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

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 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 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 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. The income continue to flow in a circular way so it is called circular flow of income.

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

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. 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. 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. From capital market these savings flow to firms as loans for investment.

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

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

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

Withdrawals & Injections In reality, however, there are leakages from and additions to the circular flows of income and expenditure 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. The leakages and additions are also called withdrawals and injections, respectively. 25/10/2010Dr. Roopali Srivastava8

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 25/10/2010Dr. Roopali Srivastava9

Injections Amount that is spent by households and firms in addition to their incomes generated within the regular economy 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 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 Firms can inject money by spending their retained earnings or borrowing from outside Injections increase the size of circular flows Injections increase the size of circular flows I+G+X I+G+X 25/10/2010Dr. Roopali Srivastava10

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

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. 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. NI is expressed in monetary terms. It reflects the value of final goods & services. It reflects the value of final goods & services. NI Is expressed over 1 financial year. NI Is expressed over 1 financial year.

National Income - Excluded Items NI excludes sale & purchase of second hand goods. NI excludes sale & purchase of second hand goods. It excludes income from illegal activities – smuggling, black marketing, gambling etc., It excludes income from illegal activities – smuggling, black marketing, gambling etc., It does not includes transfer payments – old age pension, scholarship to students 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. 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. In other words they are not earned but received only. T.P are received without doing or producing any commodity or services. T.P are received without doing or producing any commodity or services.

Concepts of National Income GDP GDP GNP GNP NDP MP NDP MP NDP FC NDP FC NNP MP NNP MP NNP FC NNP FC Private Income Private Income Personal Income Personal Income Personal Disposable Income Personal Disposable Income National Disposable Income National Disposable Income

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

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

Gross Domestic Product (GDP)Gross National Product (GNP) It refers to the money value of all final goods & services produced within the domestic territory of a country. It refers to the money value of all the final goods & services by the normal residents of a country. It is a domestic concept as it is concerned with the domestic territory of a country. It is a national concept because it is concerned with the normal resident of a country. GDP = P(G) + P(S)GNP = GDP + NFIA If we add net factor income from abroad to it, we get GNP. If we subtract NFIA from it we get GDP. GDP would be greater that GNP, if NFIA is negative. GNP>GDP if NFIA is positive.

Net Domestic Product at Market Price (NDP MP ) Net National Product at Market Price (NNP MP ) It refers to the money value of all final goods & services produced within the domestic territory in a year. It refers to the money value of all the final & services by the normal residents of a country. It is a domestic concept as it does not include NFIA. It is a national concept because it includes NFIA NDP MP = GDP MP – Depreciation = NNP MP - NFIA NNP MP = GNP MP – Depreciation = NDP MP + NFIA

National Domestic Product (NDP MP ) National Domestic Product (NDP FC )/ Domestic income It refers to the market value of all final goods & services produced both by residents or non-residents within the domestic territory of a country in an accounting year. It is the income received by the factors of production while working within the domestic territory of the country in a year.eg-Rent, Inerest, Wages, Profits Net Indirect Taxes are included in it. Net indirect taxes are not included in it. NDP MP = NDP FC + Indirect Taxes - Subsidies NDP FC = NDP MP – Indirect Taxes + Subsidies

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

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

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

Compensation of Employees Operating Surplus Mixed Income of the Self Employed 1.Wages & Salaries in Cash 2. Compensation 3. Private Pension 1.Income from property (Rent, Interest, Royalty) 2. Income from Entrepreneur-- -ship (Profits) 1. Profession of Doctors, Lawyers STEPS INVOLVED IN INCOME METHOD Identifying the producing units Classifying the factor income

Factor income from all the three sectors are added(NDP FC ) Factor income from all the three sectors are added(NDP FC ) GDP MP =Compensation of employees + Rent + Interest+ Profits + Mixed Income + NIT + Depreciation GDP MP =Compensation of employees + Rent + Interest+ Profits + Mixed Income + NIT + Depreciation GDP FC = GDP MP – NIT GDP FC = GDP MP – NIT NDP FC = GDP FC – Depreciation/Consumption of Fixed Capital NDP FC = GDP FC – Depreciation/Consumption of Fixed Capital NNP FC = NDP FC + NFIA NNP FC = NDP FC + NFIA

Steps involved in Expenditure Method To identify economic units incurring final expenditure. To identify economic units incurring final expenditure. Classification of final expenditure. Classification of final expenditure. Private final consumption expenditure Private final consumption expenditure Govt. final consumption expenditure Govt. final consumption expenditure Gross fixed capital formation Gross fixed capital formation Change in stocks Change in stocks Net Exports Net Exports GDP MP = PFCE + GFFCE + GFCF + Change in Stocks + Net Exports GDP MP = PFCE + GFFCE + GFCF + Change in Stocks + Net Exports GDP FC = GDP MP – NIT GDP FC = GDP MP – NIT NDP FC = GDP FC – Depreciation/Consumption of Fixed Capital NDP FC = GDP FC – Depreciation/Consumption of Fixed Capital NNP FC = NDP FC + NFIA NNP FC = NDP FC + NFIA

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

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

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

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

Thus, Thus, National Income = Consumption expenditure + Investment Expenditure + government expenditure + Net Exports. 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 Total Population