4TH MODULE-EE

8/7/2019 4TH MODULE-EE

http://slidepdf.com/reader/full/4th-module-ee 1/46

ECONOMICS ENVIRONMENT

MODULE ± 4

NATIONAL INCOME

ACCOUNTING



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.



NATIONAL INCOME

What is National Income?

National Income is the money value of

all goods and services produced in a

country during a year.

J.M Keynes



National IncomeNational income is generally defined as income of the nation.

It reveals the nature of economic activity in a country.

Alfred Marshall, defines National Income as The labour and

capital of country acting on its natural resources, produced

annually a certain net aggregate of commodities, material

and immaterial including services of all kinds.

NI- expressed with reference to a period of time, namely a

year



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 ² help assess & compare the

progress achieved by a country over a period of

time



DIFFERENT CONCEPTS OF NATIONAL INCOME

There are five concepts of National Income:

1. Gross National Product- TMVFGS/A IG

Acc. Only MVFGS/A to avoid DC.

Ex: Bread & Maida flour or steel for motor

car.2. Gross Domestic Product : AVOGS/A - FI




3. Net National Product MVFGS/A D

4. National Income (at factor cost & at MP)

NI at factor cost includes only the factor resources taxes depreciation + subsidies.

NI at Market price includes FC +taxes subsidies +

depreciation




Ex: A motor car costs 1.3 lakhswhich includes excise duty of Rs.30,000. Market price of a caris 1.3 lakhs.

While the factors engaged inproduction get Rs.1.00 lakhs.

Thus the value of national

income at factor would be

Equal to the market pricesminus the indirect taxes plussubsidies.



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



IMPORTANCE OF NATIONAL INCOME

1. With national income, we can chart the movement of 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.



IMPORTANCE OF NATIONAL INCOME

5. It helps to understand the contribution madeby different sectors to the economy.

6. It helps in development planning of acountry.

7. It provides information of the savings,consumption and investment structure of the economy.




GNP- -defined as the total market value of final goodsand services produced in a year.

The money value of only final goods to be considerednot the value of intermediate goods.

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

NNP means the market value of all final goods andservices after providing for depreciations.




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




3. NI at factor cost shows how much it costs tosociety in terms of economic resources for their

contribution of land, labour , capital andentrepreneurial ability which go into the years net production.

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

NI at market price = NI at factor cost +taxes subsidies +depreciation







METHODS OF MEASURING NATIONAL INCOME

National income of an economy can bemeasured in three ways.

y Product Method

y Income Method

y Expenditure Method

Each method gives the same result, there is no question of

appropriate method Application of suitable method depends upon

various factors such as, availability of data, nature of economic

activity, economic and social structure..

So for calculatin national income a combination of all three



Measurement of national income

Product 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



Primary Secondary Tertiary

Agriculture & allied

products

Registered industries Communications

Forest Non registeredindustries

Banking Insurance

Fishing Electricity Public administration

Mining Trade Health

Manufacturing Education

Other services.




Product methodUnder Product method, following categories of production are

added in order to find out GNP(NI)

(a) Product of agricultural sector total value of food grains

produced 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




Product method(e) Service sector incomes: total value of the proceeds of the

service sector namely, the services of government servants,doctors, lawyers, soldiers, singers, players etc.,

(f) Foreign trade: value of exports income earned abroad to beadded and the value of imports or payments made abroadshould be deducted.

(g) Indirect Taxes and Subsidies: indirect taxes which are includedin the price should be deducted to get exact market value of the goods.

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




Expenditure methodNational income also calculated by adding up theexpenditure incurred for goods and services. Government as

well as individuals spend money for consumption andproduction purposes.

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

GNI=Individual expenditure + Government Expenditure




Expenditure methodExpenditure approach following categories of expenditure are added in

order to find out the GNP

(a) Personal Consumption expenditure : on durable goods & non durable 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.




Income methodExpenditure 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



SIGNIFICANCE OF NATIONAL

INCOME ESTIMATES.

1.The national income of a country reveals the pictureof the economy. Indicates rise in standard of living ±reveals the improvement of economic welfare

2.NI ±reveals overall production in each year ±revealreal growthThe economy- if growth is stagnant ± measures can

be adopted to increase NI

3.NI shows the contribution made by different sectorsof the economy.




INCOME ESTIMATES.

3.NI estimates throws light on the three major aspects

of the economy namely , consumption, savings, andinvestment.

4.NI figures used to measure the economic welfare indifferent countries




INCOME ESTIMATES.

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

economy.

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.,



TRENDS IN NATIONAL INCOME

1. Trends in Net National Product

2. Trends in distribution of NI by industrial origin

3. Trends in the share of Public sector

4. Urban & Rural break-up

5. Share of organized & unorganised sector in NDP

NI & changes in the structure of national product

analyzed over the Past 50 years




1. Trends in Net National Product:

The increase in the production of goods & services indicates thegrowth more goods & services are available to people & alsoindex 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%




Share of secondary sector- include mining , mfrg, construction,

electricity, gas & water supply has shown steady increase from

16.1% of GDP to 27%.

Share of tertiary sector includes trade & transport, communications

banking, insurance, real estate amd community & personal services

improved from 28.5 % to 46.6%




3. Trends in the share of Public sector: share of the

govt.sector was 7.6% and rose to 23.3% - direct result

of expansion of economic activities.

4.Urban & Rural break-up: Urban rural disparity ratio in

percapita NDP was 2.45 in 1970 -71 & it declined to 2.39




5. Share of organized & unorganised sector in NDP

Organised enterprises- either registered or come under

the 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 accountsor balance sheets.

Share of Organised sector has risenShare of unorgnised sector has fallen



IMPORTANT TRENDS IN NATIONAL NATIONAL 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 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 overTime.

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.



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

1. Difficulty in defining the Nation NIincludes not only the income produced within

the country, but also income earned in othercountries.

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

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



DIFFICULTIES IN THE MEASUREMENT OFNATIONAL INCOME

5. Unpaid services: services performed for love, kindness andmercy 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.



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 thus

reducing 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 of NI.



CIRCUL AR FLOW OF INCOMEPresent day world- production is carried mainly for the purpose of

sale in the market.

To produce wide variety of goods the business firms combine

various 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.



CIRCUL AR FLOW OF INCOMEIn a modern capitalist economy the process of production and

exchange generate two kinds of circular flows:

House holds supply various factors of production demanded by

Business firms.

1. Business firms pay rewards in cash for the factor services supplied by the house holds.

Households Firms

Consumption expenditure (money flow)

Payment to factor service(money flow)



CIRCUL AR FLOW OF INCOME

Consumption expenditure (money flow)

Payment to factor service(money flow)

In an economy Production processes & markets generatestwo 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 firmspay 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.



Circular flow of incomeIn 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.



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.



Consumption & Savings relationship

Relationship between savings & consumption implies that every HH do not spend 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



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, plant machinery 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.



MODULE-4

THE END



DIFFICULTIES IN MEASURING

NATIONAL 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

Documents

4TH MODULE-EE