MACRO ECONOMICS BASIC CONCEPTS OF NATIONAL INCOME

What is Macroeconomics?

“Macro” is derived from Greek word “Makros” meaning Large

Is defied as the study of overall economic phenomena, such as problem of full employment, GNP, Savings, Investment, Aggregate consumption & investment, Economic Growth etc.,

Also known as “Theory of Income & Employment”

What is the scope of Macroeconomics?

Helps in solving many problems of an economy like Monetary problems Economic fluctuations General employment Inflation Disequilibrium in the balance of payment position

Macroeconomics

Theory of Income &

Employment

Theory of general price

level and Inflation

Theory of economic

growth

Theory of distribution

Why is it important?

Has emerged as the most challenging branch of economics

Gives an overall view of the growing complexities of the economic system

Provides powerful tool to explain the working of complex economic system

Provides basic and logical framework for formulating policies to direct and regulate economy towards desirable goals

Analyses reasons for economic fluctuations and provide remedies

What are its limitations

Ignores structural changes in an individual unit of the aggregate. Hence the conclusion may be misleading

Also the figures arrived at are subject to errors & ambiguities

What are goods and what are its types?

• “Goods are physical object,| natural or man-made,|

can be seen, touched and measured,| command a price in the market”. It includes both tangible and intangible objects (services)”

• Economic goods – which commands a price • Non-economic good – which does not command a

price

Goods

Intermediate Final Consumption capital

Intermediate goods

• Used for production of other goods and services

• Meant for resale so value gets added to these goods

• Remain within the production boundary

• Value not included in the National Income

• Eg: Milk used in sweet shop for resale

• Cotton yarn used by textile industry

Final goods

• Used for final consumption

• Meant for final use so no value addition is made

• Remain outside the production boundary

• Value included in national income

• Milk bought by household for consumption

Intermediate Goods Vs. Final Goods

Consumption goods

• Bought by consumers to satisfy their needs and wants

• Durable goods – car, TV, radio etc.,

• Non-durable goods – oil, milk, vegetable etc.,

• Semi durable goods – crockery etc.,

• Services – bank, doctor, teacher etc.,

Capital goods

• Which form the capital stock of the country and which is used in the production process

• Durable goods – car used by a company for business purpose

• Stock of raw material, semi finished and finished goods at the end of the financial year which satisfy human wants indirectly

Consumption goods vs. capital goods

What is Investment & what are the

types ? • Investment means addition made to stock or physical

capital (buildings, Plant & machinery, tools & equipments) during a given period of time. Also called capital formation. It raises productive capacity of the economy

• Depreciation means decrease in value of fixed assets due to normal wear and tear in the process of Production

• Gross Investment = Total addition made to physical stock during a year including depreciation

• Net Investment = Gross Investment - Depreciation

Stock vs Flow

Stock

• Quantity of an economic variable measured at a particular point of time

• Has no time dimension

• Is a static concept

• Eg: wealth, water in a tank, inventories, capital

Flow

• Quantity of an economic variable measured during a period of time

• Has time dimension – like per hour, per month etc.,

• Is a dynamic concept

• Eg: income,water in a stream, change in inventory, change in capital

What is meant by Economic Territory? According to the UN, Economic Territory is the

Geographical territory administered by a government within which persons, goods and capital circulate freely.

Definition is based on the criterion “freedom of circulation of persons, goods and capital”

Those parts of a political frontier of a country where the government does not enjoy administration rights, is not included in economic territory of that country.

Eg: foreign embassies in India will be part of the respective country’s economic territory

Similarly Indian embassies in other countries will be part of Indian Economic Territory

What are its scope and implications?

• Scope Political frontiers including water and air space Includes Embassies, consulates and military bases located

abroad but excludes the offices of other countries located within the frontier

Ships, aircraft etc., operated by residents between two or more countries

Fishing vessels, oil rigs etc operated by residents located in international territories but over which the frontier has exclusive enjoying rights

• Implicatons National Income (NI) & related aggregates are measures of

production activity Two categories of NI aggregates – Domestic & National Production activity of all production units located within the

economic territory is Domestic Product. Eg. GDP, NDP

Who are normal Residents of a country?

– A resident, |whether a person or an institution, |is one whose centre of economic interest |lies in the economic territory of the country| in which he lives

– Citizen and resident are two different terms

– A person may be a citizen of a country but he will be a resident where he lives

– Citizenship is a legal concept and residentship is an economic concept

Gross National Product / Net National Product

– Production activities of the residents of an economic territory whether performed within the economic territory or outside the territory is National Product

What is NI Aggregate? – NI or NP is defined as the money value of all final

goods and services |produced within the domestic territory of a country| in an accounting year(Domestic Income DI)| plus| net factor income from abroad (NFIA)

What are its different concepts?

Market Price

• Gross Domestic Product (GDPMP)

• Net Domestic Product (NDPMP)

• Gross National Product (GNPMP)

• Net National Product (NNPMP)

Factor Cost

• Gross Domestic Product (GDPFC)

• Net Domestic Product (NDPFC)

• Gross National Product (GNPFC)

• Net National Product (NDPFC

Gross = Net + Depreciation National = Domestic + NFIA

Market Price = Factor Cost + Net Indirect Taxes

• GDPMP

– Market Value of final goods and services| produced within the domestic territory |during one year| by all production units |including net indirect taxes and depreciation

• Important points

– This is a flow concept i.e., only the current year is taken – This is calculated on current prices. Where price of base year is

taken, it is called GDPMP at constant prices. – It excludes value of intermediate consumptions. But includes

value added by MNCs in India – Excludes transfer payments, capital gains, financial transactions

& income generated through illegal transactions – Market value = price x total quantity of goods and services

produced during the year – Includes only final value to avoid double counting – Confined to domestic territory only and excludes NFIA

GDPMP = Value of output in Domestic Territory – value of intermediate consumption

GNPMP = GDPMP + Net Factor Income from Abroad (NFIA) NNPMP

= GNPMP – Depreciation =NDPMP + NFIA =GDPMP + NFIA – Depreciation

NDPMP

GDPMP – Depreciation NNPMP – NFIA

NDPFC

= compensation of employees + Operating surplus + mixed income of the self employed

= NDPMP – Indirect Taxes + Subsidies = NDPMP – Net Indirect Taxes

GDPFC

= GDPMP – Indirect Taxes + Subsidies = NDPFC + depreciation

GNPFC

= NNPFC + DEP GNPMP – NIT

NNPFC or NI

=NDPFC+NFIA =NNPMP-NIT

• WHAT IS Net Factor Income from Abroad (NFIA)?

– Factor income from abroad by a normal resident (-) Factor income of non resident from domestic territory

What are the

components of NFIA?

Net Compensation of Employees from Abroad = compensation received by

residents working abroad – compensations paid to non-residents working in the

domestic territory

Net Income from property & Entrepreneurship = income received by the residents in the form of rent,

interest and profit from rest of the world – income paid to the non-residents in the form of rent, interest and

profit to the rest of the world

Net retained earnings of resident companies abroad = retained

earnings abroad – retained earnings of foreign companies

located in a country

Net Factor Income from Abroad

• Difference between factor income earned by our resident indians abroad and factor income earned by non-residents in domestic territory

• This is part of National Income

• Main components

• Net compensation of employees

• Net income from property & entrepreneurship

• Net retained earnings of resident companies

Net Exports

• Difference between exports and imports of goods and non-factor services related to domestic territory

• This is part of Domestic Income

• Main components

• Export and import of goods

• Export & import of non factor services

NFIA vs Net Exports

Thank you