National Income Accounting : RAS Economics
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National Income Accounting : RAS Economics

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National Income Accounting : RAS Economics

National Income (NY):

  • National Income is used as a measure of economic growth and reflects the productive power of an economy to turn out goods and services for the satisfaction of human wants.
  • The key measure of economic growth used by all countries all over the world is Gross Domestic Product.

Personal Income (PY):

  • It is the income received by an individual.

PY = NY - ( corporate taxes + corporate  retained earnings ) + Transfer payments

Disposable Income (DY):

  • It is the income received by the individuals and is at their disposal.

DY = PY - Direct taxes

Discretionary Income:

  • It is the income which the individual can spent at their free will.

Discretionary Income = DY - Compulsory savings & Loan payments

Gross Domestic Product

  • It is the market value of all final goods and services produced within a financial year by factors of production located within a country irrespective of ownership.  
  • GDP ignores all transactions in which goods are exchanged for money but in which no new goods and services are produced.
  • Ex. Sale of securities are not counted in GDP. These exchanges are transfer of ownership of assets and do not correspond to current production. But fees paid to broker is counted in GDP.

Final Goods and Services:

  • They are produced for absolute final use.
  • Intermediate goods are produced by one firm for use, in further processing by another firm. Ex. Tyres sold for use to automobile industry.

Types of Final goods:

  • Capital goods are the goods produced by the economic system that are used as inputs to produce other goods. Ex. Machinery, Building roads etc.
  • Consumer goods are the goods produced for present consumption. Ex., Perishable commodities, Clothing etc.

Gross National Product

  • It is defined as the total market value of all final goods and services, produced within a financial year by factors of production owned by a country’s citizens regardless of where the output is being produced.

GNP = GDP + NFIA

where,

NFIA is Net Factor Income from Abroad.

NFIA = Factor Income received abroad by Indian normal residents - Factor Income paid to foreign residents in Indian domestic territory

Concept of NET

  • During the process of production, capital produced previously gradually wears out.
  • GDP includes newly produced capital goods but does not take into account goods “consumed” in the production process.
  • The amount by which an asset’s value falls each period is called Depreciation.

NDP = GDP - Depreciation

NNP = GNP - Depreciation

where,

NNP = Net National Product

NNP (factor cost) = NNP (market price) - Net Indirect Taxes

where,

Net Indirect taxes = Indirect taxes - Subsidies

  • Factor costs are the actual costs at which goods and services are produced by the firms and industries in an economy. They are actually the cost of all the factors of production.
  • When to these factor costs, taxes are added then it becomes Market Price.

Which Is Better Index?

GDP and GNP:

  • GDP takes into account the income earned within the territory which may not always be the right income.
  • GNP takes into account the income earned by an Indian citizen whether in India or abroad.
  • GNP is a better index than GDP.

Factor cost and Market price:

  • Factor cost is better than Market Price as we get actual cost of production which gives true picture of economy producing goods at a particular cost.

Better measure is GNP (Factor cost).

Taking into account ‘Net’:

  • NDP is a better measure than GDP.
  • NNP is a better measure than GNP.

Better measure is NNP (Factor cost).

Therefore, NNP (Factor cost) is the best index.

Measurement of National Income:

  • Value Added Method
  • Income Method
  • Expenditure Method

Value Added Method:

  • It is also known as Production Method and Output Method.
  • It is used to calculate GDP at Market Price, which is the total values of outputs produced at different stages of production.
  • Calculation is done by taking the value of final goods and services and not intermediate goods, as it result in double counting.
  • Following goods and services should be included in production:
    • Goods and services actually sold in the market.
    • Goods and services not sold but supplied free of cost.

Calculation:

  • Multiply final output with market price.
  • It is commonly used for calculating GDP of Primary sector.

Income Method:

  • It emphasises on aggregating the payments made by:
    • firms to households
    • households and firms to government
    • banks to households/ firms
    • banks to government, called factor payments.
  • Measures the income - wages, rents, interest and profits, received by all factors of production in producing final goods.
  • It is used for calculating GDP for services sector where calculating total output is difficult.
  • Any income corresponding to which there is no flow of goods and services or value added, should not be included in calculation by Income method.

Expenditure Method :

  • It measures the final expenditure on GDP.
  • Amount of expenditure refers to all spending on final goods and services only in an economy.
  • In an economy, there are 3 main agencies, which buy goods and services.
    • Households 
    • Firms 
    • Government
  • This method is commonly used for calculating GDP for manufacturing sector.

National Income Accounting : RAS Economics

Computation:

The final expenditure is made up of the sum of 4 expenditure items:

Consumption (C):

  • Personal consumption made by households, payment of which is paid by households directly to the firms which produced the goods and services desired by the households.

Investment Expenditure (I):

  • Investment is an addition to capital stock of an economy in a given time period. This includes investments by firms as well as government sector. Ex. Purchase of new housing, plants by private sector.

Government Expenditure (G):

  • It includes the value of goods and services purchased by the government.
  • Government expenditure on pension schemes, scholarships, unemployment allowances are not included in this as all of them come under transfer payments.

Net Exports (X - IM):

  • Expenditure on foreign made products (Imports) are expenditures that escapes the system and must be subtracted from total expenditures.
  • Goods produced by domestic firms which are demanded by foreign economies involve expenditure by other economies on our production (Exports) and are included in total expenditure.

GDP = C + I + G + ( X - IM )

Per Capita Income

Per capita income = National income/ Total population

  • It is the income earned per person in the economy.
  • This measure does not reflect inequality i.e. distribution of income is not taken into consideration.

Limitations of GDP Concept

GDP and Social Welfare:

  • If crime goes down, society would be better but a decrease in crime is not an increase in output, therefore it is not reflected in GDP.
  • Inequality of income among different section is not reflected in GDP.
  • Most of the household activities done by housewives is not included in GDP. But if same job is done by a nanny or a house-cleaner then it gets included in the GDP.

Underground/ Black Economy:

  • Most illegal transactions are missed.
  • Tax evasion is a major incentive for people to participate in the black economy.
  • Because of black economy, the GDP reflects only a part of economic activity instead of a complete measure of what the economy is producing.

For more such articles join RAS Course

Also read :

Introduction to Economics

Sectors of an Economy

Circular flow of any economy