BUSINESS ENVIRONMENT

UNIT II ECONOMIC TRENDS: OVERVIEW

SUBJECT EXPERT CA. AMITA BISSA

OBJECTIVE OF THE LECTURE

METHODS OF COMPUTATION OF NATIONAL INCOME THE CONCEPT OF NATIONAL INCOME AS A WHOLE TO KNOW NATIONAL INCOME OF OUR COUNTRY

NATIONAL INCOME
National Income The sum total of the values of all goods and services produced in a year & it also includes

net earned foreign income. It is the money

value of the flow of goods and services

available in an economy in a year. National

income is a flow not a stock.

NATIONAL INCOME
National Income: DEFINTION National Income Committee of India 1951

defines National Income as follows:

A national income estimate measures the volume of commodities and services turned out

during

given

period

counted

without

duplication.

National Income concepts

NATIONAL INCOME CONCEPTS

Gross Domestic Product - GDP

Personal Income PI
Disposable Personal Income DPI Per capita Income PCI

Gross National Product GNP

Net National Product NNP

GROSS DOMESTIC PRODUCT

GROSS DOMESTIC PRODUCT

Gross Domestic Product (GDP) is a measure
of the income and expenditures of an

economy. It is the total market value of all

final goods and services produced within a

country in a given period of time.

MEASURE OF GROSS DOMESTIC PRODUCT

Output is valued at market prices . It records only the value of final goods , not intermediate goods

(the value is counted only once). It includes both

tangible goods (food, clothing, cars) and intangible

services (haircuts, housecleaning, doctor visits).

MEASURE OF GROSS DOMESTIC PRODUCT

It includes goods and services currently produced , not transactions involving goods produced in the past. It measures the value of production within the geographic confines of a country. It measures the value of production that takes place within a

specific interval of time , usually a year or a quarter

(three months)

WHAT IS COUNTED IN GROSS DOMESTIC PRODUCT

COUNTED IN GROSS DOMESTIC PRODUCT

GDP includes all items produced in the economy and sold legally in markets BUT

GDP excludes most items that are produced and

consumed at home and that never enter the

market - place. It excludes items produced and

sold illegally, such as illegal drugs.

National Income Valuation method

DOUBLE COUNTING- NATIONAL INCOME

If steel has been evaluated in industrial production, it should
not be included while calculating the value of steel products, viz, machines and motor cars.

To avoid double counting or multiple counting, two methods

are used Final products method Value added method

Final Product Method Adding the value of final products only

Value added method: Go on adding the values created at each stage in the manufacture of a commodity .Then all such values created

are added up together to arrive at the national income of

the country

GROSS NATIONAL PRODUCT

Gross National Product
Gross National Product (GNP) is the total income earned by a nations permanent residents (called nationals). It differs from GDP by including income that our citizens earn abroad

and excluding income that foreigners earn here.

GROSS NATIONAL PRODUCT IN EQUATION FORM

GNP=GDP+X-M X=Income earned & received by nationals within the boundary of foreign countries.

M=Income received by foreign nationals from with in

the country. If X=M ; then GNP=GDP Similarly, in a closed economy X=M=O, then also GNP=GDP

NET NATIONAL PRODUCT

NET NATIONAL PRODUCT

Net National Product (NNP) is the total income of the nations residents (GNP) minus losses from depreciation. Depreciation is the wear and tear on the economys stock of equipment and structures Therefore NNP=GNP-Depreciation

National Income

NATIONAL INCOME
National Income is the total income earned by a nations residents in the production of goods and services. It differs from NNP by excluding indirect business taxes (such as sales taxes) and including business subsidies. NI = NNP- Indirect Tax + Subsidy

Personal Income

PERSONAL INCOME
Personal Income earned by all the individuals

and institutions during a year in a country .

The entire national income does not reach

individuals and institutions

A part of it goes by way of corporate taxes

Undistributed profits
Social security contributions.

PERSONAL INCOME
Persons sometimes gets income without any

productive activities. They are called transfer

payments. Example

Unemployment benefits, old age pensions etc.

such transfer payments are not included in

National Income but they are included in

personal income

PERSONAL INCOME
PI is computed using the following formula

PI = NATIONAL INCOME- ( CORPORATE TAXES, UNDISTRIBUTED PROFITS, SOCIAL SECURITY CONTRIBUTIONS) + TRANSFER PAYMENTS

Disposable Personal Income

DISPOSABLE PERSONAL INCOME

Disposable Personal Income is the income that household and non-corporate business is left after satisfying all their obligations to the

government. It equates personal income minus personal taxes and certain non tax payments.

DIP = Personal Income(PI) - Direct Taxes

Per Capita Income

PER CAPITA INCOME

If National Income is divided by population , we get per capita income Per Capital Income = NATIONAL INCOME POPULATION total

PRODUCTION METHOD OR CENSUS METHOD

INCOME METHOD

COMPUTATION OF NATIONAL INCOME

EXPENDITURE METHOD

Production Method

PRODUCTION METHOD
O= C +I
WHERE ,

O =
C =

OUTPUT
CONSUMPTION OF GOODS

INVESTMENT GOODS

INCOME METHOD
According to this method,
income of individuals

net
and

business houses during a year are

added to know the national income.

INCOME METHOD
Only those incomes earned and received for producing goods and for rendering services are to be counted Transfer payments such as old age pensions , widow pensions and unemployment benefits etc should not be counted as these are the incomes received without contributing to the production

INCOME METHOD
People get incomes in the form of Rents, wages or salaries, interest and profit The formula is Y=C+S Here Y stands for Total Income C stands for consumption and S stands for Savings

Expediture Method

EXPENDITURE METHOD
One mans income is another mans expenditure Therefore, national income can be arrived at by adding the total expenditure of individual and business firms during a year.

EXPENDITURE METHOD
Expenditure or outlay on final products takes place in

three ways
1. Expenditure by consumers on goods and services.

2. Expenditure

by entrepreneurs on capital and

investment goods.

3. Expenditure by government on consumption and

capital goods

EXPENDITURE METHOD
Y= C +I
WHERE ,

Y
C

=
=

TOTAL EXPENDITURE
CONSUMPTION EXPENDITURE

INVESTMENT EXPENDITURE

DIFFICULTIES IN COMPUTING NATIONAL INCOME

The following are the practical difficulties in the
measurement of national income 1. The statistics are not fully available 2. Non-monetized sector is dominant 3. Most people take out their livelihood from more than

one activity

DIFFICULTIES IN COMPUTING NATIONAL INCOME

4. In backward economies like India, particularly in the rural
sector. 5. In developing economics like India, particularly in the rural sector, the cultivators and small producers are illiterate and they do not keep books of account. This is the serious difficulty in the calculation of national income. 6. Avoidance of double counting becomes complicated.

GDP real Growth Rate ( in percentage)

9% 8.30% 8.40% 8.20% 7.40% 6.20% 4.30%

2003

2004

2005

2006

2007

2008

2009

CURRENT ECONOMIC PROFILE OF INDIA

Gross Domestic Product during 2011-12 [at
current prices] : US$ 1680.69 billion

(Rs 82.8 trillion)

CURRENT ECONOMIC PROFILE OF INDIA

Gross Domestic Product during 2011-12 [at constant (2004-05) prices]: US$ 1060.42 (Rs 52.2 trillion) Gross Domestic Product growth rate during 2011billion

12 : 6.9 per cent

CURRENT ECONOMIC PROFILE OF INDIA

Per capita income during 2011-12
[at current prices] : US$ 1237.13 A (Rs 60972 ) Per capita income during 2011-12 [at constant (2004-05) prices] : US$ 771.72 (Rs 38005

CURRENT ECONOMIC PROFILE OF INDIA

Per capita income during 2011-12
[at current prices] : US$ 1237.13 (Rs 60972 )

Per capita income during 2011-12

[at constant (2004-05) prices] :

US$ 771.72 (Rs 38005)

SUMMARY