National Income and its components

Presented By: Prof Ritesh Lal

The Economys Income and Expenditure

When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning.

The Economys Income and Expenditure

For

an economy as a whole, income must equal expenditure because:

Every

transaction has a buyer and a

seller. Every rupee of spending by some buyer is a rupee of income for some seller.

Components of National Income

Gross

Domestic Product (GDP) Gross National Product (GNP) Net National Product (NNP) Personal Income Disposable Personal Income

GDP is the market value of all final goods and services produced within a country in a given period of time.

The Measurement of GDP

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).

The Measurement of GDP

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.

The Measurement of GDP

It

measures the value of production that takes place within a specific interval of time, usually a year.

What Is Counted in GDP?

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

What Is Not Counted in GDP?

GDP

excludes most items that are produced and consumed at home and that never enter the marketplace. It excludes items produced and sold illicitly, such as illegal drugs.

The Components of GDP

GDP (Y ) is the sum of the following:

Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX)

Y = C + I + G + NX

The Components of GDP

Consumption
The

(C):

spending by households on goods and services, with the exception of purchases of new housing.

Investment
The

(I):

spending on capital equipment, inventories, and structures, including new housing.

The Components of GDP

Government
The

Purchases (G):

spending on goods and services by local, state, and federal governments. Does not include transfer payments because they are not made in exchange for currently produced goods or services.
Net

Exports (NX):
minus imports.

Exports

To summarise:

GDP= Market value of goods & services produced by the residents in the country (+) Incomes earned in the country by foreigners (-) Incomes received by residents of a country from abroad

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.

To Summarise:
GNP=

Market value of domestically produced goods & services (+) Incomes earned by the residents of a country in foreign countries (-) Incomes earned by the foreigners in the country

Net National Product (NNP)

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.

To summarise:

NNP=

GNP - Depreciation

Personal Income
Personal

income is the income that households and non-corporate businesses receive. Unlike national income, it excludes retained earnings, which is income that corporations have earned but have not paid out to their owners. In addition, it includes households interest income and government transfers.

Personal Income & NNP

Personal

Income= NNP (-) Undistributed Company Profits (-) Surplus of Public Undertaking (-) Rentals of Public Property

Disposable Personal Income

Disposable

personal income is the income that household and noncorporate businesses have left after satisfying all their obligations to the government. It equals personal income minus personal taxes.

To Summarise:
Disposable

Personal Income= Personal

Income (-) Personal Taxes

Methods of measuring National Income

1.Net Product Method or Value Added Method 2. Factor Income method or Factor share method 3. Expenditure Method

Net Product Method (Three stages)

Estimating

the gross value of domestic output in the various branches of production Determining the cost of material and services used and also the depreciation Deducting these costs and depreciation from gross value to obtain the net value of domestic output.

Net Product Method

The

aggregate of all goods and services from the 3 sectors. The components are:
Primary sectors- agricultural, mining, fishing. Secondary sectors- industrial sectors. Tertiary sectors- service sector.

Calculation through Net Product Method

The total value of final goods and services from the 3 economic sectors:(+) Primary sector (+) Secondary sector (+) Tertiary sector = Gross domestic product at Market price (GDPmp) (-) Income paid abroad (+) Income received from abroad = Gross national product at Market price (GNPmp) (+) Subsidies (-) Indirect taxes or taxes on expenditure = Gross national product at Factor cost (GNPfc) (-) Depreciation or capital consumption = Net national product at Factor cost (NNPfc) = National Income

Factor Income Method

This approach looks at the flow of economic activities from the income point of view. The components are:

Wages and salaries of all employees in every sector. Interest and dividends from shares. Rent including inputed rent. Profits, example- undistributed profits. Income of self-employed workers such as hawkers.

Calculation through Factor Income Method

Wages and salaries (including compensation for employees) (+) Interest and dividends (+) Rent (+) Profits (including undistributed profits and income from selfemployment/proprietors income) = Gross domestic income at market price (GDImp) (-) Income paid abroad (+) Income received from abroad = Gross national income at market price (GNImp) (+) Subsidies (-) Indirect taxes or taxes on expenditure = Gross national income at factor cost (GNIfc) (-) Depreciation or capital consumption = Net national income at factor cost (NNIfc) = National Income

Expenditure Method

The components are:

Households expenditure or consumer expenditure Producers expenditure or gross investment such as: New construction such as housing, factories, etc. Equipment like machinery tools, etc. Changes in business stocks or inventories, example goods produced but unsold.

Government expenditure on goods and services, excluding transfer payments.

Calculation through Expenditure Method

Expenditure include household, producer and government:(+) Consumption (+) Investment (+) Government spending = Total Domestic expenditure at market price (+) Exports = Total final expenditure at market price (-) Imports = Gross domestic expenditure at Market price (GDEmp) (-) Income paid abroad (+) Income received from abroad = Gross national expenditure at Market price (GNEmp) (+) Subsidies (-) Indirect taxes or taxes on expenditure = Gross national expenditure at Factor cost (GNEfc) (-) Depreciation or capital consumption = Net national expenditure at Factor cost (NNEfc) = National Income

PROBLEMS IN CALCULATING NATIONAL INCOME

a. Problem of expertise
- The shortage of professional in most developing countries is a major problem. To estimate national income accurately, the services of statisticians, analysts, programmers, researches and others. These professionals will be able to present the national income data with the minimum technical and human errors.

b. Lack of sophisticated machinery

- Developing countries like Indonesia, India and Peru face the problem of technical know-how and even technical equipment. They need the latest and most advanced computers to compute the massive volume of data.

c. Problem of false information

- Businessman and other self-employed people usually underestimate their earning primarily to evade paying high taxes. This would of course lower the national income figures of the country. Perhaps stringent rules and punishment on taxes evaders should be implemented.

PROBLEMS IN CALCULATING NATIONAL INCOME

d. Problem of estimation
- Depreciation- machinery can be considered obsolete and loses its value. But the question is how obsolete is obsolete? The estimation of depreciation for every country is differ. - Imputed rent- owner-occupied houses have a value in terms of rent. Some owner may overestimate and some may underestimate their imputed rent. This will result in a distorted of the actual national income of the country.

e. Problem of measuring quality

- In national income accounting we are not merely interested in the quantity of physical goods and services only, quality is of equal importance. The problem that arises is how to measure the quality. Can prices of goods and services reflect accurately the quality of product? There is no absolute indicator of quality.

THANK YOU