 20,568 23,66,886 21,734 25,93,160 23,446 28,45,156 25,358 31,09,361 27,323

Gross National Product (GNP) is the total of the market price values of all final goods and services, whereas Gross National Income (GNI) is the aggregate income received by all members of the society engaged in productive activities. Whenever the goods are produced and sold, the total yield gets distributed among various agents of the production. In the theory, we can classify the agents which contribute to the productive activity and receive the income into four categories. The four such categories of the income are mentioned below: Page 16 of 38

Profits to the producer (P) Wages to the labour (W) Rent to the owner of land and natural resources (R) Interest payment on loans and capital transactions (I) Therefore the value of GNI can be stated as: GNI = W + R + P + I For every income generated, there is some corresponding productive activity performed and vice versa. Therefore, the two values GNI and GNP must be conceptually identical. GNI = GNP

In practice, there may arise some disparity between these two aggregates. These could be attributed to various causes: 1. There may be some members in society who live on donations and hence earn income without performing any productive functions. An instance can be cited of the unemployed living on social security allowances in US and some European countries. 2. Some part of the goods produced may not be marketed but utilized for self-consumption. 3. There can be errors in computation or others which may cause some difference in these two values.

4.6. Gross National Income (GNI) and Net National Income (NNI)
The distinction between Gross and Net values of the national income has both theoretical and practical significance. The adjustment factor is Depreciation charges (D) against the utilization of the services of the stock of capital goods while producing current output. Such capital goods are of longer duration and have to be replaced a few years after their utility is over. Such an allowance for wear and tear of the fixed capital equipment is also known as capital replacement (Cr) cost. An allowance for wear and tear of the fixed capital equipment is also known as capital replacement (Cr) cost. The two values (D and Cr) are somewhat different in their computation and purpose. Though it is difficult to accurately predict the future replacement cost of the present capital assets, the usual procedure is to set aside a certain percentage (say 8 to 10 percent) of the national income in the form of depreciation charges. This adjustment is done as follows: Page 17 of 38

NNI = GNI - D........Eq. 4.01

(Cont... from topic Gross Domestic Product (GDP) and Gross National Product (GNP))

Illustration 4.1 Earlier in our illustration, we found out GNP of Rs. 1700 for India. GNI = Rs. 1700 (because GNP = GNI) Assume Depreciation (D) = 10% of Rs. 1700 i.e. Rs. 170
NNI NNI GNI D

Rs.1700 Rs.170

= Rs. 1530 The reverse operation will be:

GNI NNI NNI D

Rs.1530 Rs.170

= Rs. 1700 So, Net National Income for India is Rs. 1530.
(Cont... on topic NNI at Market Prices (NNIMP) Net National Income at Factor Cost (NNIFC))

The significance of the depreciation allowance can be explained with the help of a simple example shown in illustration 4.3: Illustration 4.2 If a farmer produces 200 quintals of grain every year then the entire production cannot be marketed or used for his family consumption. He will keep aside say 10 quintals, to be used as seeds for the next harvest and self consumption. In this case seeds worth 10 quintals are the depreciation allowance in the absence of which no output can be produced in the next harvest. Page 18 of 38

Only after making the adjustment of depreciation charges what remains in the form of NNI is available for current consumption purposes. Hence, it should be understood that the term 'national income' in this analysis refers to it in its net form. 4.6.1. NNI at Market Prices (NNIMP) Net National Income at Factor Cost (NNIFC) Another important distinction is between NNI in its market price value and NNI in its factor cost value. When national income value is computed in terms of market prices, the presence of two elements may not allow for the estimation of the true factor expenditure or cost of production of these goods. Market price incorporates the presence of taxes and subsidies. In presence of taxes like Sales tax, Excise etc, the incidence is on the end consumer and not on the producer. Therefore there will be disparity between the cost of production and the market prices. Therefore, few additions and deletions have to be made before we arrive at NNPFC. The two elements contained in the market price are: 1. Indirect taxes (IT) such as sales tax, excise duty etc. - The estimate of NNI will exceed the true cost of production to the extent of the IT value. Therefore, the value of indirect tax is to be deducted from the estimated value of the NNI at market prices in order to arrive at the factor cost value of the NNI. 2. Subsidy (S) or assistance in cash and kind provided by the government to private producers- On the other hand, the presence of subsidies unduly reduces the correct value than what it would otherwise have been in the form of cost of production. Therefore, the value of subsidies is to be added to the estimated value of NNI at market prices in order to arrive at the factor cost value of the NNI.
(Cont... from topic Gross National Income (GNI) and Net National Income (NNI))

Caselet 1 Assume indirect taxes of Rs. 460 and subsidy of Rs. 120 for India
NNI FC NNI FC NNI MP IT S

Rs.1,530 Rs.460 Rs.120

= Rs. 1190 In its reverse form:

NNI MP NNI MP NNI MP NNI FC Rs.1,530 IT S Rs.1,190 Rs.460 Rs.120

(Cont on topic National Income (NI), Personal Income (PI), Disposable Income (DI))

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In macroeconomics, national income value (NI) is stated in its factor cost version. Therefore unless otherwise stated we will refer to this value as NI (that is, National Income at factor cost).

4.7. National Income (NI), Personal Income (PI), Disposable Income (DI)
Having understood the process of arriving at the value of NI, we need to consider two more variables. The first one relates to Personal Income (PI) and the second Personal Disposable Income (PDI), sometimes referred to as Disposable Income (DI). Lets begin with personal income (PI) value. In modern times, with an increased public expenditure, the government undertakes a considerable amount of transfer of incomes in the form of gifts, loans, assistance etc. Some citizens may also receive similar donations from foreign countries. With such gratuities the individuals capacity to spend will be enhanced. However, this additional compensation is not a part of the NI. On the other hand, big corporate agencies are subjected to corporate tax to the extent of which national income reduces before it falls in private hands. Some corporate bodies may also set aside part of their profits in a reserve (undistributed profit, UP) to utilize it for future investment. This also reduces the size of the NI before it becomes Personal Income. (Cont. From topic Net National Income at Market Prices (NNIMP) Net National Income at Factor Cost (NNI FC)) Caselet 1 Assume that Corporate Tax (CT) = Rs. 80, Undistributed Profit (UP) = Rs. 90 and Unearned Income (UI) = Rs. 310. From the previous calculation we found NNI as Rs. 1190. Lets calculate Personal Income (PI):

PI NNI (CT UP) Unearned income

Rs.1190 (Rs.80 Rs.90) Rs.310

= Rs. 1330 In a reverse operation we have: NNI = PI - Unearned Income + (CT + UP) = Rs. 1330 Rs. 310 + Rs. 170 = Rs. 1190

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Disposable income is the income available to an individual for spending. Further the entire personal income is not available for disposal and for private consumption or investment expenditure. Part of the Personal Income is taxed away in the form of personal income tax (PT). The value of Disposable Income will be smaller than that of Personal Income to the extent of the tax. (Contfrom topic National Income (NI), Personal Income (PI), Disposable Income (DI) Caselet 1 If we assume Personal Income Tax as Rs. 130, then Disposable Income (DI): DI = PI - PT Rs.1330 Rs.130

Rs.1200
In its reverse form: PI = DI + PT Rs.1200 Rs.130

Rs.1330
The total sum of disposable income is not used for consumption but a part of it may be also saved for future spending. So, disposable income in case of current consumption is high it naturally results being future spending moderate. At the same time, current consumption is low means future consumption may be more. This results in more savings which in turn is a key perspective for any business manager.

The disposable income also reflects the purchasing power and living standards of the people in the economy. Disposable income = Consumption + Saving

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Summarising the Aggregates After having defined and explained various national aggregates lets review them. Aggregates are to be interpreted as values in millions or billions in the currency of respective countries such as dollars, pounds, marks, francs, rupees, yens etc. As per illustration 4.1, GNP = GNI = Rs. 1700 GDP = GNP N + F = Rs.1700 Rs.230 Rs.310 = Rs. 1780 NNP = GNP - D Rs.1700 Rs.170 = Rs. 1530 NNPMP = Rs. 1530 NNPFC = NNPMP IT + S = Rs.1530 Rs.460 Rs.120 = Rs. 1190 NI = NNPFC = Rs. 1190 PI = NI (CT+UP) + PT Rs.1190 Rs.170 Rs.310 = Rs. 1330 DI = PI - PT Rs.1330 Rs.130

Rs.1200

4.8. Methods of Measurement

We use income for purchasing goods and services. When demand for goods and services go up, production increases. Thus, income leads to expenditure which in turn leads to increased production.

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Figure 4.4

Production

Income Expenditure

Figure 4.4 shows how production, income and expenditure are mutually related. Economic activity is directly related to these three stages. Based on this, three methods are used for calculating national income. They are: Production method Income method Expenditure method (1) Production method This method aggregates the market values of all final goods and services produced to arrive at the national income value. This requires a proper and satisfactory maintenance of records of every small and private productive activity. But this method has limited significance since it suffers from certain drawbacks like the ones mentioned below: 1. Under production method, care has to be taken to include values of the final products. The values of intermediate products should be excluded in order to avoid double counting. For instance, if we consider the case of garment manufacturing industry; the raw materials pass through various stages before it is transformed into the final product. These include production of cotton thread, cloth and garments. Therefore, we have to include in the national income only the value of the ready-made garments as final products, plus the value of some amount of cotton thread and cloth which might have been used for direct consumption. Page 23 of 38

2. The emphasis on production of tangible goods undervalues the role of intangibles. Therefore, it is possible that useful services such as those of teachers, musicians etc. get excluded or underestimated. 3. Under product method, part of the goods produced such as grains, vegetables, fruit etc. may not be marketed at all but used for self-consumption by the household members of the producers. Evaluating the contribution of non-marketed products and adding it to the national income becomes a difficult task. Hence, the value of this method is limited. (2) Income method This is the simplest and most convenient method of computing national income. As per convention, all possible incomes earned (N), fall under one of the four categories. These are wages (W), rent (R), profits (P) and interest (i). When these four categories of income are aggregated at the national level and added up, we get the total of the national income. N=W+R+P+i Illustration 4.3 The table explains the stages of producing bread and factor incomes involved at each of these stages: Stage of production (1) Wheat Flour Dough Bread Sales receipts (2) 24 33 60 90 Cost of intermediate products (3) 0 24 33 60 Value added (4) 24 9 27 30 Factor incomes (5) R + W + i+ P R + W + i+ P R + W + i+ P R + W + i+ P

Though this method is simple it suffers from some inherent limitations, few of which are described below: 1. All possible occasions of earning income are never accurately recorded. Therefore, information available is often incomplete. Government administration, big corporations, factories, semi government organizations etc. maintain their wages, salaries and profit accounts. However availability of information becomes a problem in case of a large number of small units, self employed persons, small artisans etc. where account maintenance is hardly present. Besides, even if, such accounts are maintained, we may not be able to lay hands on them. Collection of data is practically difficult if not impossible.

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2. Authenticity of the income information presents yet another task of computing National Income through this method. There are instances where people may deliberately understate their income. Instances of some people overstating their income, to make it appear that they are richer than what they are, appears equally possible. 3. National income value is expected to correspond with national production of goods and services. In some cases, a part of the goods produced or possessed may be used for self consumption, then no income will be earned, yet the product value needs to be taken account of. A farmer producing 200 quintals of rice may use 20 quintals of it for self consumption. This product has not been marketed and no income is earned. This possesses a question about its inclusion in the National Income. Moreover, it is difficult to identify how much output was actually sold and what portion was used for self consumption. 4. The case is the opposite when unproductive income is earned. There may be some people receiving government transfer earnings in the form of pension or insurance assistance. Though these are incomes, there is no corresponding productive activity and hence need not be included in the national income accounts. The incomes earned illegally by a section of society such as gamblers, criminals, smugglers etc. should also not find place in the national income accounting. 5. Finally, there are some borderline cases. Some sections of the society are either not paid or are underpaid for the services that they render which are otherwise valuable. Housewives, social reformers, voluntary agencies fall under this category. The national income account remains inaccurate to the extent that these services are not accurately evaluated, or no complete information is received about them. (3) Expenditure Method Both product and income methods have their own limitations. Therefore the expenditure method is often employed as an alternative or as a remedial measure. The value of national income (Y) is equal to total income earned either in the form of expenditure on the consumption (C) of goods or investment (I). On the other hand, whatever income earned by the society is spent on purchasing goods (C) or remains unspent and saved (S). The terms income and expenditure in this respect are relative and flexible. One persons expenditure is anothers income and vice versa. According to Income approach Y = C + I According to Expenditure approach Y = C + S In an over simplified equation as above, only private consumption and private investment values have been taken care of. But actually, there are two more categories of expenditure which make significant contributions to national income accounts. These are in the form of public spending or government Page 25 of 38

expenditure (G) and foreign trade. Under the foreign trade sector a variety of to and fro transactions are continuously taking place. These are called imports (M) and exports (X).

Imports are liabilities, for which the government has to pay to foreign producers whereas; Exports are assets for which payments are received. Therefore, the values of imports tend to reduce and values of exports tend to enhance the national wealth or income. We therefore take account of the net export (X - M) that is, Nx of foreign trade and make adjustments in the national income accounts. The expenditure method is a useful device to collect and present information. Under this approach, we are only required to take account of the expenditure of the final products. Therefore, we have to exclude all such expenditure on intermediate goods and services. In this way, double counting of intermediate goods can be avoided because of which the national income estimate would be highly exaggerated in its value. In this respect, like the earlier two methods, this also has its limitations: 1. As noted earlier, those who receive pension, insurance and other benefits contribute to expenditure but do not contribute in a countrys productive activities in any way. All such expenditure will have to be set aside from the national income accounts. 2. On the other hand, part of the income genuinely earned may not be spent at all and not even be saved and deposited with the banks. Such a practice is called hoarding of income or of purchasing power. The national income accounts cannot be satisfactory to the extent of such hoarded income.

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Summary of methods of national income Lets present income and expenditure methods of national income accounting in the form of a summary. But before we do so, we have to introduce two adjustment factors which we have not taken in to account so far. These are in the form of depreciation charges (D) and indirect taxes (IT). Market prices of goods and services are marked to the extent of indirect taxes and depreciation charges. Therefore these values form part of the aggregate expenditure. But they are not present in the aggregate income under the income method of measurement. Therefore in order to strike a balance between the two methods either we have to deduct (D + IT) from the expenditure side or add it to the income side. We have then: Table 4.2
Expenditure Account Consumption Investment Government Expenditure Foreign Trade (Net Export) Less: Depreciation Indirect Taxes Gross National Product Income Account C I G Nx Wages Rent Profits Interest W R P i

D IT Gross National Product

OR Table 4.3
Expenditure Account Consumption Investment Government Expenditure Foreign Trade (Net Export) C I G Nx Income Account Wages Rent Profits Interest Plus: Depreciation Indirect Taxes Gross National Product W R P i D IT

Gross National Product

4.9. Equilibrium Output

Output is considered to be at equilibrium level when the quantity of output produced is equal to quantity of output demanded. At equilibrium level of output, firms are selling as much as they produce, people are buying the amount they want to purchase, and there is no tendency for the level of output to change. We now proceed to define equilibrium level of output as one at which aggregate demand for goods is equal to output (Y). Page 27 of 38

AD = C + I + G + Nx = Y Where, AD - Aggregate demand Aggregate demand can be defined as the amount of goods people want to buy whereas consumption and investment (private, government and external) are amounts of goods actually bought. In national income accounting, investment included unintended changes which occur when firms find themselves selling more than they had planned to sell. Thus a fine distinction emerges between actual aggregate demand measured in accounting context and economic context of planned aggregate demand. In national income accounts, aggregate demand (C + I + G + Nx) should be equal to output (Y). If firms miscalculate the output, there will be unsold goods (inventories) which count as investment. Therefore there is a mismatch between desired investment and actual investment. This creates inventory investment. IU= Y-AD Where, IU is unplanned investment or inventory investment. Summarizing a. Aggregate demand determines equilibrium level of output b. At equilibrium, unintended changes to inventories are zero c. An adjustment process for output based on these unintended inventory changes will actually move the output to its equilibrium level.

4.10. Other Related Concepts

4.10.1. Inventory goods A special mention needs to be made of the inventory goods which find an important place in the present national income accounts. This has not been mentioned earlier because it forms part of the current investment expenditure, other than consumption expenditure. It has three distinct elements: 1. Depreciation charges (D) 2. Expenditure on new capital equipment and goods produced or purchased 3. Inventories

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As we know, depreciation measures the amount of GNP that must be spent on new capital goods to maintain the existing physical capital stock. Net or current investment therefore, is investment minus depreciation. Besides, producers or sellers maintain large stocks of finished goods and raw materials in warehouses. These are not yet sold but are available for sales. Such stocks both of finished goods and of raw materials together constitute inventories of the producers. Normally, producers have some quantity of inventories which are intended to be sold. However sometimes there may also be unintended inventories when part of the goods remains unsold. In either case, these inventory goods form part of the business expenditure and act as a future asset. Therefore, these are included in the context of net investment expenditure. At the end of the year each business firm shows its investment account which includes a value of such inventories. Exclusions 1. Only services which are received or performed in the current year for respective goods and services will be taken into consideration. A good produced in the past year but sold in the current year will not be taken up for consideration while calculating the current years GDP. Unsold inventories and second hand goods are therefore excluded from GDP calculations. 2. Even though large amount of activities happens outside the market it doesnt gets into real GDP because, lack of common measurement across the market. 3. The GDP will not assign any cost to the welfare of the people and irreplaceable resources which might have developed by inefficiency in the system. 4.10.2. Real and Nominal Income (Y) By definition national income is the total value of all final goods and services at market price. Thus, every year all productive activities are evaluated at current market prices for this purpose. This is however the nominal value of the national income. We cannot use it to compare with the national income value of the last or earlier years. This is because of the fact that market prices contain an element of inflation and to that extent actual or real changes in the national income are not accurately recorded by the nominal value. To ensure a fair comparison is possible between the national income estimates of two or more years, it is necessary to make the prices uniform and price index applicable to adjust all such values. The process is called conversion of nominal values into real value or conversion of national income from current to constant prices. Generally, national income is symbolically denoted as Y. For example take Y1 and Y0 as the national income values measured in current prices of respective years (say P 1 and P0). In this case Y1 and P1 are national income and price values of the current year and Y 0 and P0 are similar values of the base year or of the initial year with which the comparison is to be made. Then, when Y1 value is converted into P0 price, such a conversion is known as translating nominal income Y 1 (n) into real income Y1 (r).

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Illustration 4.4 Let us assign numerical values to the variables: Let us say national income in the year 1 (Y1) is Rs. 2400 crores, the income in the base year (Y0) is Rs. 1600 crores, and the increase in income can be calculated as:
Y1 Y0 100 Rs.2,400cr 100 150 or 50% Rs.1,600cr

But part of this income is only nominal and not real, because of the corresponding rise in the price. This is clear if we divide each years nominal income value by the respective prices. In this way we can obtain real or physical variations in the units of goods produced. Assume the price for base year is Rs. 4/ unit and the price for year 1 is Rs. 5/ unit. Thus, in the year Y0 and Y1 physical units of goods produced are: Y0 Rs.1600 Y Rs.2400 400 units and 1 480 units P0 Rs.4 P1 Rs.5 Therefore, real or physical increase in the volume of output produced is only 80 units. 80 100 20% increase. Y1(r) = Rs. 1920cr That is, 400 This is exactly the extent of increase in the real income shown by Y1 (r). Y1(r) Rs.1,920cr 100 100 120 20% Y0 Rs.1,600cr Therefore, conversion of current to constant price or nominal into real income value by multiplying it by P0/P1 ratio makes the comparisons realistic and enables to remove the element of inflationary price rise. The process is also therefore, known as deflating current income into constant prices. 4.10.3. Deflator and rate of inflation Deflator refers to the extent to which nominal income has been deflated or reduced in its value in order to convert it into its real value. It is a coefficient computed as follows:

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Ydeflator

Nominal Y1 Real Y1

100

In illustration 4.5, the value of the deflator will be,

Ydeflator
OR

2400 100 125 1920

The deflator value is 25 percent. This is exactly the same proportion in which the prices of the two years have changed.

P1 100 P0

5 100 25% 4

Hence, under the real income computation process we have removed the 25 percent effect of the rise in the price. Since, to this extent we have deflated the value of nominal income, if we increase real income by 25 percent; once again we arrive at nominal income. Thus, we have 1920 + 25% = 1920 + 480 = 2400. Since, real income on multiplication by deflator factor results into nominal income value it can also be called as conversion factor.

Deflator - Base year index ] 100% 100

Deflator explains the rate of inflation. In the present case it is 25 percent. In a more systematic and general form rate of inflation can be stated as: In our example, [

125 100 ] 100% 25% 100

In illustration 4.5, the price P1 is higher than P0 and hence there is an inflationary rise in the price level by 25% during Y0 to Y1 year. This is a normal case. But in an exceptional year if the current price is lower than the base year price the deflator value will be less than 100 and the rate of inflation will be negative. In that case, it is called rate of deflation. Therefore, when the rate of inflation is positive, an inflationary rise in prices has occurred, but if the rate of inflation is negative the price level is said to have deflated.

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4.10.4. Growth Rate of Income and Per Capita Income Computation of annual national income and its conversion into real or constant price value are very important activities. It serves the purpose in analyzing a variety of economic problems on the national scale. One such use of national income statistics is to make comparisons from year to year. When national income in real terms is compared, we get a clear picture of the conditions of the economy. It is a convenient tool to assess whether an economy is making any progress or not and at what rate it has grown. Such a growth rate (g) of the economy is an indicator of economic prosperity of the country. The growth rate can be computed as follows:
g [ Yr1 - Yr0 ] 100 Yr0

This is a ratio of difference in the real national income value of two subsequent years divided by base year real income. On multiplying this ratio by 100 we get the percentage change in the real national income which is the growth rate of the economy. In illustration 4.5 we have,
g 1920 - 1600 ] 100 1600 320 [ ] 100 20% 1600 [

The economy can be said to have grown by 20 percent over the two periods Y0 and Y1. Comparison of national income and computation of real growth rate, though important, is not a satisfactory indicator. It is only an absolute measure and gives an idea about gross improvements in the countrys wealth. However, it does not explain ultimate improvement in the living standards of the population of the country. This is because while computing the growth rate we have not related it to the size of the population. If over the same period, the size of the population has also increased from say N0 to N1, than the share of each citizen in the national income must have increased only by a smaller proportion. Such a share of every citizen in the national income is called per capita income (P.C.) which is obtained as ratio of real national income to the population.

P.C 0 P.C1

Yr0 N0 Yr1 N1

1600 40 1920 42

40, where N 0 45.71,where N 1

40 42

Though the real national income has shown a growth rate of 20 percent, the per capita growth rate is only 14.27. This is because of the fact that increased national income has been shared by a greater Page 32 of 38

number of people with an expansion of population (say from 40 to 42 in the example). Hence though the national income in real terms has increased at a larger pace, living standards of the people have improved at a slower pace. The population growth rate over this period is 5%. The difference between growth rate of income (20%) and growth rate of per capita income (14.27%) is approximately equal to the same proportion as the population growth rate. Hence normally per capita growth rate is indicated as a difference between income and population (g - N) growth rates. The P.C. and its growth rate is a relative measure of comparing economic conditions of a society and is a power tool of analysis.

4.11. Construction of Index Number and CPI

Exhibit 4.5 Why is the CPI Important? The CPI is important because many of its applications affect most persons in some way. The CPI is used by employers and other agencies for the adjustment of wages and salaries; by labour unions in collective bargaining; by economists as a gauge for assessing the current performance of the economy; as a measure of inflation and by government in formulating and evaluating many economic policies. How is the Basket Created? The items in the basket are determined from information obtained from Household Income and Expenditure surveys conducted by the Central Statistical Office. During a specified period, a predetermined number of households from around the country provide information on their spending habits by maintaining a diary of everything bought during that specific period. This information is used to update the basket on which the CPI is based. This update allows for new goods and services that have become significant in households budgets, like Internet Service, to be included in the basket, and other items which have lost importance to be excluded or have their weights reduced. Once the basket is set up, the quality and quantity of the items in the basket are kept constant. However, the total cost of this fixed basket will vary from one period of time to another, as the prices of the items in the basket change. Price changes resulting from such a constant or fixed basket are defined as pure price movements, which is what the CPI, in essence, measures. The All Items index therefore gives in a single figure the percentage change in the cost of purchasing the contents of the basket over a period of time.
Source: CPI Questions and Answers, October 2001, Eastern Caribbean Central Bank (www.eccb-centralbank.org)

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Earlier we have computed the deflator and used it as a tool for measurement of the inflationary rise in prices. This is one example of an index number. There are a variety of index numbers or indices constructed and used for the purpose of comparing several quantitative changes as listed below: Prices Money supply Wages National income Population Others Some of the examples of price indices are Wholesale, Retail, Standard of living etc. There are certain standard index numbers of which three are commonly used. These are Paasches, Laspeyres and Fishers index numbers. Of these, Sir Irving Fishers index number is foolproof and is completely unbiased. Consumer Price Index (CPI) is considered as a standard or basic tool of comparison of the extent of and effect of changes in the price level. Let the base year quantity of goods consumed and their prices be denoted as q 0, p0 and q1, p1 for current year as quantities and prices respectively. Then the value of the CPI can be computed as:

CPI

q 1p 1 q 0p 0

100

The is a sign of summation. Therefore CPI is a ratio of sum of the quantity multiplied by the prices of the current year, divided by sum of the quantity multiplied by the prices of the base year. The ratio value is then multiplied by 100 to obtain the percentage change in the CPI value. The quantities are also known as weights. An illustration showing the method of constructing CPI is given below.

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Illustration 4.5 For convenience lets limit our example only to three goods - wheat, gold and paper. Then we have quantities of the three goods as consumed in the base year with their respective prices. Similarly we have current year quantities and prices. Table 4.4. Current Year Total Quan Price (Rs.) tity (Rs.) Expendi ture q0p0 q1 p1 60 9 7 80 7 12 48 15 3.5 q1p1 188

Goods

Base Year Quant Price ity (Rs.)

Total (Rs.) Expenditure

Wheat Gold Paper

q0 10 8 16 q0p0

p0 6 10 3

q1p1 63 84 52.5 199.5

The CPI value is therefore:

CPI

q 1p 1 q 1p 1

100

199.5 100 106.11 188

Therefore, CPI value over this period has increased by 6.11 percent. The rise in the CPI is considered the rise in the price level or the rate of inflation. Note that base year expenditure value is equated to 100 therefore the CPI index value for the base year is 100.

CPI base

188 100 100 188

It is a matter of both convenience and convention to assume base year value as 100. This enables us to compare with a similar value of any other year and to state the difference as a percentage change. Precautions to be taken to ensure that the value of the CPI is representative and reliable are listed below: There has to be proper selection of goods to be included in the construction of CPI. Weightages should be accurately assigned. Page 35 of 38

These attributes are selected based on their composition in the regular consumption of an average man. Normally the goods included in CPI construction are food, clothing, fuel, transport, education, housing some other items. Again the data about the statistical information on these items is to be collected from average members of the society. 4.11.1. Problems with the CPI The CPI is a convenient way to compute the cost of living and the relative price levels. But, as the computation of CPI is based on a fixed basket of goods, it does not provide an accurate estimate of the cost of living. There are three major problems associated with the computation of CPI, namely- the substitution bias, the introduction of new items, and quality changes. Let's examine each of these in detail. a) Substitution bias: When the prices of goods and services change from year to year, they do not change by the same amount. The number of goods purchased by consumers depends on the relative prices of these goods. But as the basket of goods is fixed, the CPI does not reflect consumer's preference for goods whose prices have changed little from one year to the next. For example, if the price of grapes in a country increased to Rs. 30 per kg in year 1 while the price of bananas remained fixed at Rs. 17 per kg consumers are likely to purchase more bananas and fewer grapes. This phenomenon of consumers substituting purchase of high priced goods for lower priced goods is not accounted for by the CPI. b) Introduction of New Items: As time passes consumers add new goods in the basket of goods and services purchased by them. For example, if in year 1 in country consumers began to purchase a toy introduced recently; this would need to be included in the calculation of CPI to get an accurate estimate of the cost of living. But since, the CPI uses only a fixed basket of goods; the introduction of a new product cannot be reflected. Instead, the new goods are left out of the calculation, in order to keep the time periods comparable with one another. c) Quality Changes: When there is an increase or decrease in the quality of a good, the value and desirability of that good change. For example, if grapes in a year suddenly became much more satisfying than in earlier year, but the price of grapes did not change from Rs. 30, then the cost of living would remain the same while the standard of living would increase. This change would not be reflected in the CPI from one year to the next. While the Bureau of Labour Statistics attempts to correct this problem by adjusting the price of goods in the calculations, in reality this remains a major problem for the CPI.

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4.12. Wholesale Price Index (WPI)

Exhibit 4.6 India's wholesale price index (WPI) is forecast to have fallen 1.35% in the 12 months to June 20, a third straight fall. If realised, it would be more than the WPI's annual 1.14% drop in the previous week, but smaller than a record 1.61% annual fall on June 6. WPI, the main measure of price pressures in India, fell below zero in early June for the first time since weekly data was released in the 1977/78 fiscal year. But the central bank and analysts see the deflation as a statistical correction, and not a sign of a weakening economy. Analysts see the WPI number at below zero for some more weeks but inflationary pressures are expected to build up in the coming months because of a rise in global oil and commodity prices. Most analysts expect headline inflation above 5% by the end of March. The WPI is more closely watched by financial markets than the monthly consumer price index (CPI) because it includes more products and is published on a weekly basis.
Source: India WPI seen down 1.35% (YoY) Reuters. (http://www.utvi.com)

The wholesale price index (WPI) is an indicator designed to measure the changes in the price levels of commodities at the wholesale level. The index is a vital guide in economic analysis and policy formulation, and as basis for price adjustments in business contracts and projects. It is also intended to serve as an additional source of information for comparison in the international front. WPI signals changes in prices facing the producer.1

4.13. Summary
The discussion above revolves around on the measurement of output and data used in such measurement. The central idea is capturing the performance of the economy. The interest is one the welfare of the economy which economists believe that increase in output increases the welfare.

National Statistics Office, Philippines, Technical Notes on The Wholesale Price Index (WPI), www.census.gov.ph

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4.14. References
4.14.1. Book references Oliver Blanchard, Macroeconomics, Pearson Education Publications, 4th edition, 2007 Ahuja, Macroeconomics Theory and Policy, S.Chand Publications, 2008 Gregory Mankiw, Macroeconomics, Worth publications, 6th edition, 2008, chapter 2 (pg 16 to 43) 4.14.2. Web References Visual statics on GDP Deflator/India/graph.html) Deflator in India (http://www.eyestat.com/en/GDP-

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