Beruflich Dokumente
Kultur Dokumente
Lecture Plan
Introduction to National Income
Concepts of National Income
Real and Nominal GDP
Methods for Measuring National Income
Uses of National Income Data
Difficulties in Measurement of National
Income
Learning objective
To understand various concepts of national
income, like GDP, GNP and NNP.
To understand the different methods of
measuring national income.
To understand the importance of national
income calculations.
To understand the difficulties involved in
the calculation of national income.
?
Why should a manager monitor
GDP growth?
GDP Deflator =
Nominal GDP
x100
Real GDP deflator
?
How far national income of a
country a measure of welfare?
?
What is the Difference between
GDP and GNP?
Whether unemployment
allowance from the government
is to be included in the national
income. Why or Why not?
Will the transfer payment be a
part of personal income or not?
Income
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 or outlay on final
products takes place in three ways
24
Expenditure method
Expenditure or outlay on final products takes
place in three ways
Expenditure by consumers on goods and
services( Consumption Expenditure)
Expenditure by entrepreneurs on capital or
investment goods (Investment Expenditure)
Expenditure by government on consumption
and capital goods (Government Expenditure)
Net Exports
25
Expenditure method
The formula for this method is
Y = C + I + G +(X-M)
Limitations
Neglects Barter System
Ignores over consumption
Affected by Inflation
27
28
Summary
GDP is the sum of money values of all final goods and services produced
within the domestic territories of a country during an accounting year. It can be
measured at current or constant prices.
GNP is the aggregate final output of citizens and businesses of an economy in
one year. NNP is GNP less depreciation.
The average income of the people of a country in a particular year is per
capita income for that year.
National income can be measured by product method, income method and
expenditure method.
National income accounting data are of utmost importance for the economy of
any country; such data reveal the aggregate production of the economy and
also help to determine the total expenditure and total income of that country.
Difficulties in measuring national income include multiple counting, exclusion
of non market transacted services, self consumption of output, inflation or
deflation, confusion about informal sector, etc.
National income is considered as a measure of economic welfare. As national
income rises, the aggregate production of goods and services rises.
Therefore, there is a positive relation between increase in national income and
welfare.
??????????????
?
Consider an economy that produces
only three types of goods: A, B and
C. In the base year (a few year ago),
the production and price data were
as follows:
Fruit
Quantity
Price
3,ooo
$2
6,000
$3
8,000
$4
Quantity
Price
4,000
$3
14,000
$2
32,000
$4
Learning Objectives
To explain the circular flow of economic activity and
income:
Two- Sector Model
Three- Sector Model
Four- Sector Model
Injections and Leakages in the circular flow of
economic activity.
Factor Payments
(Y)
Factor Inputs
Households
Savings
(S)
Financial
Market
Investment
(I)
Firms
Goods and
Services (O)
Consumption
expenditure
(C)
Government Spending
Government Revenue
Households and firms pay various taxes and other payments and
provide factor inputs to the government.
Government borrows from the financial market to fill revenue gap.
Imports (M): Outflow of income occurs when the domestic firms buy
goods and services from foreign ones.
Exports (X): Inflow of income takes place when foreign firms buy
goods and services from domestic ones
Househol
ds
Import
s
(M)
Factor
Payment
s
Factor
Inputs
Financial
Market
Taxe
s
Investme
nt
(I)
Good
s
(O) Consumpti
on
Expenditur
e
Foreign
Export
Export
Nations
s
s
(X-M)
(X)
(X)National Income=C+I+G+(X-M)
Remittance
s for
purchases
Firms
Import
s
(M)
Objectives
To explore the realms of inflation and its
different frontiers.
To delve into concepts like wage price spiral,
hyperinflation and inflationary gap.
To understand various measures of inflation
and their role in decision making.
To analyze the reasons behind inflation, its
impact on the economy and the measures to
curb it.
Inflation
Concepts of Inflation
Prices Rise
Cost of
production rises
Wages rise
Cost of
living rises
Causes of Inflation
Scarcity of resources
Impact on Consumers
increase in any price upsets the home budget.
Impact on Producers (or Suppliers)
Producers as sellers are benefited by inflation;
higher the prices, higher are their profits.
when as buyers of raw material, they are adversely affected by inflation.
Impact on Government:
Government has to take the economy to higher levels of growth by
encouraging production and investment,
At the other end, has to see that taxpayers money is not eroded by
hyperinflation.
Thus government has to act as the balancing force between consumers
and sellers.
Measuring Inflation
Measuring Inflation
CPI differs from PPI in that price subsidy, profits, and taxes may cause
the amount received by the producer to differ from what the consumer
paid.
Cost of Living Indices (COLI): used to adjust fixed incomes and
contractual incomes to maintain the real value of such incomes.
Control of Inflation
Inflation erodes the value of money and
discourages savings
But zero inflation is undesirable
Need to control inflation
Monetary Policy
Measures
Increasing the discount rate: The central
bank rediscounts the eligible papers offered
by commercial banks. This is also called
bank rate.
Higher reserve ratios:
Cash Reserve Ratio (CRR)
Statutory Liquid Ratio (SLR)
Learning Outcomes:
1. Meaning and Scope of monetary policy;
2. Instruments of monetary policy;
3. Role of Monetary Policy in achieving
macroeconomic goals;
4. Effectiveness
monetary policy.
and
limitations
of
taken
authorities
regulate
the
by
to
the
monetary
control
demand
for
and
and
scope
depends,
of
by
monetary
and
large,
policy
on
two
factors:
i. The level of monetization of the
economy, and
ii. The level of development of the
financial market
INSTRUMENTS OF
MONETARY POLICY
General Credit
Control Measures
1. Bank Rate
2. CRR
3. Open Market
Operations
4. SLR
5. Repo Rate
(Repurchase
Selective Credit
Control Measures
1. Credit Rationing
2. Change in Lending
Margins
3. Moral Suasion
4. Direct Controls
General Measures:
1. Bank Rate Policy:
. The rate at which central bank lends
money to the commercial bank and
rediscounts the bills of exchange
presented by commercial banks is
termed as bank rate
increase
or
decrease-
Limitations of BR as a Weapon
of Credit Control
1. Nowadays, commercial banks are
not dependent
only on financial
the
growth
institutions
and
of
credit
financial
commercial
banks
are
of
CRR
is
to
prevent
change
the
money
supply
overnight
When contractionary monetary policy
is to be adopted , then the central
bank raises the CRR
When expansionary monetary policy
is to be adopted then central bank
purchase
of
government
the country.
notes
issued
by
the
auction to residents of
of Rs
1,00,000.
The auction bid is invited every
fortnight and the discount rate is
decided on the basis of auction rate.
How
the
bonds
sale
affects
of
the
government
supply
of
credit?
1. Purchase of govt. securities reduces
deposits with commercial banks and
their cash reserves which leads to
decreased credit creation capacity of
the banks.
demand of
credit?
1. Central banks sells the government
bonds them at a reduced price, i.e.,
at
price
less
than
their
denominated price.
2. Consequently, the actual rate of
Effectiveness of OMO
Under the following conditions, OMO
do not work properly:
1. When commercial banks possess
excess liquidity.
2. In UDCs where banking system is
not well developed and security
capital
markets
are
not
Quiz
1. What do you understand by SLR,
Repo Rate, and Reverse repo rate
2. Current rates?
3. How increase and decrease in repo
rate affects the credit creation?
?
1. Differentiate between general and
selective credit control measures?
2. What are the factors that determine
the effectiveness of monetary
policy?
3. What monetary measures have
been used by RBI in achieving the
FISCAL POLICY
Learning Objectives:
1. Meaning and scope of fiscal policy
2. Differentiate between financial
instruments and target variables
3. Kinds of fiscal policy
4. Fiscal policy and macroeconomic
goals
Fiscal Instruments
1. Budgetary policy deficit or surplus
budgeting
2. Government expenditure
3. Taxation
4. Public borrowings
Target Variables
Variables which are sought to be
changed through fiscal instruments
are:
1. Private disposable incomes,
2. Private consumption expenditure,
3. Private savings and investment,
4. Exports and imports, and
?
How Fiscal Instruments Affect
Target Variables?
?
1. What is fiscal policy?
2. Differentiate between fiscal
instruments and target variables?
3. Discuss the role of fiscal policy in
achieving economic growth?
4. Fiscal policy is the most powerful
tool of achieving macroeconomic