NATIONAL INCOME - Economic Growth and Development

National income is the total value of all the final services and goods produced in an economy during a specific period of time.

1. NATIONAL INCOME UNIT 1

2. Macro Economics Macroeconomics is the branch of economics that studies the behaviour and performance of an economy as a whole. Economics is split between analysis of how the overall economy works and how single markets function The division of economics into microeconomics and macroeconomics was given by Norwegian economist, Ragnar Frisch in 1933. John Maynard Keynes is the founding father of macroeconomics.

3. Major Focus For most macroeconomists, the purpose of this discipline is to maximize national income and provide national economic growth. Long-term economic growth. Shorter-term business cycles.

4. Difference – micro and macro

5. QUESTIONS What do you understand by goods? Ans : Goods are items that are touchable such as clothes, appliances, shoes, food etc. What do you understand by services? Ans : Services are actions such as customer care center services, services of a doctor, salon services etc. What do you understand by market value of goods and services? Ans : Market value of any good or service is the price paid to purchase it. Define GDP. Ans : The total market value of all final goods and services produced within the boundaries of a country in a given year, no matter by whom they are produced. It’s the basic measure of economic activity taking place within a country.

6. What are intermediate goods? Ans : Goods that are used for processing of other goods or you can say goods that are produced by firms for further use of other firms. What are final goods and services? Ans : Goods and services produced for final usage (by the consumer) Honda is a Japanese company operating its car production unit in India. Will the market value of the products produced by Honda be added to GDP of India? Why? Ans : Yes. Since the products are produced within the boundaries of India. Suppose you are a citizen of India but sent for a one year work trip to France. Will your earnings of that one year be calculated in India’s GDP? Why? Ans : No. Since the income is earned outside the boundary of India.

7. National income/GDP Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period. There are several types of GDP measurements:       Nominal GDP is the measurement of the raw data.       Real GDP takes into account the impact of inflation and allows comparisons of economic output from one year to the next and other comparisons over periods of time.       GDP growth rate is the increase in GDP from quarter to quarter.       GDP per capita measures GDP per person in the national populace; it is a useful way to compare GDP data between various countries.

8. Gross National Product The total value of all final goods and services produced by domestically owned factors of production, no matter wherever in the world they reside. GNP measures output from the citizens and companies of a particular nation, regardless of whether they are located within its boundaries or overseas.

9. Therefore, the income of a country maybe stated in the context of its (1)territory and (2) Residents DOMESTIC Focuses on the territory and not the residents. GDP or NDP NATIONAL Focuses on the residents and not the territory. GNP or NNP Thus the difference between GDP and GNP is the NET factor income earned from abroad . Net factor income = the aggregate amount that a country’s citizens and companies earn abroad, and the aggregate amount that foreign citizens and overseas companies earn in that country.

10. NNP- Depreciation It is the decrease in value of an asset over time due to wear and tear, becoming obsolete or due to economic fluctuations. It is the amount of money required to keep production at the same level, i.e., expenses on maintenance/repair or replacement. So we need to subtract the value of depreciation from the Gross value of domestic product to reach the Net value of domestic product. Thus NDP = GDP - Depreciation

11. Factor Cost to Market Price Factor Cost- Total cost of all factors of production consumed or used in producing a good or service. It is the cost of the product before it reaches the market. Market Price- is the economic price for which a good or service is offered in the marketplace.  It is quite logical that the market price would be greater than the factor cost. But by what amount? It will be greater by the value of Net Indirect taxes (NIT). NIT = IT [(Indirect Taxes) – (Subsidies)]

12. Personal and disposable Income Personal Income is the total money income received by all individuals of the household sector of a country from all possible sources before direct taxes. Personal income (PI) is the total income received by the members of the domestic household sector, which may or may not be earned from productive activities during a given period of time, usually one year.  It includes compensation from a number of sources including salaries, wages and bonuses received from employment or self employment; dividends and distributions received from investments; rental receipt from real estate investments and profit sharing from businesses. In National Income Accounting, some income is attributed to individuals, which they do not actually receive. For Example: Undistributed Profits, Employees’ contribution for social security, corporate income taxes etc. which needs to be deducted from National Income to estimate the Personal Income. PI = NI + Transfer Payments – Corporate Retained Earnings, Employees’ contribution for social security. Disposable income (DI) is the total income that can be used by the household sector for either consumption or saving during a given period of time, usually one year. Disposable personal income represents what people actually have that they can spend. The derivation of disposable income (DI) from personal income (PI) by subtracting personal taxes (PT) is illustrated in this equation: DI = PI - PT

13. MCQ 1 GNP at MP = ______ (A) GDP MP – Depreciation (B) GDP MP + Depreciation (C) GDP MP ÷ Depreciation (D) GDP MP + Net factor income from abroad

14. Answer Answer: (A) GDP MP – Depreciation

15. MCQ-2 Who had made the first attempt at National Income Accounting? (A) Prof. D.R.Gadgill (B) Simon Kuznets (C) J.M.Keynes (D) Gregory King

16. Answer Answer: (D) Gregory King

17. MCQ-3 Calculation of National Income at Market Prices is known as _________ (A) Money income (B) Real income (C) Non-monetary income (D) None of these

18. Answer Answer: (A) Money income

19. Mcq-4 Accounting of National Income at constant prices is known as ________ (A) Money income (B) Real income (C) Current income (D) Domestic income

20. answer Answer: (B) Real income

21. Mcq-5 The subject of the Study of Macro Economics is: (a) The Principle of National Income (b) The Principle of Consumer (c) The Principle of Producer (d) None of these

22. answer Answer: (a) The Principle of National Income

23. Mcq -6 Macro Economics Studies: (a) Employment opportunities in the economy (b) Theory of supply of Commodities (c) Elasticity of demand in Scooter (d) Price of wheat in the market

24. answer Answer: (a) Employment opportunities in the economy

25. MCQ-7 General Price Level is studied in: (a) Micro Economics (b) Macro Economics (c) Both (a) and (b) (d) None of these

26. answer Answer: (b) Macro Economics

27. Mcq-8 The market price of all final goods of a country in a year is known as: (a) GDPMP (b) GDPFC (c) NNPFC (d) None of these

28. answer Answer: (a) GDPMP

29. Mcq-9 Total national income divided by total population is known as: (a) Private income (b) Personal income (c) Personal spendable income (d) Per capita income.

30. Answer Answer: (d) Per capita income

31. MCQ-10 Nominal GDP is the value of GDP at _______ prices.

32. Answer Answer: current

33. Measurement of GDP On the basis of the following flows, national income can be analyzed: As a flow of expenditure on goods and services. (Called Expenditure Method) As a flow of incomes. (Called Income Method) As a flow of goods and services. (Called Product Method or Value Added Method)

34. Expenditure Method Total spending on goods and services are broken down as follows: GDP (Y) = Consumption (C) + Investment (I) + Government Purchases (G) + Net Exports (NX) Consumption is defined as spending by households. It includes purchases of durable and nondurable goods and services. To be included in the GDP, the goods purchased must be NEW purchases. Additionally, purchases of new houses are NOT part of consumption but included in fixed investment. Investment is the sum of spending by firms on goods such as plant, equipment and inventories and spending by households on housing. So, total investment can be divided into fixed investment and inventory investment. Fixed Investment  Residential and non-residential Inventory Investment = Stock of inventories at the end of this year – end of last year Government Purchases are the sum of central, state and local government purchases of goods and services. Imports (produced abroad, purchased by the domestic country) and exports (produced in the domestic country, purchased abroad.

35. STEPS INVOLVED IN CALCULATING NATIONAL INCOME BY EXPENDITURE METHOD:- Identification of Economic units incurring Final Expenditure:- a) Household sector b) Business sector c) Government Sector d) Rest of the world Sector Classification of Final Expenditure:- a) Final consumption Expenditure = Government Final Consumption Expenditure+ Personal Final Consumption Expenditure b) Gross Private Domestic Investment = Gross Domestic Fixed capital formation+ Change in stock (business spending on capital goods.) c) Net Exports = Exports – Imports (Net Foreign investments)

36. Precautions Avoid double counting Expenditure on second hand goods should not be included. Expenditure on gifts, donations, scholarships etc should not be included as these are not expenditure on final products.

37. Value Added Approach Final Goods and Services:  Goods and services produced for final usage (by the consumer or end user) Intermediate Goods:  Goods that are used for processing of other goods. Or you can say goods that are produced by firms for further use of other firms. Value Added : It is the difference between Value of Good as they leave a stage of production to another and the cost of that good as they entered that stage This method consists of the following stages: Classify the production units within the country into distinct groups like agriculture, mining, manufacturing, banking etc Estimating the gross value of domestic output (Gross value of output = Total value of all the goods and services produced in the country + Value of changes in the inventories.) Determining the intermediate consumption, i.e., the cost of material, supplies, and services used to produce final goods or services; Deducting intermediate consumption from gross value of output to obtain the gross value added. Gross value added = Gross value of output – Value of intermediate consumption. The sum of gross value added in various economic units is known as GDP at market price.

38. Steps involved in value added method It provides the rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services. Step -1 GVO = Total sales + change in Stock Step-II GVA = GVO – Intermediate consumption Step- III GDP = Sum of GDP of All Industries

39. Precautions Avoid double counting Output which is produced for self consumption and whose value can be estimated must be included in estimating the national income. Sale of second hand goods should not be included.

40. Income Method Here GDP is the sum of the incomes earned through the production of goods and services. This is: Income from people in jobs and in self-employment + Profits of private sector businesses + Rent income from the ownership of land + Interest = Gross Domestic product (by factor incomes) Only those  incomes  that come from the production of goods and services are included in the calculation of GDP by the income approach. Compensation of employees should not only include payments in cash but also in kind.

41. Precautions In estimating interest, the interest on only those loans should be included which are taken for production. The interest on loans taken for consumption expenditure (non- factor income) should not be included. Transfer payments  e.g. the state pension; income support for families on low incomes; the Jobseekers’ allowance for the unemployed and welfare assistance, such as housing benefit, lotteries. ( All are non-factor incomes) Private transfers of money  from one individual to another.

42. Difference between GVA and GDP GVA gives a picture of the state of economic activity from the producers’ side or supply side, the GDP gives the picture from the consumers’ side or demand perspective. Both measures need not match because of the difference in treatment of net taxes. This is one of the reasons that in the first quarter of 2015, GDP growth was stronger at 7.5%, while GVA growth was 6.1%. Why did policy makers decide to also give weight to GVA? A sector-wise breakdown provided by the GVA measure can better help the policymakers to decide which sectors need incentives/stimulus or vice versa. Some consider GVA as a better gauge of the economy because a sharp increase in the output, only due to higher tax collections which could be on account of better compliance or coverage, may distort the real output situation.

43. Statistics The value of expenditures The value of inputs used in production The sum of value added at each level of production

44. Trends in distribution of national income Indian economy is classified in three sectors — Agriculture and allied, Industry and Services. Agriculture sector includes Agriculture (Agriculture proper & Livestock), Forestry & Logging, Fishing and related activities. Industry includes 'Mining & quarrying', Manufacturing (Registered & Unregistered), Electricity, Gas, Water supply, and Construction. Services sector includes 'Trade, hotels, transport, communication and services related to broadcasting', 'Financial, real estate & professional services', 'Public Administration, defence and other services'.

45. Contribution of sectors post independence

46. Graphical Representation

47. Recent Stats According to IMF World Economic Outlook (October-2016), GDP growth rate of India in 2016 was 7.6% and India is 4th fastest growing nation of the world. Average growth rate from 1980 to 2016 stands at 6.32%, reaching an all time high of 10.26% in 2010 and a record low of 1.06% in the 1991.The GNI at current prices is estimated at `149.94 lakh crore during 2016-17, as compared to `135.22 lakh crore during 2015-16, showing a rise of 10.9 percent. The Gross National Income (GNI) at 2011-12 prices is estimated at `120.35 lakh crore during 2016-17, as against the previous year’s estimate of `112.46 lakh crore . In terms of growth rates, the gross national income is estimated to have risen by 7.0 percent during 2016-17, in comparison to the growth rate of 8.0 percent in 2015-16. Real GDP or GDP at constant (2011-12) prices for the year 2016-17 is estimated at `121.90 lakh crore showing a growth rate of 7.1 percent over the year 2015-16 of `113.81 lakh crore . Nominal GDP or GDP at current prices in the year 2016-17 is projected at Rs . 152.51 lakh crore , with growth rate of 11.5 percent against Rs . 136.75 lakh crore for 2015-16. Services sector is the largest sector of India. Gross Value Added (GVA) at current prices for Services sector is estimated at 73.79 lakh crore INR in 2016-17. Services sector accounts for 53.66% of total India's GVA of 137.51 lakh crore Indian rupees. With GVA of Rs . 39.90 lakh crore , Industry sector contributes 29.02%. While, Agriculture and allied sector shares 17.32% and GVA is around of 23.82 lakh crore INR. At 2011-12 prices, composition of Agriculture & allied, Industry, and Services sector are 15.11%, 31.12%, and 53.77%, respectively. Source: Ministry of Statistics and Programme Implementation, IMF World Economic Outlook (October-2016)

48. Features 1. High Growth Rate of Population: High level of inequality Widespread unemployment and underemployment 2. Excessive Dependence on Agriculture: 3.Occupational Structure: 4. Low Level of Technology and its Poor Adoption: 5. Poor Industrial Development: 6. Poor Development of Infrastructural Facilities: 7. Poor Rate of Saving and Investment: 8. Socio-Political Conditions:

49. Limitations of National Income Estimates Ignore costs that arise from externalities- the cost associated with pollution, environmental damage, resource depletion etc Non-income earning producers, e.g. housewives/husbands, family members. Non-Market Production - Goods and services produced but not exchanged for money, known as "nonmarket production", are not measured, even though they have value. For instance, if you grow your own food for your own consumption, the value of that food will not be included in GDP. Underground economy - Barter and cash transactions that take place outside of recorded marketplaces are referred to as the underground economy and are not included in GDP statistics. National Income does not measure:- An increase in leisure or work satisfaction. Changes in product quality Per capita income is a more meaningful measure of living standards than total national income. Problem of double counting. However, problem of double counting could be avoided by utilizing the value added approach. Problems of depreciation estimation: Different methods of calculating or estimating depreciation Arbitrary Definition: Inclusion or exclusion of certain items in national income accounting can cause confusion Challenges like difficulties in getting information especially those related to underground economy.

50. Circular Flow Of income Two Sector Model Three Sector Model Four Sector Model

51. Two Sector model

52. Two Sector model with savings

53. Three sector model

54. Four sector model