NATIONAL INCOME

Rohit Mishra MBA 2nd Sem IBS-Bangalore

Measurement of Macroeconomic Aggregates

Introduction


Economics analysis deals with those concepts which can actually be measured like price of industrial production, stock prices, interest rates etc. The concepts like national income and product are most significant in macroeconomic accounting.
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The Concept of The National Product

 

The GDP growth rate, the most important indicator of the nation s economy. GNP and national income provide the policy makers and business community with the most useful tool for analyzing an economy s performance. In general, GNP is the sum of all final goods and services produced during a specific time period. When measuring GNP, or any other aggregate of national product, we are interested in the final value of goods and services.
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Gross & Net Concepts of National Income



Gross emphasizes that no allowance for capital consumption has been made or that depreciation has yet to be deducted. Net includes that provision for capital consumption has already been made or that depreciation has already been deducted. Thus, the difference between the gross aggregate and the net aggregate is depreciation.
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National and Domestic Concepts



The term national denotes that the aggregate under consideration represents the total income which accrues to the normal residents of a country due to their participation in world production during the current year. As against this, it is also possible to measure the value of total output or income originating within the specified geographical boundary of a country known as domestic territory . The resulting measure is called domestic product . Net factor income from abroad=factor income received from abroad-factor income paid abroad.
Measurement of Macroeconomic Aggregates

Market Prices and Factor Costs



The valuation of the national product at market prices indicates the total amount actually paid by the final buyers in a country. The valuation of the national product at factor cost is a measure of the total amount earned by the factors of production for their contribution to their final ouptut. GNP at market price/factor cost=GNP at factor cost+indirect taxes-subsidies NNP at market prices/factor cost=NNP at factor cost+indirect taxes-subsidies
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Real vs. Nominal GNP



Real GNP is the GNP in current rupees deflated for changes in the prices of the items included in GNP. Nominal GNP expresses in current rupees. It measures the value of output in a given period in the prices of that period, or as it is sometimes put , in current rupees.
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Price Indices


The Consumer Price Index (CPI)



It depends upon the Cost of Living Index (CLI)

 

The Whole Sale Price Index National Income Deflators

Measurement of Macroeconomic Aggregates

Index Number of Production



Among the commonly used economic indictors to monitor current trends in the economy are indices of production. The index number of industrial production which is regularly published in Monthly Statistics of production of Selected Industries is a quantity index which cover mining; manufacturing; and electricity generation.
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Money and Credit



In any modern economy, the quantity of money, aggregate volume of credit and its Sectoral composition are important variables. They have significant influence on expenditure flows such as consumption, investment etc.
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Definition: Money Stock Measures

The RBI has evolve four measures of money denoted M1, M2, M3 and M4. They are as: M1: RBI currency notes with public + small coins + demand deposits with banks + other deposits with RBI M2: M1+ Post Office Savings Deposits M3: M1+ Time Deposits with banks M4: M3+ All Post Office Deposits (savings and time)

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The Measurement of National Income

The Output Method  The Expenditure Method  The Income Method



Measurement of Macroeconomic Aggregates

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The Output Method



It is followed either by valuing all the final goods and services produced during a year or by aggregating the values imparted to the intermediate products at each stage of production by the industries and productive enterprises in the economy. The sum of these values added gives the gross domestic product at factor cost.
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Use of Output Method in Real Life



This approach is used to estimate gross and net value added in the following sectors of the Indian economy.
    

Agriculture and allied activities Forestry Fishing Mining and Quarrying Registered Manufacturing
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The Expenditure Method



It aggregates all money spent by private citizens, firms and the government within the year, to obtain total domestic expenditure at market prices. This includes consumer spending and investment i.e. total domestic spending. It aggregates only the value of final purchases and excludes all expenditures on intermediate goods.
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The Income Method



It aggregates only those of that residents of the nation, corporate and individual, that obtain income directly from the current production of goods and services. It aggregates the money payment made to different factors of production. The total of all factor of income gives total domestic income.
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Use of Income Method



The approach of Income Method is used for following activities.

     

Railways Electricity, Gas and Water Supply Transport, Storage and Communication Banking, Finance and Insurance Real Estate Public Administration and Defence
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Other Measures of National Output

Gross national product  Net national product  National income  Personal income  Disposable income

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Difficulties in Measuring National Income

     

Non-market Production Imputed Values The Underground Economy Side Effects and Economic Bads Leisure and Human Costs Double Counting
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The Uses of National Statistics



As an instrument of economic planning and review As a means of indicating changes in a country s standard of living To indicate changes in economic growth of a country As a means of comparing the economic performance of different countries
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