National Income Topic By Me

TRENDS IN NATIONAL INCOME SINCE 1941 By: PRIYANKA KASWA SONALI JAIN

NATIONAL INCOME National income is a money value of final goods and services produced in an economy over some period of time, usually a year. Alfred Marshal: “ The labor and capital of the country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds. This is the net annual income or revenue of the country or the national dividend.”

Need for the study of National Income • To measure the size of the economy and level of • • •

country’s economic performance. To trace the trend or speed of the economic growth in relation to previous year as well as to other countries. To know the structure and composition of national income in terms of various sectors. To make projection about the future development trend of the economy.

Need for the study of National Income….. • To help government formulate suitable • • •

development plans and policies to increase growth rates. To fix various development targets for different sectors. To help business firms in forecasting future demand for their products. To make international comparison of people’s living standards.

• National income is the final outcome of all

economic activities of a nation valued in terms of money.

• It shows the economic position of a nation. • It also help to assess and compare the economic progress achieved by a country over a period of time.

The Circular-Flow Diagram Rev enue Good s & Se rv ices sol d

Market for Goods and Services

Firms

Inp uts for prod uct ion Wag es , re nt, and pr ofi t

Spen din g Good s & Servi ce s bou ght

Households

Market for Factors of Production

Labor, land, and cap ital Income

• Circular flow diagram shows that income received is equal to the consumption expenditure made by the consumers. Y=C

• Diagram is explained without the other

components of national income: savings or investment, I public expenditure by government, G expenditure on net exports, X-M

•

Y = C + I +G + ( X – M )

Measures of National Income • Gross Domestic Product (GDP) • Gross National Product (GNP) • Net Domestic Product (NDP) • Net National Product (NNP) • Per Capita Income

Gross Domestic Product • It is the total value of output of goods and

services produced by the factors of production located within the country’s boundary in a year.

• The factors of production may be owned by any one-citizens or foreigners.

• GDP measures income from where it is earned

rather than who owns the factor of production.

Gross National Product • It is the total value of output of goods and

services produced and income received in a year by domestic residents of a country.

• It includes profits earned from capital invested abroad.

• GNP = GDP + Net income earned from abroad

Net Domestic Product • It is the sum of consumption expenditures, government expenditures, net foreign expenditures and investment, less the depreciation.

• NDP = GDP – Depreciation • Depreciation means reduction in the value of assets through wear and tear.

Net National Product •

It is the total income of the nation’s residents (GNP) minus losses from depreciation.

• NNP = GNP – Depreciation • It gives the measure of net output available for consumption by the society.

Per Capita Income • It refers to the average income of a country. • Per Capita Income or output per person is an

indicator to show the living standards of people in a country.

• If PCI increases, it means an improvement in the overall living standard of people.

Other National Income Terms •

• •

•

Persona l i ncom e is the income that households and non-corporate businesses receive. It excludes retained earnings. In addition, it includes household’s interest income and government transfers. PI = NI + Transfer payments from government + Net non-business interest income – Corporate retained earnings – Social security taxes

Other National Income Terms.. •

Dis posa ble p ersona l i nco me is the income that household and non-corporate businesses have left after satisfying all their obligations to the government.

•

It equals personal income minus personal taxes and certain non-tax payments.

•

It is what people have readily available to spend.

DPI = PI - Personal taxes

Methods Of calculating National income • The sum of value added from each productive sector of the economy- Ou tp ut meth od

• The sum of factor incomes earned in productionIncome method

• Aggregate demand for goods and servicesEx pe ndi tu re method

Output or Production method • The measures of GDP are calculated by adding the total value of the output (of goods and services) produced by all activities during any time period, such as a year.

• Double-counting problem can be avoided by

including only the value added at each stage of production or by adding only the final value of output produced.

Income method • The income received by the factors of

production during a year can be obtained by adding rent to land, wages to labor, interest to capital and profit to organizations. This will be equal to the income of the nation.

• GNI = Rent + Wage + Interest + Profit + Income from abroad.

Expenditure method • Government as well as private individuals spend money for consumption and production purposes.

• The sum total of expenditure incurred in a

country during a year will be equal to national income.

• GNI = Individual Expenditure +Government Expenditure.

Problems in calculating National Income • Non availability of reliable statistics. • The service of housewives is not included in the • • •

national income because this service is not sold in the market. Individuals do not keep correct account of their consumption. Illiteracy and ignorance. Lack of proper criteria for measuring the value of services.

Contd…… • Black Money: GDP does not take into account the ‘parallel economy’ as the transactions of black money are not registered.

• Non-Monetization: In most of the rural economy, considerable portion of transactions occurs informally and they are called as non-monetized economy.

Contd…… • Growing Service Sector: In recent years, the

service sector is growing faster than that of the agricultural and industrial sectors. However, value addition in legal consultancy is not based on accurate reporting.

• Social Services: It ignores volunteer and unpaid social services.

Factors Affecting National Income • Factors of Production: Normally the more efficient

and richer the resources, the higher the level of national income or GNP will be.

Land: the geographical location of these natural resources affects the level of GNP.

Capital: it is greatly determined by investment which in turn depends on other factors like profitability, political stability etc.

Factors Affecting National Income.. Labor & Entrepreneur: The quality or productivity of

human resources is more important than quantity. Manpower planning and education affect the productivity and production capacity of an economy.

• Technology: This factor is more important for nations with little natural resources. The development in technology is affected by the level of invention and innovation on production.

Factors Affecting National Income.. • Government: It provides laws and order, regulations that affect exchanges.

• Political Stability: A stable economic and political

system helps the allocation of resources. Wars, strikes and social unrests will discourage investment and business activities.

TRENDS IN NATIONAL INCOME OF INDIA

Before 1990:After 1947 India independence License Raj between 1947-1990. The rules of License Raj is very strick. India still ranks in the bottom of developing nations. Before 1991 closed economy and import of certain goods was restricted.

After 1990:After 1990 the government of P. V. Narasimha Rao the License Raj was cancelled. Competitors from all over the world entire the Indian market. Ended many public monopolies, allow automatic approval of foreign direct investment in many sectors.

Gross National Product and the Net national Product of India Yea r NN P Rs . Cr ores 1992 - 93 546023 1993 - 94 685912 1994 - 95 803090 1995 - 96 936548 1996 - 97 1089563 1997 - 98 1224946 1998 - 99

GNP Rs . Cr ores 6189 69 7692 65 9011 11 1053 736 1224 208 1376 943 1583 110

PER CAPITA INCOME The finance minister said India's per capita income is now $800.From the World Development Indicators database, India's PPP per capita income was $3,100 in 2004, leading to a rank of 145th out of 208 countries ranked.

Growth of National Income in India Sector

1950-1980

1980-2005

GDP Total

3.5

5.6

GDP Per capita

1.4

3.6

During 1950-51,agriculture which also included animal

husbandry, forestry and fisheries contributed nearly half of the NI. Mining, manufacturing and hand trades contributed about one-sixth of the total income. Commerce, transport and communication accounted for a little more than one-sixth of the total NI. Other services such as domestic services, administrative services etc are accounted for about 15% of national income. The share of commodity production was about two-third of the NI. The margin of error in the calculation of national income estimates worked out at about 10%.

Annual Growth Rates during the Plans First Plan(1951-56) Second Plan(1956-61) Third Plan(1961-66) Annual Plan(1966-69) Fourth Plan(1969-74) Fifth Plan(1974-79) Annual Plan(1979-80) Sixth Plan(1980-85) Seventh Plan(1985-90) Two Annual Plan(1990-92) Eighth Plan(1992-97) Ninth Plan(1997-2002) Tenth Plan(2002-07)

NNP at factor cost

Per Capita NNP

4.4 3.8 2.6 3.9 3.1 4.9 6.0 5.4 5.5 5.5 6.7 5.3 7.8

2.6 1.7 0.4 1.6 0.8 2.6 8.2 3.1 3.3 3.3 4.5 3.3 6.1

National Income by industrial origin I. Agriculture etc 1. Agriculture 2. Forestry 3. Fishing II. Mining, Manufacturing etc. 1. Mining & Quarrying 2. Manufacturing (a) Registered (b) Unregistered 3. Electricity, gas & water supply 4. Construction III. Transport, Communication & Trade etc. IV. Finance & Real Estate V. Community & Personal Services

1950-51

1980-81

2005-06

57.2 50.2 6.1 0.9 14.8

39.7 35.8 3.0 1.0 23.7

19.7 18.0 0.7 0.9 26.2

1.5 8.9 4.4 4.5 0.3 4.1 11.9

2.1 13.8 8.1 5.8 1.7 6.1 18.4

2.1 15.1 10.3 4.8 2.2 6.8 26.1

6.7 9.4

6.5 11.7

13.8 14.2

From the analysis it is seen that the national income of India is growing slowly. Reasons are:-

• • • • •

Slow growth of agricultural sector Defect in planning Rapid growth of population. Under-utilization of the productive capacity of machines Poverty

Re cen t Gr owth Tr en ds i n I ndi an Eco nomy • India’s Economy has grown by more than 9% for three • • • • • •

years running, and has seen a decade of 7% positive growth. The growth rate of the service sector was 11.18% in 2007 and now contributes 53% of GDP. The industrial sector grew 10.63% in the same period and is now 29% of GDP. Agriculture is 17% of the Indian economy. The growth rate of the manufacturing sector rose steadily from 8.98% in 2005, to 12% in 2006. The storage and communication sector also registered a significant growth rate of 16.64% in the same year. The percentage of gross capital formation in GDP is concerned, there has been a significant rise from 22.8% in the fiscal year 2001, to 35.9% in the fiscal year 2006.

How it can be improved? • It needs legal reform to focus sharply on the interests of the public, and not those of the public servant, in the functioning of the governmental and public delivery systems. • All forms of special protection for persons working for Government or public sector agencies (except for armed forces or agencies engaged in maintenance of law and order) deserve to be eliminated.

• Government should be free to engage the services of non-governmental organizations or private service providers at competitive costs to ensure effective delivery of essential services. • Freedom of information and full disclosure of all financial decisions made by Governments and its multifarious agencies on a daily rather than quarterly or annual basis.

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