National Product/Income

IntroductionEconomic activities: Production, Consumption, Capital Formation

Economic growth: Increasing production of goods & services

Need for common measure: money serves the purpose

National Income concept used as a measure of size and growth of economy

To find out growth of an economy, we have to look at national income for number of years

Economy: Quantity/volume of goods & services produced

End-use classification of goods: Final Goods (Consumer/Capital goods) Intermediate Goods

Introduction……If national income (money value of final goods & services)grows over a period, it means, economy is growing. ?

May or may not.Price comes into picture.Thus, Economic growth will occur only when national incomerises in real terms (constant prices)

Increase in real national income should improve levels of living of people

Increase in real national income necessarily improves levels of living of people?

May or may not.

Introduction……

Population enters the picture.

If population increases faster than the rise in real national income, what will happen?

Levels of living of people will not improve

Thus, growth in per capita real national income (real PCI) is more realistic indicator of economic growth with improved well being of people

Are you sure, this is the best indicator of economic growth& improved well being of people of a country

Introduction……

May be may not be.

Distribution of incremental income enters the picture

Thus, growth in real PCI along with improving equality/equity is better indicator

That is why; objective of economic policies in India is

Growth with equity

National Product ConceptsGross Domestic Product at market price (GDP_MP)=Market value of all final goods & services produced

in a country during an accounting year

Gross Domestic Product at factor cost (GDP_FC)=GDP_MP – Net Indirect taxes

Gross National Product at market price (GNP_MP)= GDP_MP + Net Income from abroad

Gross National Product at factor cost (GNP_FC)=GDP_FC + Net Income from abroad

Or GDP_MP – Net Indirect Taxes + Net Income from abroad

National Product Concepts…

Net Domestic Product at market price (NDP_MP)=GDP_MP – Depreciation

Net Domestic Product at factor cost (NDP_FC)=NDP_MP – Net Indirect taxes

GDP_FC – Depreciation

Net National Product at market price (NNP_MP)=GNP_MP – Depreciation

GDP_MP + Net Income from abroad – Depreciation

Net National Product at factor cost (NNP_FC)=NNP_MP – Net Indirect Taxes

GNP_FC – Depreciation

GNP_MP

NDP_MP

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Some Important PointsNominal income vs. real income

Output at market price vs. output at factor cost

Domestic output vs. National output

Gross output vs. Net output

Measurement of National Income

Accordingly, there are 3 methods of measuring National Income1. Product method / value added method / output method2. Income method3. Expenditure method

Production gives rise to income; income gives rise toDemand for goods & services; and demand in turn givesRise to expenditure; again, expenditure leads to furtherProduction.

The circular flow of production, income and expenditureRepresents 3 related phases, namely, production,Distribution and disposition

Product/output/value added method

• Identifying the producing enterprises & classifying them into industrial sectors– Indian Economy divided into 3 sectors [primary,

secondary and tertiary/service sectors]– 13 sub-sectors

• Estimating value added– Estimate Value of output[Volume of physical output valued at market price]

– Estimate Value of intermediate consumption[Intermediate consumption valued at actual price paid by

the enterprises]

Product ……method• Deduct value of intermediate consumption from value

of output– We get value added by individual enterprises/sectors

• Sum the value added by all enterprises/sectors– We get GDP_MP

• Deduct consumption of fixed capital (depreciation) from GDP_MP– We get NDP_MP

• Deduct Net Indirect Taxes (indirect taxes minus subsidies)– We get NDP_FC

• Add net factor income from abroad– We get NNP_FC (National Income)

Product ……method

• Take care to include following:– Own-account production of fixed assets by

government, enterprises, households– Production for self-consumption– Imputed rent of owner-occupied houses

• Do not include following:– Sale and purchase of second-hand goods

• Commission & Brokerage included

Income method

• Identifying the producing enterprises which employ factor inputs

• Classifying factor payments• Estimating factor payments

– Compensation of employees– Rent– Interest– Profits– Mixed income of the self-employed

Income method….

• Summing above, we get domestic factor income

• Add, net factor income earned from abroad

• We get, National Income

Income method….• Precautions

– Exclude transfer payments– Include value of production for self-consumption,

and imputed rent of owner-occupied houses– Exclude illegal incomes– Exclude windfall gains like lotteries– Include profits before corporation tax– Include compensation of employees including

income tax– Exclude death duties, gift tax, wealth tax, tax on

windfall gains– Exclude income from sale of second-hand goods – Exclude proceeds from sale of bonds and shares

Expenditure method

• This method measures the disposal of gross domestic product.

– Private final consumption expenditure– Government final consumption expenditure– Gross fixed capital formation– Change in stocks– Net exports of goods & services (export –

import)

• We arrive at GDP at Market Price

Expenditure method….

• Precautions– Exclude expenditure on second-hand goods– Exclude expenditure on purchase of bonds

and shares– Exclude government expenditure on transfer

payments such as old age pension, etc– Exclude expenditure on intermediate goods

and services

Reconciling the 3 methods

Production method Income method Expenditure method

Private final consumption expenditure

Value added in primary sector

Compensation of employees

Govt. final consumption expenditure

Value added in secondary sector

Rent + interest + profit Gross capital formation

Value added in services sector

Mixed income of self-employed

Net export of goods and services

GDP_MP NDP_FC GDP_MP

Indian Economy - Composition

I. Primary sector1. Agriculture2. Forestry & logging3. Fishing4. Mining & quarrying

II. Secondary sector5. Manufacturing

1. Registered 2. Unregistered

6. Construction7. Electricity, gas, water supply

Indian Economy - Composition

III. Tertiary sectorA. Transport, Communications and Trade

8. Transport, storage, communication1. Railways2. Transport by other means and storage3. Communications

9. Trade, hotels, restaurants

B. Finance and real estate10. Banking & insurance11. Real estate, ownership of dwellings, and

business services

Indian Economy - Composition

C. Community and personal services12. Public administration and defense13. Other services

Methods used in India

• Production approach– Agriculture– Forestry– Fishing– Mining– Registered manufacturing

• Construction– Expenditure approach

• Remaining sectors– Income approach

Other Aggregates

Income from Domestic Product accruing to the Private Sector

NDP_FC (Domestic Factor Income)minus Income from property and

entrepreneurship accruing to Govt.minus Saving of non-departmental

enterprises

Other Aggregates

Private IncomeFactor income from NDP accruing to the

private sector+ net factor income from abroad+ national debt interest+ current transfers from government+ other current transfers from the rest of

world (net)

Other Aggregates

Personal IncomePrivate incomeminus saving of the private corporate

sector net of retained earnings of foreign companies

minus Corporation taxes

Other Aggregates

Personal Disposable IncomePersonal incomeminus direct taxes paid by householdsminus miscellaneous receipts of the

government

Institutional Categories of Producers

1. Corporate and Quasi-corporate enterprises– Corporations (recognized as business entities)– Quasi corporations (large unincorporated

enterprises such as large partnerships, sole proprietorships, financial intermediaries such as banks and cooperative societies)

– Government enterprises• Departmental enterprises (Railways, Post, etc)• Non-departmental enterprises

– Financial (IDBI, Commercial banks)– Non-financial (BHEL, Air India)

Institutional Categories of Producers..

2. General Government– Central government– State government– Local authorities

3. Households– Unincorporated enterprises (manufacturers of

footwear, furniture, handloom, farmers, etc)• Partnership• Sole proprietorship

– Non-profit institutions serving households (trusts, charitable societies)

– Households which render domestic services to other households

Transfer Payments Unilateral payments against which there is no

flow of goods or servicesCurrent transfers

Transfers made from current income of the payer and added to the current income of the recipient for consumption purposes

Capital transfersTransfers in cash or kind which are used for purpose of GCF or other forms of accumulation, or long term expenditure of the recipient, which are made out of the wealth or saving of the donor

Current Transfers (within country) ExamplesFrom To Particulars

Government Households Scholarship, gift, prizes, unemployment allowances, old-age pensions, maintenance grant to non-profit organizations

Government Enterprises Subsidies, any other gifts, prizes or donations,

Enterprises Households Scholarship, gift, prizes

Enterprises Government Direct and indirect taxes

Households Government Direct and indirect taxes

Households Enterprises -----

Capital Transfers (within country) ExamplesFrom To Particulars

Government Households Lump sum payments for damages like demolition of house

Government Enterprises Investment grants under policy to develop particular enterprises, or to develop particular regions of country

Enterprises Households -----

Enterprises Government Taxes on capital gains or any other tax which is not regularly imposed by Govt.

Households Government Death duties, inheritance tax, or any other tax which is not regularly imposed by Govt

Households Enterprises -----

Examples of Transfers between countries

Current transfers between countriesGifts at the time of natural calamities

Capital transfers War damages economic aid unilateral transfer of capital goods Grants from one government to another to

finance deficit in the external trade

Domestic Territory of India

• Territory lying within political boundaries including territorial waters of the country

• Ships and aircrafts operated by the residents of the country

• Fishing vessels, oil & natural gas rigs, and floating platforms operated by residents

• Embassies, consulates, and military establishments located abroad

Normal residents of country

• A resident is a person who ordinarily resides in a country and whose centre of interest lies in that country. Since he normally lives in the country of his interest, he is called as normal resident.

• Includes individuals and institutions; nationals and non-nationals residing in country

• International organizations are residents of an international arena. [Indian citizens working in these organizations located in India are normal residents of India]

Normal residents of country…

• Resident households and individuals cover all except following:

• Foreign visitors in a country (for recreation, holidays, medical treatment, study tours, sports, etc)

• Crew members of foreign vessels, commercial travelers and seasonal workers

• Officials, diplomats and members of armed forces of a foreign country

• Employees of international organization who are not citizens of the country in which the offices are located

• Foreigners who are the employees of non-resident enterprises and who have come for temporary purposes