National Income MBA PPT

7/31/2019 National Income MBA PPT

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ECONOMICS ENVIRONMENT

NATIONAL INCOMEACCOUNTING


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NATIONAL INCOME

LEARNING OBJECTIVES

What is national income?

Importance of national income Concepts of National income

National income estimates in India.

Measuring National income Trends in National income

Difficulties in measuring national

income.


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NATIONAL INCOME

What is National Income?

National Income is the money value ofall goods and services produced in a

country during a year.

J.M Keynes


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NATIONAL INCOME

While family income reflects the economic

Position of household, national income shows

the economic position of a Nation.

The basic objective of an economy is to achieve

economic Progress.

National income help assess & compare the

progress achieved by a country over a period of

time


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IMPORTANCE OF NATIONAL INCOME

1. With national income, we can chart the movementof country from depression to prosperity.

2. The economic welfare of community can bemeasured with national income.

3. It helps in finding standard of living.

4. It helps in determining the pace of economicdevelopment of the economy.


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DIFFERENT CONCEPTS OF NATIONAL INCOME

There are five concepts of National Income:

1. Gross National Product

2. Net National Product

3. National Income

4. Personal Income

5. Disposal Income


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GNP- -defined as the total market value of final goods andservices produced in a year.

The money value of only final goods to be considered not thevalue of intermediate goods.

GDP- aggregate values of output of goods and servicesproduced in a country without adding net factor incomesreceived from abroad.

GDP = GNP - Income received from abroad.

NNP means the market value of all final goods and servicesafter providing for depreciations.


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NNP means the market value of all final goods andservices produced in a year is considered.

It means that in the production of goods & services ,there is the consumption of capital goods such asequipment & machinery.

To get NNP the value of depreciation has to bereduced from GNP.

Hence NNP=GNP-Depreciation


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3. NI at factor cost shows how much it costs tosociety in terms of economic resources for theircontribution of land, labour , capital andentrepreneurial ability which go into the years netproduction.

NI at factor cost=NI at market prices taxes-depreciation + subsidies

NI at market price = NI at factor cost +taxessubsidies +depreciation


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Ex: A motor car costs 2 lakhs which includes exciseduty of Rs.20,000. Market price of a car is 2 lakhs

While the factors engaged in production get Rs.1.80lakhs.

Thus the value of national income at factor would be

Equal to the market prices minus the indirect taxesplus subsidies.


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NATIONAL INCOME -CONCEPTS

PERSONAL INCOME : PI is that income actually received by

the individuals or households in a country during the year,

from all sources.

DISPOSABLE INCOME: DI is that part of income which is left

behind after the payment of direct taxes is called Disposable

Personal Income.

Disposable income can either be consumed or saved.

Therefore Disosable Personal Income =Consumption +Savings

DPI = PI - TAXES


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NATIONAL INCOME -CONCEPTS

PERCAPITA INCOME :index of changes in the standard of

living of the people of a country.

The percapita income indicates the economic progress in

terms of goods and services available per head of the

Population.

PI=NI/population


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ESTIMATION OF NATIONAL INCOME

The work on National income in India had started in the 19thcentury, by Dadabhai Naoroji.

A number of research had taken place since 1900.

VERV Rao made the first national income estimate on a scientificway for the year 1931-32.

Government of India also prepared the estimates for the year1948-49.

1949- The national income committee was formed.

The Central Statistical organization (CSO) was entrusted with thework of estimation and the first official paper White Paper wasreleased in the year 1956. Now it is knows as national accountsstatistics.


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NATIONAL INCOME ESTIMATION

NI estimation can be studied under two categories:

1. Pre-independence period estimation2. Post independence period estimation

Pre-independence period estimation: several estimates wereprepared in the British period.

A) Dadabhai Naoroji,Wadia & Joshi : estimated the value of output

of the agricultural sector and then added certain percentage asthe income to the non-agriculture sector. This was devoid of anyscientific basis


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B) DR.VERV Rao made use of a combination census of output and

census of income method. Here the economy was divided into twoCategories:

First- included agriculture pastures, mines forest, fishing,& hunting

Output methodwas used to evaluate the product derived from

these sectors.

Second- included industry trade transport public services & admin.

Profession liberal arts & domestic service for which census of

income methodwas used.

To these two subtotals was added the income so obtained the values of

goods and services consumed in production were excluded.

By adding the net income earned from abroad an estimate of the Ni

Was computed.


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C) JR hicks, M Mukherjee & SL Ghosh: calculated the rates ofgrowth per capita income for the period :

TIME PERIOD RATE OF GROWTH

1860-1885 1.1

1885-1905 -0.3

1905-1925 1.3

1925-1950 -0.1

1860-1945 0.5

The Indian economy presents a picture of stagnation over a long

period with a growth rate of 0.5% during the British rule.


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POST INDEPENDENCE PERIOD ESTIMATION:

Soon after independence the Govt. Of India appointed the National income

committee in August 1949 to compile the national income estimated.

1951- First report appeared

1954- Final report =landmark in history as it was the first time even that NI

data was provided for whole India.


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POST INDEPENDENCE PERIOD ESTIMATION:

National income & CSO (Central Statistical organisation )estimates

It provides NI data at current prices at for the period upto 1964-65.

It divides the economy into 13 sectors. Two methods were used for these 13

Sectors.

a. Net output method

b. Net Income method


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Net output method: Income from 6 sector

Agriculture, Animal husbandry,forestery,fishing,mining & Factory

establishments:i) Agriculture: each crop output is estimated by multiplying the area sown

by the yied per hectare.

From the gross values so obtained deductions for the costs of seed manures

& fertilizers, market charges repairs & depreciation are made to derive the ne

value of the product from agriculture.

Gross value in agriculture= area sown X yield /hectare

Net value= GROSS VALUE cost of materials, depreciation etc


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ii) For animal husbandary, forestery, fishery, mining and Factory

establishments, the estimates of production are multipliedwith market price to obtain gross value.

GROSS VALUE = PRODUCTION X MARKET PRICE

NET VALUE = GROSS VALUE COST OF MATERIALS,DEPRECIATION ETC


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2. Net Income method: income from seven sectors , i.e. small enterprises,

organised banking & insurance, commerce & transport, profession, public

authorities, house properties.

Contribution of small enterprises: total No. of workers X average earningObtained.

For Banking & insurance the balance sheets of the firms provide requisite

information wages salaries directors fees and dividends are all added to get

the contribution.

For public sector wages salaries pensions other benefits dividends or surplus

are added to arrive at the contribution.


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METHODS OF MEASURING NATIONAL INCOME

National income of an economy can be measured inthree ways.

Product Method Income Method Expenditure Method

Each method gives the same result, there is no question ofappropriate method Application of suitable method depends upon

various factors such as, availability of data, nature of economicactivity, economic and social structure..

So for calculating national income a combination of all threemethods used in India.


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METHODS OF MEASURINGNATIONAL INCOMENational income of an economy can be measured in three ways.

Product Method : There are two approaches in product method for

measuring National Income.

This method is used for estimating domestic product in the following

sectors: Agriculture and allied activities Forestry, Fishing

Mining and quarrying Registered Manufacturing.

In this approach, Gross Market Value of all final goods and servicesproduced in a financial year in the domestic territory of country are

taken into account for measuring national income.

The value so arrived is called Gross Domestic Product (GDP) at

Market Price


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METHODS OF MEASURINGNATIONAL INCOME

INCOME METHOD: In income method, National income iscalculated by adding all the factor incomes of all thenormal residents of a country during a year.

Domestic income by this method includes both incomeaccruing to private sector and income accruing toGovt./Public sector.

a. Rent including imputed rent.b. Wages and salaries included imputed valuec. Interest.d. Compensation of employees


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METHODS OF MEASURINGNATIONAL INCOME

EXPENDITURE METHOD: in this method, final expenditure on allthe products at their market value, produced during a particularperiod is measured for estimating domestic income.

Whatever is earned as income in an economy will be either

consumed or invested (saved), therefore final expenditure canbe divided in two parts :

Final consumption expenditure andFinal Investment expenditure.

That is why, this method is also called Consumption andinvestment method


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DIFFICULTIES IN MEASURINGNATIONAL INCOME

1. The out put of the non-monetized sector.

2. Non-availability of data about the income of small

producers or household enterprises

3. Absence of data on income distribution

4. Unreported illegal income


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Measurement of national incomeProduct method

Estimation of goods & services produced in 3 sectors.

The sum total of products produced in these three sectorsis the output of the nation.

GNI- Money value of total goods & services + Incomefrom abroad.

This method helps us to find out contributions of varioussectors to national income


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Primary Secondary Tertiary

Agriculture & alliedproducts

Registered industries Communications

Forest Non registeredindustries

Banking Insurance

Fishing Electricity Public administration

Mining Trade Health

Manufacturing Education

Other services.


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Under Product method, following categories of production are

added in order to find out GNP(NI)

(a) Product of agricultural sectortotal value of food grainsproduced by the farmers in the country during a year.

(b) Product of Industrial Sector Total market value of all goods

produced in various industries like electronics, cement, steeletc. in a country during a year.

(c) Products of trade: induces income resulting from variousactivities which are connected to internal trade


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(e) Service sector incomes: total value of the proceeds of theservice sector namely, the services of government servants,doctors, lawyers, soldiers, singers, players etc.,

(f) Foreign trade: value of exportsincome earned abroadto beadded and the value of imports or payments made abroadshould be deducted.

(g) Indirect Taxes and Subsidies: indirect taxes which are included

in the price should be deducted to get exact market value ofthe goods.

Subsidies given by Govt to certain products should be added tocalculate the exact value of the product


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Measurement of national incomeExpenditure method

National income also calculated by adding up theexpenditure incurred for goods and services. Government aswell as individuals spend money for consumption and

production purposes.

The sum total of expenditure incurred in a country during ayear will be equal to national income.

GNI=Individual expenditure + Government Expenditure


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Measurement of national incomeExpenditure method

Expenditure approach following categories of expenditure are added in

order to find out the GNP

(a) Personal Consumption expenditure : on durable goods & nondurable goods produced in a country during a year.

Expenditure on services, such as transport , education and medical.

Expenditure on household.

(b) Government purchase of goods and services : goods such as paper,stationery, machinery, equipment etc.,

Services: Govt. incurs expenditure on payment of salaries t Militarypersonnel, police and administration.


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Measurement of national incomeIncome method

Expenditure made by the people in a country on goods and services

produced in a country during a year becomes the income of the various

Factors.

The factor income is grouped into following categories:

Wages and salaries

Income of Company business

Rental incomes of persons

Corporate profits

Income from net interest


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SIGNIFICANCE OF NATIONALINCOME ESTIMATES

.1.The national income of a country reveals the picture of the

economy.

Indicates rise in standard of living reveals the improvement of

economic welfare

2. NI reveals overall production in each year reveal real growthThe economy- if growth is stagnant measures can be adopted toincrease NI

3. NI shows the contribution made by different sectors of the economy.

4. NI estimates throws light on the three major aspects of the economynamely , consumption, savings, and investment.

5. NI figures used to measure the economic welfare in different countries


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SIGNIFICANCE OF NATIONALINCOME ESTIMATES

.

6.From the NI estimates, we can also see the partplayed by the government in the nationaleconomy.

7.No, development planning is possible withoutcomplete study of national income estimates.

8.NI estimates are very useful in formulating plansfor the development of agriculture, Industry, andinfrastructure etc.,

DIFFICULTIES IN THE MEASUREMENT OF


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DIFFICULTIES IN THE MEASUREMENT OFNATIONAL INCOMEMeasurement of national income is not an easy

task.

1. Difficulty in defining the Nation NIincludes not only the income produced withinthe country, but also income earned in othercountries.

2. Nonavailability of a data about the incomeof small producers or household enterprises.

3. The error of double counting-failure todifferentiate final and intermediate goods.



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DIFFICULTIES IN THE MEASUREMENT OFNATIONAL INCOME

5. Unpaid services: services performed for love, kindnessand mercy and not for money have no money value

But have only economic value. These are excluded from

NI figures and leads to the under estimation of the NI.

6. Individuals do not keep correct account of theirconsumption.

7. Illiteracy and ignorance.

8. Lack of proper criteria for measuring the value of services.



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DIFFICULTIES IN THE MEASUREMENT OFNATIONAL INCOMEThe services of housewives is not included in the NI

because is not sold in the market.

6. Income for illegal activities: black marketing, gambling,smuggling etc., not included in the national income thusreducing the real value of the national income.

7. The out put of non monetised setor: India- agriculturebased - considerable portion of the out put does not cometo the market for sale.

8. The non co-operation of the people: Major part of thepopulation are illiterate and hence may not co-operate inproviding the information is needed for the estimation ofNI.

TRENDS IN NATIONAL INCOME


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1. Trends in Net National Product

2. Trends in distribution of NI by industrial origin

3. Trends in the share of Public sector4. Urban & Rural break-up

5. Share of organized & unorganised sector in NDP

NI & changes in the structure of national product analyzed overthe Past 50 years



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1. Trends in Net National Product:

The increase in the production of goods & services indicates thegrowthmore goods & services are available to people & also

index of total productive effort of the community

2. Trends in distribution of NI by industrial origin

1950-51 : Agriculture contributed to 48.6% of GDP & fell to

24.2% in 1997-98

Share of fishing in GDP remained constant throughout the fiveDecades Share of forestery shows continues decline from 5% to1.1%


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5. Share of organized & unorganised sector in NDP

Organised enterprises- either registered or come underthe purview of any of the acts and maintain annualaccounts and balance sheets.

Unorganised enterprises include all unincoraporatedenterprises and household industries which are regulatedby any one of the acts & do not maintain annual accounts

or balance sheets.

Share of Organised sector has risenShare of unorgnised sector has fallen

IMPORTANT TRENDS IN NATIONAL NATIONAL


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INCOME

The rate of growth of GDP since 1950 around 4.5 %.

1950 1980 : Growth rate hovered around a low of 3.5 %

Growth rate remain stuck at the low level for long.

1980-81 to 1991 -92:Break from this trend came in the 1980s

with the growth rate going above 5%.

1992 -93 to 2001-02 : growth rate further accelerated to 6.5%

Thereafter the rise was rapid and large .

IMPORTANT TRENDS IN NATIONAL NATIONAL


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INCOME

As for the sectoral contributions to the GDP all the three sectors

have added to the final outcome

However, differences in the contributions of different sectors over

Time.

1950 1980 : early low growth phase of three decades

Agriculture was an important contributor, alongside industry and

service sector.

In the recent high growth phase since 1980, the service sector,

with the fastest growth, emerged as the largest contributor

followed by industry and agriculture.


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CIRCULAR FLOW OF INCOME

Present day world- production is carried mainly for the purpose of

sale in the market.

To produce wide variety of goods the business firms combinevarious factors of production and try to sell those goods in the

market.

In the economy, the sales made by the business firm generate flowof money income which are used to make payments to the factors

of production for their services.


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In a modern capitalist economy the process of production and

exchange generate two kinds of circular flows:

House holds supply various factors of productiondemanded by

Business firms.1. Business firmspay rewards in cash for the factor services

supplied by the house holds.

Households Firms

Consumption expenditure (money flow)

Payment to factor service(money flow)


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Consumption expenditure (money flow)

Payment to factor service(money flow)

In an economy Production processes & markets generates

two types of flows:

1. A supply of factor services by the household to theproduction process of firms.

2. After production goods & services are sending to the

market by firms for selling to house hold.

Some types of flow which is circular in a nature takes place-called real flow.

Another type of flow called- money flow- production firms

pay in cash for goods & services they get from house holds.

Money so received by HH will be spent on required goods &services produced by firms.


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Circular flow of income

In every economy, irrespective of size of population,

this flow forever.

Circular flow of income in two sector model acts as a

base for measuring national income and expenditure.


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SAVINGS

The income received by households will have two channels:

1. Consumption Expenditure

2. Savings

Y=C+S

In a circular flow two situations can occur

1. Withdrawl of money out of income(leakage)

2. Introduction of income into circular flow(injection)

Leakage occurs because savings of the households ,tax paid to

government, payments for imports.

injection form of investment , govt. spending & exports.


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Consumption & Savings relationship

Relationship between savings & consumptionimplies that every HH do notspend all money received from firms towards consumption & a portion will besaved.

Savings impact on circular flow of money & income .

Both decline due to savings.

If HH keeps savings for liquidity purposes leakage occurs.

If savings is kept in a bank or any other financial institutions it becomesproductive.

Thus money withdrawn from circular flow will be coming back to the firms indifferent circuit.

In this process another concept emerged INVESTMENT emerges


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INVESTMENTSWhat is Investment?Investment is a term referred to capital expenditure made by firms.

This expenditure will be in the form of capital goods like land, building, plantmachinery etc., without which firm cannot produce goods for households.

Investment comes from two sources viz., borrowings & retained earnings.

Investment will be an addition to circular flow of income.

S & I in any economy need not be necessarily equal as investment takesplace by firms and savings by the people.

S>I or I>S

Normally investment will be more than savings. There will be leakage incircular flow of income due to savings.

This leakage will be neutralized by injection in the investment.


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National Income MBA PPT

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