National Income National Income Accounting Macroeconomics-Unit-I National Income is the sum total of income of all the earning units of a country in a given financial year. National income accounting provides us with ex-post data about national income, it cannot explain the level and determinants of national income. The following identities are true for any level of income. In order to explain and predict the level of national income, models are constructed.

GNP v.s. GDP Gross National Product (GNP) The total value at market prices of final goods and services produced by the citizens in an economy in a specified period. Gross Domestic Product (GDP) The total value at market prices of final goods and services produced within the domestic boundary of a territory in a specified period

GNP & GDP Flow concept Resale of existing houses  Sale of used cars / existing shares  Commission / Brokers’ fee  Imputed rents of owner-occupied dwellings  Capital gain is not income (Irving Fisher) Only the interest earned from the capital gain is considered as income

Real GNP & Nominal GNP & Per capita GNP Real GNP=(Nominal GNP/GNP Deflator)*100 Per capita GNP = GNP / Population size 7 Measurement of National Income Income Approach  NNP at factor cost OR National Income Output Approach  GDP at factor cost Expenditure Approach  GDP at market Prices

GDP at market price - Indirect sales tax + Indirect subsidies = GDP at factor cost + Net income from abroad = GNP at factor cost – Depreciation = NNP at factor cost Expenditure Approach C+I+G+X-M  Income Approach  W+I+R+P  Output Approach Factor Income-from abroad Factor Income paid abroad

NNP at factor cost - Retained profits - Social insurance / Mandatory Provident Fund - Direct business Tax + Transfer payments = Personal income - Direct personal taxes = Disposable personal income - Consumption = Saving

Income Approach W+I+R+P = NNP at factor cost Profits are stated net of depreciation / capital consumption allowances If the figures exclude net income from abroad, NDP at factor cost can be obtained.

Output Approach The total value of the final goods and services produced by the primary / secondary / tertiary industries In order to avoid double counting, the value-added method is adopted to exclude intermediate goods. GDP at factor cost + Indirect Taxes – Indirect Subsidies = Distinguish between Indirect / Direct / Business / Personal Taxes

Expenditure Approach People spend their income. Thus, the total expenditure on final goods and services must be equal to the total value of final goods and services produced domestically. Any output that is not sold to consumers is bought by producers in the form of unintended inventory investment. C+I+G+(X-M) = Aggregate / Total expenditure

Private Consumption Expenditure (C) Gross Investment Expenditure (I) Firms : plant (in progress) / unused raw materials Households : residential building Inventory investment : intended unintended (reduce information cost) - gross domestic fixed capital formation* - change in stocks & work in progress *gross national fixed capital formation  GNP at market prices Government Expenditure (G) roads/education/medical & health services/law & order/public works/… salary to civil servants, NOT transfer payments at the cost to taxpayers, NOT at market prices

Net Exports (X-M) the value of imports is included in C, I, G, X Exports include domestic exports & re-exports 14 Items excluded from National Income Accounting Second-hand goods Intermediate goods Non-marketed goods / services Volunteer work / Housework Unreported / Illegal market transactions

Merits & Uses of National Income Statistics Reflecting & comparing the standards of living of different countries Per capita real GNP  standard of living Providing information to the government and firms for economic planning Reflecting the economic growth of a country % change in real GNP over a period of time

Limitations of National Income Statistics Factors that may understate the standard of living / the welfare Exclusion of the value of leisure Same Q produced with fewer working hours  higher welfare Exclusion of non-marketed / unreported transactions

Limitations of National Income Statistics Factors that may overstate the standard of living / the welfare Undesirable Side-effects of Production Air pollution / traffic congestion /… Understate the real / social costs to society  externality /divergence between social costs & private costs

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