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National Income and Related Aggregates

National Income and Related Aggregates. Dr. Roopali Srivastava Department of Management ITS, Ghaziabad. Circular Flow Of Income.

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National Income and Related Aggregates

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  1. National Income and Related Aggregates Dr. Roopali Srivastava Department of Management ITS, Ghaziabad

  2. Circular Flow Of Income • The process of production is a continuous process. In it, various FOP such as land ,labor, capital & entrepreneurship are combined together for the production of goods & services. • The supply of these FOP come from these FOP from households. These factors offers their services to the producers (also known as firms) who in returns produce goods &services & make payments as reward in the form of rent, wages, interest & profits. • The households spend this money on goods & services produced by the firms. Thus income or money first flows n he firms to the households in the form of factor payments & then from the firms to the households in the form of consumption expenditure. • The income continue to flow in a circular way so it is called circular flow of income.

  3. Goods & Services Factor Services Producers Households Factor Payments Payment For Goods & Services Two Sector Model

  4. In the previous model ,it is assumed that household sector and firms do not save at all. But in actual practice it does not happen so. Households save some part of their income for various reasons like precautionary reasons, transactionary reasons &speculative reasons. • Similarly firms also save some of their receipts for reasons like-expansion of their business etc. • All the banking institutions, insurance companies & financial houses taken together constitute capital market of the economy. • From capital market these savings flow to firms as loans for investment.

  5. Two Sector Model With Savings Goods & Services Factor Services Savings Borrowings Capital Market Producers Households Savings Borrowings Factor Payments Payment For Goods & Services

  6. Three-Sector Model With Savings Government Payments Subsidies Direct Taxes Indirect Taxes Borrowings Savings Savings Borrowings Capital Market Producers Households Savings Borrowings Factor Payments Payment For Goods & Services

  7. Four-Sector Model Pay.re.on gov.a/cf E Rest of the world Transfer Payments+Factor Payment+Social Services Factor Services Government p.made g.a. Subsidies Direct Taxes Indirect Taxes P f E P f I Borrowings Savings Savings Borrowings Capital Market Producers Households Savings Borrowings Factor Payments Payment For Goods & Services

  8. Withdrawals & Injections • In reality, however, there are leakages from and additions to the circular flows of income and expenditure • The leakages and additions are also called withdrawals and injections, respectively. Dr. Roopali Srivastava

  9. Withdrawals • Withdrawal is the amount that is set aside by the households and the firms and is not spent on the domestically produced goods and services over the period of time . Example a household sets aside a part of income for old age or against the loss of job. • Saving is a withdrawal. • When savings are invested, they take a form of injections • Firms may also withhold a part of their total receipts and may not return it to the circular flows in the form of factor payments in anticipation of depression • Such withdrawals reduce the size of circular flows • S+T+M Dr. Roopali Srivastava

  10. Injections • Amount that is spent by households and firms in addition to their incomes generated within the regular economy • Injection by the household may be in the form of spending inherited savings or the hoarding • Firms can inject money by spending their retained earnings or borrowing from outside • Injections increase the size of circular flows • I+G+X Dr. Roopali Srivastava

  11. Export expenditure (X) Investment (I) Government expenditure (G) BANKS, etc ABROAD GOV. Import expenditure (M) Net taxes (T) Net saving (S) The circular flow of income INJECTIONS Consumption of domestically produced goods and services (Cd) Factor payments WITHDRAWALS

  12. National Income • Refers to the money value of all final goods & services produced by residents of a country while working both within or outside the domestic territory in an accounting year. • NI is expressed in monetary terms. • It reflects the value of final goods & services. • NI Is expressed over 1 financial year.

  13. National Income -Excluded Items • NI excludes sale & purchase of second hand goods. • It excludes income from illegal activities – smuggling, black marketing, gambling etc., • It does not includes transfer payments – old age pension, scholarship to students etc., • Transfer payment are those earning for which no contribution is made to the flow of goods & services. • In other words they are not earned but received only. • T.P are received without doing or producing any commodity or services.

  14. Concepts of National Income • GDP • GNP • NDPMP • NDPFC • NNPMP • NNPFC • Private Income • Personal Income • Personal Disposable Income • National Disposable Income

  15. GROSS & NET –: DEPRECIATION • Gross Product =Net Product + Depreciation • NATI0NAL PRODUCT & NET PRODUCT -:NFIA National Product=Domestic Product+ NFIA • PRODUCT at MARKET PRICE & FACTOR PRICE-:NIT Product at Market Factor =Product at Factor Cost+ Net Indirect Tax • Net Indirect Tax=Indirect Taxes - Subsidies

  16. Concepts related to National Income(NNPFC) • GDP : Value of all final goods and services produced within the domestic territory of a country during an accounting year. • GNP = GDP + Net factor income from abroad

  17. Calculation of National Income • There are three successive phases in the circular flow Income Production Expenditure

  18. Methods of Measuring NI • Value added method/Product Method • Income method • Expenditure method

  19. Steps involved in Product Method • Identification of product units – • Primary Sector – Agricultural, Forestry, Fishing, Mining • Secondary Sector – Manufacturing Sector • Tertiary Sector – This sector is also called service sector – Banking, Insurance etc., • GDPMP = 1+2+3+Net Indirect Taxes+ Depreciation • NDPMP = GDPMP – Depreciation/Consumption of Fixed Capital • NDPFC = NDPMP – Net Indirect Taxes • NNPFC = NDPFC + NFIA

  20. Identifying the producing units • Classifying the factor income Steps involved in Income Method

  21. Factor income from all the three sectors are added(NDPFC ) • GDPMP=Compensation of employees + Rent + Interest+ Profits + Mixed Income + NIT + Depreciation • GDPFC = GDPMP – NIT • NDPFC = GDPFC – Depreciation/Consumption of Fixed Capital • NNPFC = NDPFC + NFIA

  22. Steps involved in Expenditure Method • To identify economic units incurring final expenditure. • Classification of final expenditure. • Private final consumption expenditure • Govt. final consumption expenditure • Gross fixed capital formation • Change in stocks • Net Exports • GDPMP = PFCE + GFFCE + GFCF + Change in Stocks + Net Exports • GDPFC = GDPMP – NIT • NDPFC = GDPFC – Depreciation/Consumption of Fixed Capital • NNPFC = NDPFC + NFIA

  23. Steps involved in the calculation of National Income • All economic units incurring expenditure are classified into: • Households • Business sector • Government Sector • Rest of the world

  24. Final Expenditure is divided into: • Consumption Expenditure : It is incurred by the households. • Expenditure by the households is divided into three categories: • Expenditures on durables • Expenditure on non durables • Expenditure on services like transport, medical, etc. • Expenditure is calculated by multiplying volume of sale in the market by the price.

  25. Investment Expenditure • Investment is an addition to the existing stock of capital goods such as machinery, factories, residential houses and firms inventories.. • Investment expenditure is made on the capital goods • Expenditure on the purchase of new plants, machines, equipment, factories, etc. • Inventory expenditure includes the change in inventories • Expenditure on the purchase of new houses by households are included.

  26. Estimation of Government Expenditure: • Defence expenditure • Expenditure on the maintenance of law and order • Expenditure on the social welfare activities • Expenditure on health and education • Estimation of net exports: • Exports represents spending of foreigners on our goods • Imports represents our expenditure on the purchase of foreign goods. • The difference between the two give us net exports

  27. Thus, National Income = Consumption expenditure + Investment Expenditure + government expenditure + Net Exports. • Personal Income : It is the income which an individual earns from all the sources. • Personal Disposable Income : Personal Income – Direct Taxes • Per Capita Income = National Income Total Population

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