Engineering_Economics_PPT-UNyfyff5IT-_II.pptx

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1. UNIT- II Macroeconomic Concepts Lavanya.K Assistant Professor MRIT-MBA

2. NATIONAL INCOME INTRODUCTION The term National Income is used to refer the money value of the total income of the economy in a year. In common parlance national income means the total value of goods and services produced annually in a country. In other words the total amount of income accruing to a country from economics activities in a year's time is known as national income. Firstly it measures the market value of annual product. Secondly National income is a monetary measure. Thirdly national income includes the market value of all final goods the value of intermediate products are not included. A final product is one which is available for immediate consumption. For example, a shirt or a sewing machine. The example of intermediate product is raw materials.

3. DEFINITIONS OF NATIONAL INCOME The definitions of National income can be grouped into two classes as the traditional definition advanced by Marshall, Pigou and Fisher and the modern definitions.   Marshallion Definition:- According to Marshall, the labour and capital of a 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 true net annual income or revenue of the country or national dividend.   Pigovian Definition: - According to Pigou "National income is that part of objective income of the community, including of course income derived from abroad which can be measured in money” National Income

4. Fisher's Definition: - Fisher adopted consumption as the criterion of national certain whereas Marshall and Pigou regarded it to be production. According to Fisher ‘the national income consists solely of services as received by ultimate consumers whether from their material or from their human environment'. From the modern point of view national income is defined as the net output of commodities and services flowing during the year from country's productive system in the hands of ultimate consumer. DEFINITIONS OF NATIONAL INCOME National Income

5. NATIONAL INCOME ACCOUNTING The total income obtained as wages, rent, interest and profits are the national income of the country. Various households get their income from the firms for the production of goods and services. The value of all the goods produced is the national product. Thus the total national product produced by firms in a year is distributed to all factors in the form of wages, interest rent and profits. The sum of all these factors income will be equal to the national income. Thus the national product is equal to the national income. National Income = Wages + Rent + Interest + profit National income = Domestic income + Net income from abroad. Personal Income = Domestic income + Net income from abroad + Transfer Payments + Net interest on borrowings + Unearned income - Taxes on profit - Undistributed profit - Contribution to social security measures. National Income

6. METHODS OF ESTIMATION There are three methods to calculate the national income of a country. They are : Product or inventory method: Under this method national income is computed by adding the net value of all commodities and services produced during a given period. Thus national income is equal to the total of final products. We first estimate the gross value of domestic output in the various sectors of production (Agriculture, manufacturing industry, and services including government). The value of gross output is obtained by multiplying the output of each sector by their respective market prices and adding them together. Then we deduct value of depreciation from gross value of domestic output. National Income

7. The figure so obtained has to be adjusted with net income from abroad. This is the national income at factor cost. This method is also known as output method or value added method. This method is very complicated because of non-availability of adequate and requisite data. It is also difficult to calculate depreciation. National Income

8. Income Method: Under this method the national income of a country is obtained by adding the incomes accrue to factors of production within the national territory. Basic factors of production used producing the national products are land, labour , capital and organisation . The national income is equal to total rent plus total wages and salaries of all employees including income of self employed persons plus total interest on capital including dividends of the shareholders plus total profit of all firms including undistributed corporate profits and earnings of public enterprises. In short, the national income represents the total of rent, wages, interest and profit. National Income

9. Expenditure method: This method is based on the assumption that income is equal to expenditure plus savings. Under this method the personal consumption expenditure, government purchase of goods and services, gross private domestic investment and net foreign investment are added together to get the national income of a country. This method is also known as consumption- saving method. The expenditure method is not generally used because the necessary data regarding consumption expenditure are not easily available. This method includes the total expenditure of a country during a given year. The income is spent on consumer goods or on producer goods. The consumption expenditure and investment expenditure of all the individuals in a government during a year is added. Thus National Income = Consumption Expenditure + Investment Expenditure + government expenditure + exports - imports.   Y = C + I + G + X-M National Income

10. Value Added Method Another method of measuring national income is the value added by industries. The difference between the value of material output and input at each stage of production is the value added. If all such differences are added up for all industries in the economy we arrive at the gross domestic product.   National Income

11. Various Concepts of National Income Gross National Product (GNP) Gross national product is defined as the total market value of all final goods and services produced in a year. GNP includes four types of final goods and services, (i) Consumer goods and services to satisfy the immediate wants of the people (ii) gross private domestic investment on capital goods consisting of fixed capital formation, residential constructions and inventories of finished and unfinished goods, (iii) goods and services produced by government and (iv) net export of goods and services‘ GNP = government production + private output National Income

12. Net National Product (NNP) The second concept is Net National Product. The capital goods like machinery wear out as a result of continuous use. This is called depreciation. This is also called National income at market prices. Hence NNP = GNP - depreciation. National Income at factor cost National income at factor cost denotes the sum of all incomes earner by the factors. 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. It includes all items of GNP less indirect tax. GNP at market price is always more than GNP at factor cost as GNP at factor cost is the income which the factors of production receive in return for their service alone. National income at factor cost = net national product - indirect taxes + subsidies. National Income

13. Personal Income (PI) Personal income is the sum of all incomes received by all individuals during a given year. Some incomes such as Social security contribution are not received by individuals; similarly some incomes such as transfer payments are not currently earned, for example Old Age Pension. Therefore, Personal income = national income - social security contribution - Corporate income taxes - undistributed corporate profit + transfer payment . Disposable Income (DI) Disposable income = personal income - personal taxes After a part of the income is paid to the Government in the form of taxes, the remaining income is called disposable income. National Income

14. INFLATION DEFINITION OF INFLATION Inflation can be defined as the persistent increase in the price level of goods and services in an economy over a period of time. Some of the important definitions of inflation are : In the words of Samuleson-Nordhaus , “Inflation is a rise in the general level of prices .” According to Coulborn , inflation can be defined as, “too much money chasing too few goods .” According to Parkin and Bade , “Inflation is an upward movement in the average level of prices. Its opposite is deflation, a downward movement in the average level of prices. The boundary between inflation and deflation is price stability.”

15. In the words of Peterson , “The word inflation in the broadest possible sense refers to any increase in the general price-level which is sustained and non-seasonal in character.”   According to Johnson , “Inflation is an increase in the quantity of money faster than real national output is expanding.” Inflation

16. TYPES OF INFLATION Generally, inflation is categorised on the basis of its rate. There are three types of inflation:   Moderate inflation: This type of inflation takes place when there is a rise in the prices of goods and services at a single rate annually. Moderate inflation is also known as creeping inflation. At the time of moderate inflation in an economy, the prices of goods and services increase only at a moderate rate. However, the rate of increase in prices differs in different countries. It is easy to anticipate moderate inflation; therefore, individuals hold money as a store of value. Inflation

17. Galloping inflation: This type of inflation takes place at the time of the rise in the prices of goods and services at two-digit or three-digit rate per annum. Another name for galloping inflation is as jumping inflation. In the words of Baumol and Blinder, “Galloping inflation refers to an inflation that proceeds at an exceptionally high.” The worst sufferers of galloping information are middle and lower class individuals. Due to this, people are unable to save money for the future. This kind of situation requires strict measures to control inflation. Inflation

18. Hyperinflation: This type of inflation takes place when the rate of increase in prices is extremely high or out of control. In other words, hyperinflation occurs when the increase in prices is more than three-digit rate annually. The cause behind hyperinflation is the unrestricted increase in the supply of money in the market. This results in a situation of imbalance in the supply and demand for money. Consequently, money loses its real worth at a rapid speed. Inflation

19. Causes of Inflation Primary Causes Increase in Public Spending Deficit Financing of Government Spending Increased Velocity of Circulation Population Growth Hoarding Genuine Shortage Exports Trade Unions Tax Reduction The imposition of Indirect Taxes Price-rise in the International Markets Inflation

20. Primary Causes In an economy, when the demand for a commodity exceeds its supply, then the excess demand pushes the price up. On the other hand, when the factor prices increase, the cost of production rises too. This leads to an increase in the price level as well. Increase in Public Spending In any modern  economy, Government spending is an important  element  of the total spending. It is also an important determinant of aggregate  demand. Deficit Financing of Government Spending There are times when the spending of Government increases beyond what taxation can finance. Therefore, in order to incur the extra expenditure, the Government resorts to deficit financing. For example, it prints more money and spends it. This, in turn, adds to inflationary pressure. Inflation

21. Increased Velocity of Circulation In an economy, the total use of money = the money supply by the Government x the velocity of circulation of money. When an economy is going through a booming phase, people tend to spend money at a faster rate increasing the velocity of circulation of money . Population Growth As the population grows, it increases the total demand in the market. Further, excessive demand creates inflation . Hoarding Hoarders are people or entities who stockpile commodities and do not release them to the market. Therefore, there is an artificially created demand excess in the economy. This also leads to inflation. Inflation

22. Genuine Shortage It is possible that at certain times, the factors of production are short in supply. This affects production. Therefore, supply is less than the demand, leading to an increase in prices and inflation . Exports In an economy, the total production must fulfill the domestic as well as foreign demand. If it fails to meet these demands, then exports create inflation in the domestic economy . Trade Unions Trade Union  work in favor of the employees. As the prices increase, these unions demand an increase in wages for workers. This invariably increases the cost of production and leads to a further increase in prices. Inflation

23. Tax Reduction While taxes are known to increase with time, sometimes,  Governments  reduce taxes to gain popularity among people. The people are happy because they have more money in their hands. However, if the rate of production does not increase with a corresponding rate, then the excess cash in hand leads to inflation . The imposition of Indirect Taxes Taxes are the primary source of revenue for a Government. Sometimes, Governments impose indirect taxes like excise duty, VAT, etc. on businesses. As these indirect taxes increase the total cost for the manufacturers and/or sellers, they increase the price of the product to have a minimal impact on their profits . Inflation

24. Price-rise in the International Markets Some products require to import commodities or factors of production from the international markets like the United States. If these markets raise prices of these commodities or factors of production, then the overall production cost in India increases too. This leads to inflation in the domestic market. Non-economic Reasons There are several non-economic factors which can cause inflation in an economy. For example, if there is a flood, then crops are destroyed. This reduces the supply of agricultural products leading to an increase in the  prices of the  commodities. Investment in Gold, Real estate, stocks, mutual funds, and other assets are some of the ways to deal with Inflation. Inflation

25. Measures to Control Inflation Inflation is considered to be a complex situation for an economy. If inflation goes beyond a moderate rate, it can create disastrous situations for an economy; therefore is should be under control. It is not easy to control inflation by using a particular measure or instrument. The main aim of every measure is to reduce the inflow of cash in the economy or reduce the liquidity in the market. Inflation

26. Monetary Measures: The government of a country takes several measures and formulates policies to control economic activities. Monetary policy is one of the most commonly used measures taken by the government to control inflation. In monetary policy, the central bank increases rate of interest on borrowings for commercial banks. As a result, commercial banks increase their rate of interests on credit for the public. In such a situation, individuals prefer to save money instead of investing in new ventures . This would reduce money supply in the market, which, in turn, controls inflation. Apart from this, the central bank reduces the credit creation capacity of commercial banks to control inflation. Measures to Control Inflation

27. Fiscal Measures: Apart from monetary policy, the government also uses fiscal measures to control inflation. The two main components of fiscal policy are government revenue and government expenditure. In fiscal policy, the government controls inflation either by reducing private spending or by decreasing government expenditure, or by using both . It reduces private spending by increasing taxes on private businesses. When private spending is more, the government reduces its expenditure to control inflation. However, in present scenario, reducing government expenditure is not possible because there may be certain on-going projects for social welfare that cannot be postponed Measures to Control Inflation

28. Besides this, the government expenditures are essential for other areas, such as defense , health, education, and law and order. In such a case, reducing private spending is more preferable rather than decreasing government expenditure. When the government reduces private spending by increasing taxes, individuals decrease their total expenditure. Measures to Control Inflation

29. Price Control Another method for ceasing inflation is preventing any further rise in the prices of goods and services. In this method, inflation is suppressed by price control, but cannot be controlled for the long term. In such a case, the basic inflationary pressure in the economy is not exhibited in the form of rise in prices for a short time. Such inflation is termed as suppressed inflation Measures to Control Inflation

30. New Economic Policy 1991 impact on Industry Salient Features of The Industrial Policy 1991 The industrial policy resolution of 1956 emphasized on increasing state involvement through the public sector. The main objective of achieving economic growth, was by allowing public sector to grow fast and attain “commanding heights”. The statement on industrial policy of 1991 appears to be the reversal of the 1956 policy. The objectives of the industrial policy, 1991 were To speed up liberalization measures To correct the distortions or weaknesses that might have crept in To maintain sustained growth in productivity and gainful employment To attain international competitiveness

31. The main features of NIP-1991 Doing away with industrial licensing requirements: In a major move to liberalize the Indian economy, the NIP abolished all kinds of industrial licensing irrespective on level of investments in all excepts 18 industries related to security and strategic concerns, safety, environmental issues etc . In continuation of the 1991 policy with regard to delicensing , there are only six industries related to health, strategic and security consideration that remain under the preview of industrial licensing .

32. Diminishing role of public sector: The spirit of the 1991 policy is diametrically opposite to that of 1956 policy with regard to the role of the public sector in economic growth and development . The 1956 resolution reserved 17 industries in the public sector where as the 1991 policy reduced this to 8 and by 2001, the number reserved for public sector is just 3. The govt decided to open the arms and ammunition industry also to the private sector. The govt also made its intentions clear to further reduce the importance of the public sector by introducing a ‘divestment’ where in private sector participation is encouraged in the important areas of the economy. The main features of NIP-1991

33. Incentives and concessions for foreign investment and technology: The NIP prepared a specified list of high technology and high investments priority industries where automatic permission was to be made available for foreign direct investment up to 51% foreign equity. At present, foreign up to 100% has been permitted in infrastructure industries such as electricity generation, transmission and distribution, construction and maintenance of roads, highways, ports and harbors . The main purpose of announcing these investments is to make the Indian industries more vibrant, modern and efficient. The main features of NIP-1991

34. Drastic amendments to MRTP Act : The Monopolies and Restrictive Trade Practices (MRTP) act has been amended in tune with the spirit of new industrial policy (NIP 1991). Earlier there were restrictions on the size of assets of MRTP companies (which are very strong in terms of asset and market hold). Such restrictions have now been lifted and the companies operate freely. For instance foreign equity has gone up to a maximum limit of 51% in most industries. In the case of export oriented units (EOUs) and life saving drugs and equipment manufacturers, there is provision for 100% foreign equity. Now the amended act emphasizes prevention of restrictive and unfair trade practices. The main features of NIP-1991

35. Stabilization Measures (LPG) These measures were undertaken to correct the inherent weakness that has developed in Balance of Payments and  control the inflation. These measures were short-term in  nature. Various Long-Term Structural Reforms were categorized as: Liberalization Privatization and Globalization Collectively they are known by their acronym LPG. The balance of Payment is the system of recording the economic transactions of a country with the rest of the world over a period of one year. When the general prices of goods and services are increasing in an economy over a period of time, the same situation is called  Inflation. Let’s understand each terminology in detail

36. Liberalization The basic aim of  liberalisation  was to put an end to those restrictions which became hindrances in the development and growth of the nation. The loosening of government control in a country and when  private sector companies’ start working without or with fewer restrictions and government allow private players to expand for the growth of the country depicts liberalization in a country . Objectives of Liberalization Policy To increase competition amongst domestic industries. To encourage foreign trade with other countries with regulated imports and exports. Enhancement of foreign capital and technology. To expand global market frontiers of the country. To diminish the debt burden of the country. Stabilization Measures (LPG)

37. Privatization This is the second of the three policies of LPG. It is the increment of the dominating role of private sector companies and the reduced role of public sector companies. In other words, it is the reduction of  ownership of the management of a government-owned enterprise. Government companies can be converted into private companies in two ways : By disinvestment By withdrawal of governmental ownership and management of public sector companies. Stabilization Measures (LPG)

38. Forms of Privatization Denationalization or Strategic Sale : When 100% government ownership of productive assets is transferred to the private sector players, the act is called denationalization. Partial Privatization or Partial Sale : When private sector owns more than 50% but less than 100% ownership in a previously construed public sector company by transfer of shares, it is called partial privatization. Here the private sector owns the majority of shares. Consequently, the private sector possesses substantial control in the functioning and autonomy of the company. Deficit Privatization or Token Privatization:  When the government disinvests its share capital to an extent of 5-10% to meet the deficit in the budget is termed as deficit privatization. Stabilization Measures (LPG)

39. Objectives of Privatization Improve the financial situation of the government. Reduce the workload of  public sector companies. Raise funds from disinvestment. Increase the efficiency of government organizations. Provide better and improved goods and services to the consumer. Create healthy competition in the society. Encouraging foreign direct investments (FDI) in India. Stabilization Measures (LPG)

40. Globalization It means to integrate the economy of one country with the global economy. During Globalization the main focus is on foreign trade & private and institutional foreign investment. It is the last policy of LPG to be implemented. Globalization as a term has a very complex phenomenon. The main aim is to transform the world towards independence and integration of the world as a whole by setting various strategic policies. Globalization is attempting to create a borderless world, wherein the need of one country can be driven from across the globe and turning into one large economy. Stabilization Measures (LPG)

41. Thank You