b) National income at factor prices. This measure is perhaps the most comprehensive of all. 4. For example, if over a certain period the national income of a country rises by 25 per cent, but over the same period there is a 40 per cent increase in the population, can we say that living standards have gone up? The omissions of non-marketed economic activities become very serious when we try to compare the standards of living of different countries. It differs from GDP at market price due to the presence of net indirect taxes. So growth of GDP can counter the tensions arising from an unpopular and unsuccessful war, a long overdue self-confrontation with conscience of racial injustice, a volcanic eruption of sexual mores, and an unprecedented assertion of independence by the young. Major Types of Production in National Income: The circular flow diagram identified two basic units of an economy, viz. In other words, net investment is gross investment minus depreciation. Suppose the Government of India provides a subsidy of 50 paisa per kg to the producer of wheat. For example, the White Paper provides details of changes in three important variables, namely, saving, investment and consumption. [GNP is found by summing indirect taxes, household disposable income and direct taxes (35 + 5100 + 900), or by summing consumption, investment and government spending (4600 + 500 + 935).The figure is Rs. In this context we have to note an important point. Thus this method establishes the importance of intermediate products in the national economy. Thus: NNP at Factor Cost = NNP at Market Prices-Indirect taxes + Subsidies. However, certain qualifications have to be added to this view. But depreciation is added. It has better reception, and is more reliable and durable. We also divide GNP by the total number of hours worked to arrive at output per hour of labour input. Interest received on loan given to a foreign company in India 2.value of bonus shares received by shareholders of a company 3.income of foreign banks operating in India 4.sales proceeds of second hand goods 5.death duties,gift tax and wealth tax Share with your friends. Consequently, the GNP would increase too much. Now market prices are relevant variables here inasmuch as they are reflectors of the relative desirability of diverse goods and services. The foundation-stone of macroeconomics is the circular flow of national income. The identity of Y and O then follows from the conventional accounting practice that the value of all output must accrue to someone. It is because some of sale proceeds accrue to the government as revenue. The following points may be noted in this context: Firstly, GDP provides the best answer to be question: What is the market value of goods and services produced for final demand: Moreover, for assessing a country’s potential military strength, we need to know (among other things) the maximum output (including goods) it is capable of producing. This is perhaps the major component of a country’s national income. In official national income statistics of most countries, market prices are used to value stocks. But GNP at factor cost is the income which the factors of production receive, in return, for their services alone. Similarly, variations in the value of assets, that can be ascertained beforehand and are insured against flood or fire, are not included in the GNP. It includes the gross value of output of all items from (1) to (4) mentioned under GNP. It may be recalled that macroeconomics is the study of those forces, economic and physiological, that determine the four key macro variables, aggregate employment, production, real income, and the price level. Money received from sale of old house. (a) National income = compensation of employees + business interest payments + rental income of persons + corporate profits + proprietors’ income. Thus we find that the total gross value added of an economy equals the value of its gross domestic product. As per the CSO classification, which of the following does not fall under the industrial sector? Concept of National Income 2. Thus to estimate national output by expenditure we have to add exports and subtract imports. The deductions include income from government departments as well as surpluses from public undertakings, and employees’ contribution to social security schemes like provident funds, life insurance, etc. Concept: Concept of Balance of Payments Account. Definitions of National Income: The definitions of national income can be grouped into two classes: … But if the government builds up a power plant, the interest that is paid on this debt is counted as transfer payment and hence excluded form national income. 2578.6 – 402.1 = Rs. In case of O, it is of industry of origin, such as electricity generation or car production, in case of E, it is by type of expenditure; in the case of Y, it is by type of income, such as wages and salaries, interest, profits and dividends. For instance, it can tell us whether agriculture is contributing more or the share of manufacturing is falling, or of the tertiary sector is increasing in the current year as compared to some previous years. These include profits of unincorporated business, self-employed persons and partnerships. Q.21 Which of following is not included in national income ? GNP at Market Prices 8. 31.4, we illustrate the concept of ‘value added’. (c) GNP = NNP + capital consumption allowance = Rs. If we add net income from abroad to domestic income, we get national income, i.e., National Income = Domestic Income + Net Income earned from abroad. It is because someone must own the value of output (GNP) that has been created or, in other words, the net value of all that has been produced is the joint contribution of all factors. It can be arrived at from NNP at Factor Cost by making certain additions and deductions. To run the offices, the governments have also to spend on contingencies which include paper, pen, pencil and various types of stationery, cloth, furniture, cars, etc. Some of the major items whether included or excluded in national income are as follows: 1. This is what is left to households, after paying taxes and social security contributions, for spending or saving. But if, during the current year, a portion of a house is constructed anew, the increase in the value of the house (after subtracting the cost of the newly constructed portion) will be included in the GNP. This concept is illustrated in Table 31.1. (e) Personal disposable income = Personal income – personal taxes = Rs. In other words, the term refers to the amount added to the value of the production (under consideration) by the firm’s own activities. This relationship always holds true in a two-sector model, since saving leakages must always equal spending injections. The money value of all factor incomes is net national income. These three methods of calculating GDP yield the same result because National Product = National Income = National Expenditure. (c) Comparison of Standards of Living in Different Countries: Per capita GNP figures are often used to compare the standards of living in different countries. We first try to identify the major types of production in the economy. The amount of domestic output available for Indian purchases is GNP— Exports = Rs. In a modern economy total production is divided into three main categories, viz. 80), or by summing consumption and investment Rs. (Ans. where DI is disposable income, Y is NNI,T is income tax paid, C is consumption spending and S is saving. The problem is whether that part of the produce which is not sold in the market can be included in national income or not. Fifth the profits earned or losses incurred on account of changes in capital assets as a result of fluctuations in market prices are not included in the GNP if they are not responsible for current production or economic activity. In a two-sector (household and business) model, suppose households receive the following compensation from business: wages Rs. So in our discussion of national income we confine ourselves to current expenditures. But personal income includes transfer income which is not included in national income. Welcome to EconomicsDiscussion.net! In comparing one year with another, we are faced with the problem that the rupee is not a stable measure of purchasing power. In this article we will discuss about National Income:- 1. The reason is that interest is paid on such debt by imposing tax on others and not from the profit generated from the power plant. Give reasons for each answer. Similarly GNP – C + I + X – M and NNP = C + In + G + X – M. Here I is gross investment and In is net investment. No, this will not be included in the national income as it is a transfer income. View solution National income at constant price is an estimate on the basis of base prices. 100 while gross imports are Rs. Thus the difference between domestic income and national income is the net income earned from abroad. The components or constituents are: 1. If all such differences are added up for all industries in the economy, we arrive at the GNP by value added. According to the income method, total output can be looked at in terms of the incomes generated in the process of producing the output. Circulating capital is known as stocks or inventories. Here firm X produces the basic material (iron ore) valued at Rs. We may start with two variations of NNP. and the estimated rents of all such assets as are used by the owners themselves. This point is slightly complicated. b) National income at factor prices. Valuation of stocks at market prices has its own problems. The same argument applies in case of government expenditure. (b) by taking the sum of the values added by each firm at three different stages (of this example). This is arrived at by subtracting depreciation (or capital consumption allowance) form GNP. Major Types of Production 4. 935. Thus along with various commodities we include all types of economic services that are rendered to satisfy human wants (such as haircuts, legal advice, medical care, etc.). However, in the real world no country is self-sufficient. This includes gross salary and compensation before deduction of income tax, social security and provident fund contributions. • National income is an uncertain term which is used interchangeably with national dividend, national output and national expenditure. market value of output less taxes collected by the government) fall short of the total market value of output. Last, the income earned through illegal activities is not included in the GNP. This is because the factor cost (payments to factors) of producing goods must equal the final value of goods and services at market prices. Therefore, in order to arrive at GDP at factor cost, indirect taxes are subtracted and subsidies are added to GDP at market price. This imputation of rent to owner-occupied housing is absolutely essential if all housing, whether owner-occupied or rented, is to be treated at par. Then we study how the circular flow of income can be measured. The word ‘net’ refers to the exclusion of that part of total output which represents depreciation. Real NNP = NNP for the Current Year x Base Year Index (= 100)/Current Year Index. They provide a basis of assessing each country’s financial contribution to international institutions. A rise in the average figure per head does not show whether the increase has gone to a small number of very rich people, leaving the rest of the community in exactly the same position as before or whether the fruit of progress was shared equally by everyone. 150. Lipsey, “A household refers to all people who live under the same roof and who make joint financial decisions about, among other things, the purchase and consumption of goods.” In macroeconomics we use this term ‘household’ to describe the basic purchasing unit for consumption goods. According to R.G. (a) NNP MP = GNP MP. This is recorded as part of profit income. For example, if the market price of rice is Rs 3 per kg but it costs the producers in certain areas Rs 3.50. So we do not have reliable information about these. (3) New residential houses constructed over that period. 900 from domestic production plus the Rs. Profits which are not distributed by companies and are retained by them are included in the GNP. 2663 = Rs. Saving represents the proportion of national income which is not spent on consumption goods and services. For example, the contribution of the United Kingdom to the European Economic Community budget was worked out in this way. Moreover, it may be that the national income of a country has risen because people are being forced to work more hours. They are subtracted from the domestic income to get the national income. Ans: C. Q.23 Which of following is not an intermediate goods ? Are the following included in national income 1. Each of these three groups help create and maintain economic activity in a process that continues over and over again, as shown in Fig. Free. For studying change in living standards, we need per capita income figures. 6, 00,000 × 100/300 = Rs. Personal income differs from private income in that it is less than the latter because it excludes undistributed corporate profits. It Includes the cost of factors of production e.g. Gross domestic capital formation is always greater … Percentage growth rates are usually expressed in terms of percentage increases in GNP. Measurement Problems and Others. The simply means that domestic investment plus net exports equals personal saving plus the budget surplus. GNP at factor cost is the sum of the money value of the income produced by and accruing to the various factors of production in one year in a country. If we have all factor incomes and want to get the market value of output, we must add in net indirect taxes. 3. Sometimes we divide GNP by the number of persons employed to arrive at GNP per employed person. The value added method for measuring national income is more realistic than the product and income methods because it avoids the problem of double counting by excluding the value of intermediate products. Rent is a factor income. Thus Personal Income=National Income-Undistributed Corporate Profits-Profit Taxes-Social Security Contribution + Transfer Payments + Interest of Public Debt. One, it is not known whether these things were produced during the current year or the preceding years. (b) Both saving and investment equal Rs. However, any commission to be paid to second hand car dealers is a part of current production because the car dealer is providing a useful service (which is paid for). Now a breakdown of GDP from the earnings of cost side shows GDP – DI + GCS + Tr-Tp where Tr = tax revenue and Tp = transfer payments. So care must be taken to add together only the values added at each stage of production. The following two types of expenditure are valuation problems: A certain portion of output created by the government is not sold through the market. The latter are the end-product of economic activity i.e., they are the economy’s output. 900; consumption spending is Rs. To use the language of Samuelson: “The net national product or ‘national income evaluated at market prices’ …. Each one will give the same result. (3) Government expenditure on final goods and services (G). Thus NNP at Market Prices=GNP at Market Prices-Depreciation. 6, 00,000 crores and the price index for this year is 300. Some of the metrics calculated by using national income accounting include the gross domestic product (GDP), gross national product (GNP), and gross national income … The basic question here is: what is the basic measure of investment in standard national accounting system? (b) Income of the government sector is included in the national income but not included in personal income. 2. Each one gives us some useful information. Secondly, the GNP may not adequately reflect changes in quality of products. To rectify the underestimation and overestimation of GDP, we need a measure that adjusts for rising and falling prices. But in this manner, due to an increase or decrease in the prices, the GNP shows a rise or decline, which may not be real. All this process is termed depreciation or capital consumption allowance. 4 per kg but there is a subsidy of 50 paisa to producers. Explanation: Rent is earned from the use of capital which is one of factors … (3) Government revenue surplus (GRS), which is the excess of government’s current tax revenue over its current expenditures on goods and services and on transfers. Let us see why this is so. There are practical problems regarding coverage of items in national income (expenditure). A rise in national income may be accompanied by an increase in the amount of pollution. Thus the difference between the two measures is due to the single term, depreciation. (b) Profits earned by the branches of a foreign bank in India: No, the profits will not be a part of the national income of India. Major Classes 6. “National income is a collection of goods and services reduced to a common basis by being measured in term of money.”. 33.3). The sources of saving are personal saving, business earnings and depreciation, and government saving (i.e., the government budget surplus). Again, if indirect taxes (Rs 7 crores) are deducted from the net domestic product of Rs 67 crores, we get Rs 60 crores as the net value added at factor cost which is equivalent to net domestic product at factor cost. Thus GNP according to the Expenditure Method=Private Consumption Expenditure (C) + Gross Domestic Private Investment (1) + Net Foreign Investment (X – M) + Government Expenditure on Goods and Services (G) = C + I + (X – M) + G. As already pointed out above, GNP estimated by either the income or the expenditure method would work out to be the same, if all the items are correctly calculated. GDP Deflator 6. In all three approaches the total value of the value of the nation’s output at market prices is the same. They provide estimates of the value of joining an alliance of other countries or of the strength of a potentially hostile nation. It is used to measure and track a nation's wealth from year to year. 910 the sum of household compensation or the sum of consumption (Rs. Although these are a part of India’s production, these are incomes earned, not by India, but by foreign residents. Hence Payment of corporate tax is not included in the national income as it is a mere transfer payment from the firm to the government. 5. Fourthly, the per capita GNP figure tells us nothing about the composition of the goods and services available to the members of society. These are called income from employment since these represent that part of the value of production which is attributed to labour. a) Dividends received on shares is a part of corporate profits and thus, is included in national income of a country. This new development is no doubt exciting. It includes all sums received or deposited during a year by way of all types of contributions like overtime, commission, provident fund, insurance, etc. To avoid confusion we have to be very careful. This refers to the incomes of privately and publicly owned producers who sell their outputs in the market: So we have to include trading surpluses of public sector enterprises in national income along with profits and dividends accruing to the private sector. crores/1049.2th. 40) or by summing consumption (Rs. Construction of a new house. Lipsey and C. Harbury: “Economists and policy-markers who are interested in the ebb and flow of economic activity that passes through markets, and in the variations in employment opportunities for factors of production whose services are sold on markets, will continue to use GDP as the measure that comes closest to telling them what they need to know.”. Each one gives a somewhat different final figure, and each gives us useful and interesting information. Thus. (ii) Corporate profits already form part of national income. (i) Profits earned by a branch of foreign bank. Two related points may be noted in this context. The inventory includes produced but unsold manufactured and semi-manufactured goods during the year and the stocks of raw material, which have to be accounted for in GNP. The second valuation problem arises because stocks are often accumulated by the private sector. (3) The expenditure to be made to purchase that output. See table 31.2. Here investment I includes change in stocks while government expenditure excludes government transfer payments. In Fig. Technically, it is called the gross national product (GNP). Welcome to EconomicsDiscussion.net! GNP (at factor cost) = GDP (at factor cost) ± net factor income from abroad. However, because of such payments the modern mixed economy is called by the name ‘welfare state.’. 1991.9 + Rs. GNP at market prices always includes indirect taxes levied by the government on goods which raise their prices. Since there is no market price at which to value these goods and services, they are valued ‘at cost’. In agriculture, corn is treated as circulating capital because corn is required to produce corn. This is illustrated in Table 3. So the distinction between output and input gets blurred. Those who receive such payments (such as the unemployed, the handicapped, the needy families, etc.) This is why such payments are called transfer payments. It includes rents received by those owning property let out to others as also what is called ‘inputted rent’ of owner occupied houses (i.e., income from house property). GDP at Factor Cost 3. (a) Use of Machine tools (b) Raw Material (c) Advocate’s Services (d) Heavy Machinery. There are three different ways to measure GDP: Product Method, Income Method and Expenditure Method. This simple circular flow model now provides the starting point of our study. Suppose 1990-91 is the base year and GDP for 1999-2000 is Rs. What is meant by national income? (i) Compensation of Employees i.e., wages, salaries, etc. Firstly, the word ‘stock’ is used in a restricted sense, to denote circulating capital. 17. Therefore, in order to arrive at GNP at factor cost, we deduct indirect taxes from GNP at market prices. Samuelson calls it net economic welfare (NEW). The fifth measure is GNP at factor cost. Then the gross national income is Rs 80 crores (Rs 75 crores + Rs 5 crores).
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