23 National Income 1

MACRO AGGREGATES GROSS NATIONAL PRODUCT (GNP) GNP IS THE SUM OF ALL FINAL GOODS AND SERVICES PRODUCED DURING A SPECIFIED PERIOD OF TIME (1 Yr.) WHICH CAN BE MEASURED AT MARKET VALUE (GNPmp) OR AT FACTOR COST (GNPfc) ARRIVING AT REAL GNP NOMINAL GNP IS GROSS NATIONAL PRODUCT EXPRESSED IN CURRENT Rs. Where as REAL GNP IS DEFLATED FOR CHANGES IN THE PRICES OF ITEMS REAL GNP (current period) = NOMINAL GNP * GNP DEFLATOR (base period) (current period) GNP DEFLATOR (current period)

PERSONAL DISPOSABLE = INCOME

PERSONAL INCOME – PERSONAL TAXES

PERSONAL INCOME

=

NNPfc – RETAINED EARNINGS CORPORATE TAXES + TRANSFER PAYMENTS + NET INTEREST AND DIVIDENDS

=

WAGES + PROPRIETORS INCOME + NET INTEREST + DIVIDENDS + TRANSFER PAYMENTS

PERSONAL SAVING

=

PERSONAL DISPOSABLE INCOME - CONSUMPTION

NET EXPORTS

=

GNPmp - (C+I+G) Where (C+I+G) is Domestic absorption

PRIVATE INCOME = INCOME FROM DOMESTIC PRODUCTION ACCRUING TO THE PRIVATE SECTOR + NET FACTOR INCOME FROM ABROAD+ CURRENT TRANSFER FROM GOVERNMENT + NET TRANSFERS FROM ROW TO THE PRIVATE SECTOR PERSONAL INCOME

= PRIVATE INCOME - RETAINED PROFITS CORPORATE PROFIT TAX

NET FACTOR INCOME FROM ABROAD = FACTOR INCOMES PAID income generated in domestic productive activity paid to foreigners(eg repatriated profits, payment to consultants)- FACTOR INCOMES RECEIVED(domestic residents earn incomes abroad)

SIMPLE ECONOMY WAGES&PROFITS(Y) Rs1000

PRODUCTIVE SECTOR

Y=AD Y=C

PRIVATE CONSUMPTION Rs 1000 ( C)

HOUSEHOLD SECTOR

CLOSED ECONOMY WAGES&PROFITS(Y) Rs1000

PRODUCTIVE SECTOR

Y=AD Y=C+I S=I

PRIVATE CONSUMPTION Rs 800 ( C)

INVESTMENT Rs 200

HOUSEHOLD SECTOR

SAVING Rs 200

OPEN ECONOMY WAGES&PROFITS(Y) Rs1000

PRODUCTIVE SECTOR

Y=AD Y=C+I+G+X Y =C+J W=J

PRIVATE CONSUMPTION Rs 800 ( C)

INJECTIONS(J)=(Rs 200) INVESTMENT(I)=80 Exports(E)=60 Expenditure(G)=60

HOUSEHOLD SECTOR

WITHDRAWALS(W)=(200)

SAVINGS(S)=100 IMPORTS(I)=50 TAXES(T)=50

GDP at Market Price Value at market prices of all goods and services during a specified period GDPmp = C+I+G+E-M GDP at Factor Cost – Income generated in the productive activities in an economy during a year GDPfc = W+INT+P+R KEY TO FLOW CHART NATIONAL PRODUCT – DOMESTIC PRODUCT = NET INCOME FROM ABROAD (NIA) GROSS VALUE – NET VALUE = DEPRECIATION MARKET PRICE – FACTOR COST = INDIRECT TAXES + SUBSIDIES

GNPMP -depreciation

-net indirect taxes -net income from Abroad

=NNPMP

=GNPFC GDPMP -net indirect taxes -depreciation

-net income from Abroad

-depreciation =NNPFC

= NDPMP

-net indirect taxes

-net indirect taxes GDPFC

-net income from Abroad

= NDPFC

-net income from Abroad

-depreciation

SUMMARY OF THE FLOW CHART KEY RELATIONSHIPS GNPmp-NET INDIRECT TAXES = GNPfc GNPmp-NET INCOME FROM ABROAD = GDPmp GNPmp – DEPRECIATION = NNPmp GDPmp – DEPRECIATION = NDPmp NNPmp – NET INCOME FROM ABROAD = NDPmp (SAME RELATIONSHIPS HOLD FOR NATIONAL INCOME VARIABLES MEASURED AT FACTOR COST)

CONCEPTUAL FRAMEWORK STOCKS AND FLOWS Stocks – Measured at a point of time eg. Total number of persons employed at a time in India Flows – Measured over a period of time eg. No. of persons who get new jobs Stocks MONEY SUPPLY CPI FOREX RESERVES CAPITAL STOCK UNEMPLOYMENT

Flows INFLATION EXPORTS / IMPORTERS INVESTMENT WAGES TAXES

Measurement of national income The Output (Value Added) Method refers to value of all final goods and services produced during a year by different sectors of the economy or aggregating values imparted to intermediate Products at each stage of production The agricultural and extractive industries

10

plus

Manufacturing Industries

40

plus

Services and construction

40

equals

Gross Domestic Product at factor cost

90

plus

Net factor income from abroad (= Income received from abroad – income paid abroad)

10

equals

Gross National Product at factor cost

100

less

Capital consumption or depreciation

-20

equals

Net National Product at factor cost or National Income

80

INCOME METHOD MONEY PAYMENTS MADE TO ALL FACTORS OF PRODUCTION FACTOR INCOMES FOR CURRENT SERVICES TO PRODUCTION Income from employment Income from self employment Gross trading profits of cos Gross trading surplus of public cos Rent Total domestic income Stock appreciation GDPfc NFIA GNPfc

80 10 10 10 10 120 -30 90 10 100

EXPENDITURE METHOD AGGREGATES ALL MONEY SPEND BY PRIVATE CITIZENS FIRMS AND GOVERNMENT Consumer Expenditure (C) Govt.Expenditure (G) Gross Domestic Fixed Capital Formation (GDFC) (I) Value of Physical increase in stocks Total domestic expenditure (mp) Exports & factor income received Imports & factor income paid GNPmp Indirect Taxes Subsidies GNPfc

70 + 20 + 20 + 10 120 + 20 - 30 110 - 20 +10 100

DIFFICULTIES IN MEASUREMENT OF NI Non Market production Imputed values Underground economy Side effects and Economic Bads Double counting USE OF NI ECONOMIC PLANNING STANDARD OF LIVING CHANGES IN COUNTRY’S ECONOMIC GROWTH COMPARATIVE ANALYSIS FACILITATED

Yr 1995-96 1996-97

Nominal GNP 2500 3200

Base yr GNP deflator

GNP deflator 120 145

1994 -95 =100

What is real GNP of 1995-96 What is the real GNP of

1996-97

What is the growth rate of real GNP from 1995-96 to 1996-97? What is the inflation rate in 1996-97 in relation to 1995-96 ?

Real GNP 2500 x 100/120 = 2083.33 3200 x 100/145 = 2207

Growth rate Growth Rate = Real GNP 1996-97 Real GNP 1995-96 2207/2083.3 –1

=

0.059

= 5.9%

Inflation rate GNP deflator (cp- 96-97) - GNP(BP95-96) GNP def (1995-96)bp 145-120/120 x 100 = 20.83%

Following are the data relating to the national accounts Of an economy for the year 1995 in mn units of currency Capital consumption allowance Personal consumption spending Corporate income taxes Undistributed corporate profits Net exports Dividends Rent Interest Indirect business taxes Gross private investment Compensation to employees Government spending Proprietors income

1000 12500 500 250 25 750 1000 500 1250 550 8487.5 912.5 1250

Compute GNP using income method and expenditure method

(a) GNP – INCOME METHOD INDIRECT BUSINESS TAXES COMPENSATION TO EMPLOYEES RENTS INTEREST PROPRIETOR’S INCOME CORPORATE TAX DIVIDENDS UNDISTRIBUTED PROFITS

(b)

GNP =– EXPENDITURE METHOD = C+I+G+X-M = 12500+550+912.5+25 = 13987.5

1250 8487.50 1000.00 500.00 1250.00 500.00 750.00 250.00 13987.50

From the following figures compute a) GDP at factor cost b) National income c) Personal disposable income GNP mp Personal income tax Corporate taxes Subsidies FIPA FIRFA Undistributed profit Indirect taxes Depreciation

5000 1000 800 400 800 900 200 450 350

GDP fc = GNP fc - NFIA GNPfc = GNP mp - IT + subsidies = 5000 - 450 + 400 = 4950 GDP fc

= 4950 –(900-800) = 4850

National income NNPfc = GNP fc - Dep 4950 –350 4600 Personal disposable income = Personal income – Personal Taxes Personal income = National income - Retained earning - Corp tax 4600 -200 – 800 = 3600

GDP mp 6000 Corporate income tax 1200 Personal income tax 900 Subsidies 475 Factor incomes received from abroad 1500 Factor incomes paid 1200 abroad Undistributed profits 225 Indirect taxes 900 Depreciation 600 Compute Personal Disposable income, national income and GNP at market prices

GNPmp

= GDPmp +NFIA = 6000+1500 -1200 = 6300

National income = NNPfc GNPfc = GNP mp + Subsidies - Indirect taxes = 6300 + 475 -900 =5875 NNPfc

=

5875- 600 5275

Personal disposable income = National income - Retained earnings - Corporate taxes - Personal txes 5275 -225 -1200 -900 = 2950

NATIONAL INCOME ACCOUNTING INTRODUCTION MODERN ECONOMY IS VERY COMPLEX IN NATURE – INVOLVES A NUMBER OF TRANSACTIONS eg HOUSEHOLDS CONSUME GOODS AND SERVICES AND PROVIDE THEIR LABOUR SERVICES TO FIRMS THEY PROVIDE SAVINGS TO Fis WHICH ACT AS INTERMEDIARIES BETWEEN SAVERS AND INVESTORS GOVERNMENT PLAYS A ROLE IN COLLECTING TAXES AND PROVIDING PUBLIC SERVICES TRANSFER OF PHYSICAL AND FINANCIAL ASSETS TAKE PLACE WITH FOREIGNERS

NATIONAL INCOME ACCOUNTS – SUMMARY PICTURE OF ALL TRANSACTIONS

NATIONAL ACCOUNTING INVOLVES A SUBSTANTIAL AMOUNT OF AGGREGATION – HELPS IDENTIFY IMPORTANT ECONOMIC RELATIONSHIPS MAJOR TYPES OF ACCOUNTS – NATIONAL ECONOMY NATIONAL INCOME ACCOUNTS -

FLOW OF GOODS AND SERVICES IN AN ECONOMY DURING A YEAR

INPUT OUTPUT ACCOUNT

-

FLOWS OF GOODS AND SERVICES BETWEEN PRODUCTIVE AND HOUSEHOLD SECTORS

NATIONAL BALANCE SHEET

-

REFLECTS NATIONS WEALTH AT A POINT OF TIME

NATIONAL ACCOUNTS SIMPLE ECONOMY –

NUMBER OF HOUSEHOLDS SINGLE FIRM (OWNED BY SOME HOUSEHOLDS) LABOUR IS THE ONLY SCARCE INPUT PRODUCTION ACCOUNT Dr. Wages 90 Profits 10 Sales (to households) 100 HOUSEHOLD ACCOUNT

Wages Profits Consumption Sales (to households)

100 100

Cr. --100 100 90 10 100

CONSOLIDATED PRODUCTION ACCOUNT (WITH BUSINESS SAVING & DEPRECIATION)

Wages & Salaries Retained Profits Depreciation Sales Investment

Dr.

Cr.

1340 310 50

---

1700

1200 500 1700

INVENTORY INVESTMENT GNP IS NOT EQUAL TO GNI-ROLE OF SAVING & INVESTMENT PRODUCTION A/C

Dr. 360

Wages & Profits Sales Households Investment

360

Cr. -325 35 360

HOUSEHOLD A/C.

Wages & Profits Sales to Households Saving

325 35 360

360 360

SAVINGS A/C

Investment in inventories Saving (Household)

35 35

35 35

(ROLE OF GOVERNMENT)-PR0DUCTION SECTOR

Wages and salaries Dividends Retained profits Corporate profit tax Sales to households Sales to Government Domestic investment

1000 500 500 1000

3000

1000 1000 1000 3000

GOVERNMENT SECTOR Wages and salaries Purchases Taxes collected

500 1000 1500

1500 1500

HOUSEHOLD A/C Wages & Salaries Dividends Personal income tax Consumption Personal Saving

Dr. 500 1000 500 2000

Cr. 1500 500

2000

SAVINGS & INVESTMENT Personal Saving Business Saving Domestic Investment

Dr. 1000 1000

Cr. 500 500 1000

INDIRECT TAXES AND SUBSIDIES-PR0DUCTION SECTOR

Wages and salaries Dividends Retained profits Corporate profit tax Sales and excise taxes Sales to households Sales to Government Domestic investment

1000 500 500 500 300

3300

1100 1100 1100 3300

GOVERNMENT SECTOR Wages and salaries Purchases Taxes collected

700 1100 1800

1800 1800

HOUSEHOLD A/C Wages & Salaries Dividends Personal income tax Consumption Personal Saving

Dr. 500 1100 600 2200

Cr. 1700 500

2200

SAVINGS & INVESTMENT Personal Saving Business Saving Domestic Investment

Dr. 1100 1100

Cr. 800 500 1100

A COMPLETE PICTURE PRODUCTION A/C Dr. Factor Incomes

Cr.

85

Sales to households

78

(80)

Sales to Government

4

(5)

Domestic Investment

12

Retained Profits

8

(a) Fixed Investment

(10)

Corporate Profit tax

1

(b) Inventory Investment Exports

Indirect taxes

6

Subsidies from Govt.

Imports

5

(a) Paid to domestic residents (b) Paid to foreign residents

105

(2) 3

105

EXTERNAL A/C. Dr.

Cr.

Exports

8

Imports

5

Transfers from foreigners

3

Transfer to foreigners

6

Incomes from abroad Deficit on current a/c.

4

Income paid to foreigners

5

1 16

16

SAVINGS & INVESTMENT A/C Dr. Fixed Investment Inventory

CR

10

Personal Saving

2

2

Business Saving

8

Government Saving

1

Deficit on current a/c.

1

12

12

HOUSEHOLD SECTOR Dr.

Consumption

78

Personal Income Tax

10

Incomes from domestic production Income from abroad

Cr. 86 4

Transfers to foreigners

5

Transfers from Govt.

2

Personal Saving

2

Transfers from foreigners

3

95

95

GOVERNMENT A/C. Dr.

Cr.

Wages & Salaries

5

Corporate profit tax

1

Purchases of goods & services

4

Indirect Tax

6

Transfers abroad

1

Income Tax

10

Transfers to household

2

Subsidies to producers Surplus

3 1 17

17

12 10 8

9.89.5

8.5 7

8.1 6

6 4

5.8 5.3 4.5 4.5

re a

S. Ko

or e ap

Si ng

na m

Vi et

ia In d

C

hi n

a

2 0

Outlook in April Outlook in Oct

A comparitive picture 4.2 4.4

s. Korea

7.1 7.7

India 0.9 1.3

Euro

GDP growth 2009 8.5 9.8

China

GDP growth 2008

0.9 1

Japan

1.3 1.6

US 0

5

10

15

Budget deficit as a percentage of GDP 1.50%

2.00%

0.60%

1.00% 0.00% -1.00%

US

UK

-2.00% -3.00% -2.50% -2.80% -4.00%

S. India Korea -3.40%

China

Series1

Growth in industrial production

In di a S. Ko re a

Eu ro C hi na

K

U

U

.S .

12.80% 14.00% 12.00% 9.10% 10.00% 7.10% 8.00% 6.00% 4.00% 2.40% 2.00% 0.00% -2.00% -1.50% -1.70% -4.00%

Growth in industrial production

(39) The following is the information from the national income accounts for a hypothetical country : GNP MP

2400

Gross Investment

400

Net Investment

150

Consumption

1500

Government purchases of goods and services

480

National Income

1925

Wages and Salaries

1460

Proprietor’s income + rental income of persons

160

Dividends

50

Government budget surplus

15

Interest

60

Transfer payments

260

Personal tax and non-tax payments

300

Required to compute : (a) NNP at market prices

(b) Net exports

(c) Net indirect taxes

(d) Corporate profits

(e) Taxes – Transfers

(f) Personal income

(g) Disposable personal income

(h) Personal saving

(39) (a)

NNP

Depreciation

= = = = = =

(g)

Net Exports

(j)

= = Net Indirect Profits = =

GNP – Depreciation 2400-250 2150 Gross Investment – Net Investment 400-150 250 = GNP – (C+I+G) 2400-(1500+400+480) 20 = NNP – National Income 2150-1925 225

(a)

Corporate Profits = NI – (Wages and Salaries + Proprietors Income + Rental Income + Net Interest) = 1925-(1460+160+60) = 1925-1680 = 245

(f)

Taxes- Transfers = = =

Gross Purchases + Budget Surplus 480+15 495

(j)

Personal Income = = =

National Income – Corporate Profits + Transfer Payments + Dividends (1925-245) + 260+50 Rs. 1990

(o)

Personal Disposable Income = =

=Personal Income – Personal Taxes and Non-Tax payments 1990-300 Rs. 1690

(s)

Personal Saving

Personal Disposal Income – Consumption 1690 – 1500 Rs. 190

= = =

1.

Given below are the accounts of a hypothetical economy PRODUCTION A/C

WAGES & SALARIES 100 DIVIDENDS( ) EXCISE TAX PROFIT TAX RETAINED PROFIT

GOVT. PURCHASE 30 PERSONAL SECTOR A/C. PERSONAL SECTOR PURCHASES (BF) 20 PURCHASES INCOME TAX 20 20 20 EXPORTS 40 SAVING 60 10 FIXED INVESTMENT FIXEDINVESTMENT 20 20 20 50 NET CHANGE IN I FOREIGN SECTOR A/C IMPORTS (BF) __ -1MPORTS(BF) 10 EXPORTS 40 FACTOR INCOMES 20

GOVERNMENT A/C. WAGES & SALARIES TRANSFER to HH TRANSFERS TO ROW EXPENSES ON GOOD SAVINGS TOTAL

10

EXCISE TAX PERSONAL INCOME TAX PROFIT TAX FROM BUSINESS

?

20 20

?

IMPORTS FACTOR INCOMES PAID TRANSFERS TO ROW

160 30

10

SURPLUS

(30)

SAVING AND INVESTMENT A/C 10

DOMESTIC INVESTMENT INVESTMENT IN INVENTORIES

20

HOUSEHOLD SAVINGS BUSINESS SAVINGS

10 GOVT. SAVINGS

NET FOREIGN INVEST

Fill up the missing entries and compute GDP & GNPfc GDP & GNPmp Personal Disposable Income

FACTOR INCOMES TRANSFER PAYMENT(GOVT)

60

1.

Given below are the accounts of a hypothetical economy PRODUCTION A/C

WAGES & SALARIES 100 DIVIDENDS(10) EXCISE TAX PROFIT TAX RETAINED PROFIT

GOVERNMENT A/C. WAGES & SALARIES TRANSFER PAYMENT

GOVT. PURCHASE 30 PERSONAL SECTOR A/C. PERSONAL SECTOR PURCHASES (BF) 110) 20 PURCHASES 110 INCOME TAX 20 20 20 EXPORTS 40 SAVING 60 10 FIXED INVESTMENT FIXEDINVESTMENT 20 20 20 50 NET CHANGE IN I 10 FOREIGN SECTOR IMPORTS (BF) __-10 -1MPORTS(BF) 10 FACTOR INCOMES 20

30 30

TRANSFERS TO ROW

10

PURCHASES(HS) SAVINGS TOTAL

30 -50

EXCISE TAX PERSONAL INCOME TAX PROFIT TAX FROM BUSINESS

?

20 20

10

eXPORTS

FACTOR INCOMES PAID TRANSFERS TO ROW SURPLUS

160 30

10

10 30

SAVINGS AND INVESTMENT A/C DOMESTIC INVESTMENT INVESTMENT IN INVENTORIES NET FOREIGN INVEST

Fill up the missing entries and compute GDP & GNPfc GDP & GNPmp Personal Disposable Income

40

FACTOR INCOMES TRANSFER PAYMENT(GOVT)

20

HOUSEHOLD SAVINGS BUSINESS SAVINGS

60

GOVT. SAVINGS

-50

10 (-30)

50

(45) The following are inter-industry transactions in an economy. (The figures represent money valued of output)

Industries

X

Y

Z

Total Output

X

50

80

30

200

Y

20

60

50

240

Z

30

40

60

160

200

240

160

Total Output

Calculate the National Income in the economy and value added in industry Y

(45) The National Income in the Economy = Total final output in the Economy - Sales to household sector. The sales to household sector by X, Y and Z industries are as follows :X

=

200-(50+80+30) = 40

Y

=

240-(20+60+50) = 110

Z

=

160-(30+40+60) = 30

National Income

=40+110+30= 180

Value added in Industry Y

=

Output of Y – Input from the industries

=

240-(80+60+40)

=

240-180

=

60

(14)

The following is the information from the national income accounts for a country XXX Rs. In Crore National Income 3850 Government purchases 930 Consumption 3000 Net investment 300 Gross investment 800 GNP 4800 Personal Tax and non-tax payments 600 Transfer payments 510 Net interest 120 Government budget surplus 30 Dividends 100 Proprietors incme and rental income 320 of persons W ages and salaries 2920

Required to compute : b. Net Indirect Tax c. Taxes – Transfers. d. Personal Income d. Net Exports

a.

Net indirect taxes OR Indirect taxes - Subsidies

(14)

=

NNP at market prices – National income

=

(GNP at Market price – Depreciation) – National Income

= GNP at Market Price – (GI-NI) – National Income [where Gross Investment (NI) = Depreciation ] = 4800-(800-300)-3850 = 4800-500-3850 = 450 b. Taxes – Transfers = Government purchases + Budget surplus = 930+30=960 c. Personal Income = (Wages + Proprietor’s income + Net Interest + Dividends + Transfer Payments) = 2920+320+120+100+510 = 3970. d. Net Exports = GNP – (C+I+G) = 4800 – (3000+800+930) = 70

(20) The following is the information drawn from the National Income Accounts for an economy

Item

Amount (Rs. In crore) A. GNP 4850 B. Gross investment 854 C. Net investment 310 D. Consumption 3095 E. Government Spending 968 Calcutta the NNP and net export for the economy.

(20) NNP

Net Exports

=

GNP – Depreciation (i.e. Gross Investment – Net Investment)

=

4850-544=4306

=

GNP – Domestic absorption (i.e. C+I+G)

=

4850-4917= -67

Note : While calculating Domestic Absorption we have to consider gross investment