ECONOMICS ENVIRONMENT

NATIONAL INCOME ACCOUNTING

NATIONAL INCOME

LEARNING OBJECTIVES What is national income? Importance of national income Concepts of National income National income estimates in India. Measuring National income Trends in National income Difficulties in measuring national income.

NATIONAL INCOME
What is National Income?
National Income is the money value of all goods and services produced in a country during a year.

J.M Keynes

NATIONAL INCOME
While family income reflects the economic Position of household, national income shows the economic position of a Nation.
The basic objective of an economy is to achieve economic Progress.

National income help assess & compare the progress achieved by a country over a period of time

IMPORTANCE OF NATIONAL INCOME

1.

With national income, we can chart the movement of country from depression to prosperity.
The economic welfare of community can be measured with national income. It helps in finding standard of living.

2.

3.

4.

It helps in determining the pace of economic development of the economy.

IMPORTANCE OF NATIONAL INCOME

5. It helps to understand the contribution made by different sectors to the economy. 6. It helps in development planning of a country.
7. It provides information of the savings, consumption and investment structure of the economy.

DIFFERENT CONCEPTS OF NATIONAL INCOME

There are five concepts of National Income:

1. 2. 3. 4. 5.

Gross National Product Net National Product National Income Personal Income Disposal Income

DIFFERENT CONCEPTS OF NATIONAL INCOME

GNP- -defined as the total market value of final goods and services produced in a year. The money value of only final goods to be considered not the value of intermediate goods. GDP- aggregate values of output of goods and services produced in a country without adding net factor incomes received from abroad.

GDP = GNP - Income received from abroad.

NNP means the market value of all final goods and services after providing for depreciations.

DIFFERENT CONCEPTS OF NATIONAL INCOME

NNP means the market value of all final goods and services produced in a year is considered. It means that in the production of goods & services , there is the consumption of capital goods such as equipment & machinery. To get NNP the value of depreciation has to be reduced from GNP. Hence NNP=GNP-Depreciation

DIFFERENT CONCEPTS OF NATIONAL INCOME

3. NI at factor cost shows how much it costs to society in terms of economic resources for their contribution of land, labour , capital and entrepreneurial ability which go into the years net production.

NI at factor cost=NI at market prices taxesdepreciation + subsidies NI at market price = NI at factor cost +taxes subsidies +depreciation

DIFFERENT CONCEPTS OF NATIONAL INCOME

Ex: A motor car costs 2 lakhs which includes excise duty of Rs.20,000. Market price of a car is 2 lakhs While the factors engaged in production get Rs.1.80 lakhs. Thus the value of national income at factor would be Equal to the market prices minus the indirect taxes plus subsidies.

NATIONAL INCOME -CONCEPTS

PERSONAL INCOME : PI is that income actually received by the individuals or households in a country during the year, from all sources. DISPOSABLE INCOME: DI is that part of income which is left behind after the payment of direct taxes is called Disposable Personal Income.

Disposable income can either be consumed or saved.

Therefore Disosable Personal Income =Consumption +Savings

DPI = PI - TAXES

NATIONAL INCOME -CONCEPTS

PERCAPITA INCOME :index of changes in the standard of living of the people of a country. The percapita income indicates the economic progress in terms of goods and services available per head of the Population. PI=NI/population

ESTIMATION OF NATIONAL INCOME

The work on National income in India had started in the 19th century, by Dadabhai Naoroji. A number of research had taken place since 1900. VERV Rao made the first national income estimate on a scientific way for the year 1931-32. Government of India also prepared the estimates for the year 1948-49.

1949- The national income committee was formed.

The Central Statistical organization (CSO) was entrusted with the work of estimation and the first official paper White Paper was released in the year 1956. Now it is knows as national accounts statistics.

NATIONAL INCOME ESTIMATION

NI estimation can be studied under two categories: 1. Pre-independence period estimation 2. Post independence period estimation Pre-independence period estimation: several estimates were prepared in the British period.
A)

Dadabhai Naoroji,Wadia & Joshi : estimated the value of output of the agricultural sector and then added certain percentage as the income to the non-agriculture sector. This was devoid of any scientific basis

NATIONAL INCOME ESTIMATION

B) DR.VERV Rao made use of a combination census of output and census of income method. Here the economy was divided into two Categories: First- included agriculture pastures, mines forest, fishing,& hunting Output method was used to evaluate the product derived from these sectors.

Second- included industry trade transport public services & admin. Profession liberal arts & domestic service for which census of income method was used.
To these two subtotals was added the income so obtained the values of goods and services consumed in production were excluded. By adding the net income earned from abroad an estimate of the Ni Was computed.

NATIONAL INCOME ESTIMATION

C) JR hicks, M Mukherjee & SL Ghosh: calculated the rates of growth per capita income for the period : TIME PERIOD 1860-1885 1885-1905 1905-1925 1925-1950 1860-1945 RATE OF GROWTH 1.1 -0.3 1.3 -0.1 0.5

The Indian economy presents a picture of stagnation over a long period with a growth rate of 0.5% during the British rule.

NATIONAL INCOME ESTIMATION

POST INDEPENDENCE PERIOD ESTIMATION: Soon after independence the Govt. Of India appointed the National income committee in August 1949 to compile the national income estimated. 1951- First report appeared 1954- Final report =landmark in history as it was the first time even that NI data was provided for whole India.

NATIONAL INCOME ESTIMATION

POST INDEPENDENCE PERIOD ESTIMATION: National income & CSO (Central Statistical organisation )estimates It provides NI data at current prices at for the period upto 1964-65. It divides the economy into 13 sectors. Two methods were used for these 13 Sectors.
a.

b.

Net output method Net Income method

NATIONAL INCOME ESTIMATION

Net output method: Income from 6 sector Agriculture, Animal husbandry,forestery,fishing,mining & Factory establishments: i) Agriculture: each crop output is estimated by multiplying the area sown by the yied per hectare.

From the gross values so obtained deductions for the costs of seed manures & fertilizers, market charges repairs & depreciation are made to derive the net value of the product from agriculture. Gross value in agriculture= area sown X yield /hectare Net value= GROSS VALUE cost of materials, depreciation etc

NATIONAL INCOME ESTIMATION

ii) For animal husbandary, forestery, fishery, mining and Factory establishments, the estimates of production are multiplied with market price to obtain gross value. GROSS VALUE = PRODUCTION X MARKET PRICE NET VALUE = GROSS VALUE COST OF MATERIALS, DEPRECIATION ETC

NATIONAL INCOME ESTIMATION

2. Net Income method: income from seven sectors , i.e. small enterprises, organised banking & insurance, commerce & transport, profession, public authorities, house properties. Contribution of small enterprises: total No. of workers X average earning Obtained. For Banking & insurance the balance sheets of the firms provide requisite information wages salaries directors fees and dividends are all added to get the contribution. For public sector wages salaries pensions other benefits dividends or surplus are added to arrive at the contribution.

METHODS OF MEASURING NATIONAL INCOME

National income of an economy can be measured in three ways.

Product Method Income Method Expenditure Method

Each method gives the same result, there is no question of appropriate method Application of suitable method depends upon various factors such as, availability of data, nature of economic activity, economic and social structure.. So for calculating national income a combination of all three methods used in India.

METHODS OF MEASURING NATIONAL INCOME

National income of an economy can be measured in three ways. Product Method : There are two approaches in product method for measuring National Income. This method is used for estimating domestic product in the following sectors: Agriculture and allied activities Forestry, Fishing Mining and quarrying Registered Manufacturing. In this approach, Gross Market Value of all final goods and services produced in a financial year in the domestic territory of country are taken into account for measuring national income. The value so arrived is called Gross Domestic Product (GDP) at Market Price

METHODS OF MEASURING NATIONAL INCOME

INCOME METHOD: In income method, National income is calculated by adding all the factor incomes of all the normal residents of a country during a year. Domestic income by this method includes both income accruing to private sector and income accruing to Govt./Public sector. Rent including imputed rent. Wages and salaries included imputed value Interest. Compensation of employees

a. b. c. d.

METHODS OF MEASURING NATIONAL INCOME

EXPENDITURE METHOD: in this method, final expenditure on all the products at their market value, produced during a particular period is measured for estimating domestic income. Whatever is earned as income in an economy will be either consumed or invested (saved), therefore final expenditure can be divided in two parts : Final consumption expenditure and Final Investment expenditure.

That is why, this method is also called Consumption and investment method

DIFFICULTIES IN MEASURING NATIONAL INCOME

1. 2.

The out put of the non-monetized sector. Non-availability of data about the income of small producers or household enterprises Absence of data on income distribution Unreported illegal income

3. 4.

Measurement of national income Product method

Estimation of goods & services produced in 3 sectors. The sum total of products produced in these three sectors is the output of the nation. GNI- Money value of total goods & services + Income from abroad.

This method helps us to find out contributions of various sectors to national income

Primary
Agriculture & allied products Forest Fishing Mining

Secondary

Tertiary

Registered industries Communications Non registered industries Electricity Trade Manufacturing Banking Insurance Public administration Health Education Other services.

Measurement of national income Product method

Under Product method, following categories of production are added in order to find out GNP(NI)
(a)

Product of agricultural sector total value of food grains produced by the farmers in the country during a year. Product of Industrial Sector Total market value of all goods produced in various industries like electronics, cement, steel etc. in a country during a year. Products of trade: induces income resulting from various activities which are connected to internal trade

(b)

(c)

Measurement of national income Product method

(e)

Service sector incomes: total value of the proceeds of the service sector namely, the services of government servants, doctors, lawyers, soldiers, singers, players etc., Foreign trade: value of exports income earned abroad to be added and the value of imports or payments made abroad should be deducted. Indirect Taxes and Subsidies: indirect taxes which are included in the price should be deducted to get exact market value of the goods. Subsidies given by Govt to certain products should be added to calculate the exact value of the product

(f)

(g)

Measurement of national income Expenditure method

National income also calculated by adding up the expenditure incurred for goods and services. Government as well as 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

Measurement of national income Expenditure method

Expenditure approach following categories of expenditure are added in order to find out the GNP
(a)

Personal Consumption expenditure : on durable goods & non durable goods produced in a country during a year. Expenditure on services, such as transport , education and medical. Expenditure on household.

(b)

Government purchase of goods and services : goods such as paper, stationery, machinery, equipment etc., Services: Govt. incurs expenditure on payment of salaries t Military personnel, police and administration.

Measurement of national income Income method

Expenditure made by the people in a country on goods and services produced in a country during a year becomes the income of the various Factors.
The factor income is grouped into following categories:

Wages and salaries Income of Company business Rental incomes of persons Corporate profits Income from net interest

SIGNIFICANCE OF NATIONAL INCOME ESTIMATES

1.The national income of a country reveals the picture of the economy. Indicates rise in standard of living reveals the improvement of economic welfare 2. NI reveals overall production in each year reveal real growth The economy- if growth is stagnant measures can be adopted to increase NI 3. NI shows the contribution made by different sectors of the economy. 4. NI estimates throws light on the three major aspects of the economy namely , consumption, savings, and investment. 5. NI figures used to measure the economic welfare in different countries

SIGNIFICANCE OF NATIONAL INCOME ESTIMATES

6. From the NI estimates, we can also see the part played by the government in the national economy. 7. No, development planning is possible without complete study of national income estimates.
.

8. NI estimates are very useful in formulating plans for the development of agriculture, Industry, and infrastructure etc.,

DIFFICULTIES IN THE MEASUREMENT OF NATIONAL INCOME

Measurement of national income is not an easy task. 1. Difficulty in defining the Nation NI includes not only the income produced within the country, but also income earned in other countries. Non availability of a data about the income of small producers or household enterprises. The error of double counting- failure to differentiate final and intermediate goods.

2.

3.

DIFFICULTIES IN THE MEASUREMENT OF NATIONAL INCOME

Unpaid services: services performed for love, kindness and mercy and not for money have no money value But have only economic value. These are excluded from NI figures and leads to the under estimation of the NI. Individuals do not keep correct account of their consumption.

5.

6.

7.

Illiteracy and ignorance.

Lack of proper criteria for measuring the value of services.

8.

DIFFICULTIES IN THE MEASUREMENT OF NATIONAL INCOME

The services of housewives is not included in the NI because is not sold in the market.
6.

Income for illegal activities: black marketing, gambling, smuggling etc., not included in the national income thus reducing the real value of the national income. The out put of non monetised setor: India- agriculture based - considerable portion of the out put does not come to the market for sale.
The non co-operation of the people: Major part of the population are illiterate and hence may not co-operate in providing the information is needed for the estimation of NI.

7.

8.

TRENDS IN NATIONAL INCOME

NI & changes in the structure of national product analyzed over the Past 50 years

1. Trends in Net National Product 2. Trends in distribution of NI by industrial origin 3. Trends in the share of Public sector 4. Urban & Rural break-up 5. Share of organized & unorganised sector in NDP

TRENDS IN NATIONAL INCOME

1. Trends in Net National Product: The increase in the production of goods & services indicates the growth more goods & services are available to people & also index of total productive effort of the community 2. Trends in distribution of NI by industrial origin 1950-51 : Agriculture contributed to 48.6% of GDP & fell to 24.2% in 1997-98 Share of fishing in GDP remained constant throughout the five Decades Share of forestery shows continues decline from 5% to 1.1%

TRENDS IN NATIONAL INCOME

Share of secondary sector- include mining , mfrg, construction, electricity, gas & water supply has shown steady increase from 16.1% of GDP to 27%. Share of tertiary sector includes trade & transport, communications banking, insurance, real estate amd community & personal services improved from 28.5 % to 46.6%

TRENDS IN NATIONAL INCOME

3. Trends in the share of Public sector: share of the govt.sector was 7.6% and rose to 23.3% - direct result of expansion of economic activities. 4.Urban & Rural break-up: Urban rural disparity ratio in percapita NDP was 2.45 in 1970 -71 & it declined to 2.39

TRENDS IN NATIONAL INCOME

5. Share of organized & unorganised sector in NDP

Organised enterprises- either registered or come under the purview of any of the acts and maintain annual accounts and balance sheets. Unorganised enterprises include all unincoraporated enterprises and household industries which are regulated by any one of the acts & do not maintain annual accounts or balance sheets. Share of Organised sector has risen Share of unorgnised sector has fallen

IMPORTANT TRENDS IN NATIONAL NATIONAL INCOME

The rate of growth of GDP since 1950 around 4.5 %. 1950 1980 : Growth rate hovered around a low of 3.5 % Growth rate remain stuck at the low level for long.

1980-81 to 1991 -92:Break from this trend came in the 1980s with the growth rate going above 5%.
1992 -93 to 2001-02 : growth rate further accelerated to 6.5% Thereafter the rise was rapid and large .

IMPORTANT TRENDS IN NATIONAL NATIONAL INCOME

As for the sectoral contributions to the GDP all the three sectors have added to the final outcome However, differences in the contributions of different sectors over Time. 1950 1980 : early low growth phase of three decades Agriculture was an important contributor, alongside industry and service sector.

In the recent high growth phase since 1980, the service sector, with the fastest growth, emerged as the largest contributor followed by industry and agriculture.

CIRCULAR FLOW OF INCOME

Present day world- production is carried mainly for the purpose of sale in the market. To produce wide variety of goods the business firms combine various factors of production and try to sell those goods in the market. In the economy, the sales made by the business firm generate flow of money income which are used to make payments to the factors of production for their services.

CIRCULAR FLOW OF INCOME

In a modern capitalist economy the process of production and exchange generate two kinds of circular flows: House holds supply various factors of production demanded by Business firms. 1. Business firms pay rewards in cash for the factor services supplied by the house holds.
Consumption expenditure (money flow)

Households Payment to factor service(money flow)

Firms

CIRCULAR FLOW OF INCOME

In an economy Production processes & markets generates two types of flows:

1. A supply of factor services by the household to the production process of firms. 2. After production goods & services are sending to the market by firms for selling to house hold.
Some types of flow which is circular in a nature takes placecalled real flow. Another type of flow called- money flow- production firms Consumption expenditure (money flow) pay in cash for goods & services they get from house holds. Money so received by HH will be spent on required goods & services produced by firms.
Payment to factor service(money flow)

Circular flow of income

In every economy, irrespective of size of population, this flow forever. Circular flow of income in two sector model acts as a base for measuring national income and expenditure.

SAVINGS

The income received by households will have two channels: 1. Consumption Expenditure 2. Savings Y=C+S In a circular flow two situations can occur 1. Withdrawl of money out of income(leakage) 2. Introduction of income into circular flow(injection)

Leakage occurs because savings of the households ,tax paid to government, payments for imports. injection form of investment , govt. spending & exports.

Consumption & Savings relationship

Relationship between savings & consumption implies that every HH do not spend all money received from firms towards consumption & a portion will be saved. Savings impact on circular flow of money & income . Both decline due to savings.

If HH keeps savings for liquidity purposes leakage occurs.

If savings is kept in a bank or any other financial institutions it becomes productive. Thus money withdrawn from circular flow will be coming back to the firms in different circuit. In this process another concept emerged INVESTMENT emerges

INVESTMENTS
What is Investment? Investment is a term referred to capital expenditure made by firms.

This expenditure will be in the form of capital goods like land, building, plant machinery etc., without which firm cannot produce goods for households.
Investment comes from two sources viz., borrowings & retained earnings. Investment will be an addition to circular flow of income. S & I in any economy need not be necessarily equal as investment takes place by firms and savings by the people. S>I or I>S Normally investment will be more than savings. There will be leakage in circular flow of income due to savings. This leakage will be neutralized by injection in the investment.

THE END