Macroeconomics Sessions

Macroeconomics

National Income Accounting

Need for National Income Accounting

⚫Indicates Economic Growth: – it indicates performance

and the level of economic growth in an economy. The
data on national income and per capita display the true
picture of the health of an economy. If both are increasing
continuously, it surely reflects an increase in economic
welfare, otherwise not.
⚫ Helps in Policy Formulation: – Statistical data on
national income not only helps in making economic
analysis but also helps in policy formulation. Moreover it
not only helps in formulating fiscal policy, monetary
policy, foreign trade policy but also helps in making
modifications and amendments wherever necessary.
Need for National Income Accounting

⚫Helpful in Making Comparisons – it helps us in

comparing national income and per capita income of our
country with those of other countries. This may lead us to
make suitable changes in our plans and approach to achieve
rapid economic development of our country.
⚫Helpful to Trade Unions – National accounts throw light
on distribution of factor incomes which is very helpful to
trade unions and other labour organizations in making
rational analysis of the remuneration the labourers are
getting.
⚫ Distribution of income – National income accounting
describes distribution of national income in terms of factors
like interest, rent, profit & wages. It also shows the relative
significance of the factors of production in the economy.
Need for National Income Accounting

⚫Helpful in economic planning – National income

accounting is helpful in economic planning. The planning
commission comes to know about the resources available
for economic planning.
⚫ Structural changes in the economy – National income
accounting is helpful in providing knowledge of
structural changes in the economy. We are able to know
that decrease or increase in share of agriculture and
industry in national income.
⚫Facilitates forecasting – National income accounting is
helpful in forecasting the effect of economic policies on
the level of production & employment.
GDP vs Welfare

GDP is a measure of the economic prosperity of a country

compiled as output or income. There is a strong
correlation between the development in GDP and changes
in several important social factors, including tax
payments and unemployment and, to a lesser extent,
health and education. However, GDP is regularly
criticised for not presenting a fair view of welfare. If
GDP is a poor measure of welfare, focusing one-sidedly
on increasing GDP may lead to misguided political
decisions
Importance of GDP

(i) Study of economic growth

(ii) Unequal distribution of wealth
(iii) Problems of inflation and deflation
(iv) The share of government in economic progress
(v) Comparison with developed countries of the world
(vi) Estimate of the purchasing power
(vii) Guide to economic planning
(viii) Economy's structure
(ix) Public Sector
Measurement of National Income: Product Method

Known as value added method : Value added is the difference

between the value of goods as they leave a stage of production
and the cost of the goods as they entered that stage.

Value added is the increase in value that a firm contributes to a

product or service. – It is calculated by subtracting cost of
intermediate goods.
Value Added Method
STEPS 1. Classification of Productive Enterprises
(a) Primary Sector: It produces goods by exploiting natural
resources like land, water, forests, rivers, etc. It includes all
agricultural and allied activities like fishing, forestry, mining.
(b) Secondary Sector: It is also known as manufacturing sector. It
transforms one type of commodity into another using men,
machines and materials. For example, manufacturing of fabric
from cotton and sugar from sugarcane.
(c) Tertiary Sector: It is also known as services sector which
provides services like banking, insurance, transport,
communication, trade and commerce, etc, to primary and
secondary sectors.
Value Added Method

2. Calculation of Value Added:

Value of Output ( - ) Value of Intermediate Consumption
3. Calculation of Domestic Income: NDPFC
4.. Calculation of National Income: NDPFC + NFIA = NI
(NNPFC)
Value Added Method
Value Added Method

In product method we calculate the aggregate annual value of

goods and services produced in a year. In this method GDP is the
sum of Gross Value Added by the entire production units in the
economy. The term that is used to denote the net contribution
made by a firm is called its value added.

Simply it is the difference between value of output and input/ raw

material/ intermediate product at each stage of production is
called value added.

The value added (value addition) of a firm = value of production

of the firm (-) value of intermediate goods used by the firm.
Value Added Method

Gross Value Added (GDPMP) = (gross)Value of Output – (gross)Value of

intermediate goods. Value of output =[ sales + change in stock] –intermediate
consumption

GDPFC = GDPMP – NIT (Net Indirect Tax= taxes and subsidies)

NDPMP = GDPMP – Depreciation
NDPFC = NDPMP – NIT
GNPMP = GDPMP + NFIA
GNPFC = GNPMP - NIT
NNPMP = GNPMP - Depreciation or (NDPMP + NFIA)
NNPFC = NNPMP - NIT or NDPFC + NFIA
Items included and excluded in National Income Estimation by
Value Added Method
Precautions to be taken in Product Method

Imputed rent values of self-occupied houses should be included in

the value of output. Though these payments are not made to
others, their values can be easily estimated from prevailing values
in the market.

Sale and purchase of second-hand goods should not be included

in measuring value of output of a year because their values were
counted in the year of output of the year of their production.
Precautions to be taken in Product Method
Value of production for self-consumption are be counted while
measuring national income. In this method, the production for self-
consumption should be valued at the prevailing market prices.

Value of services of housewives are not included because it is not easy

to find out correctly the value of their services.

Value of intermediate goods must not be counted while measuring value

added because this will amount to double counting.

Suppose the GDP at market price of a country in a particular year

was Rs 1,100 crores. Net Factor Income from Abroad was Rs 100
crores. The value of Indirect taxes – Subsidies was Rs 150 crores
and National Income was Rs 850 crores. Calculate the aggregate
value of depreciation
Measurement of National Income: Income Method

By this method the total sum of the Factor payments received during a
given period is estimated to obtain National Income. Depending on the
way the income is earned, it can be classified into following
components;
Compensation to Employees
Operating Surplus ( rent, profit and interest)
Mixed Income
Measurement of National Income: Income Method

Components of domestic income – Compensation of employees (This is

the reward or compensation paid to employees for rendering productive
services. It includes wages and salaries, Employer’s contribution to
social security schemes, dearness allowance, bonus, city allowance,
house rent allowance, leave travelling allowance etc.)

Operating surplus:- It includes rent, profit and interest. Profit includes

corporate tax, dividend and undistributed profit.

Mixed income of self employed:- Income of own account workers like

farmers, doctors, barbers etc, and unincorporated enterprises like small
shopkeepers, repair shops retail traders etc, is known as mixed income.
Measurement of National Income: Income Method
Disposable personal income is what people have readily available to spend.

Precautions while using income method

1. income from illegal activities like smuggling, theft, gambling etc. should not be
included.
2. the generation of income should be added
3. brokerage on the sale or purchase of shares and bonds is to be included
4. income in terms of windfall gains should not be included
5. transfer earnings like old age pensions, unemployment allowances, scholarships,
pocket expenses etc. should not be included

Calculate National Income ?

Measurement of National Income: Expenditure
Method
Expenditure Method: In this method the total sum of expenditure on the
purchase of final goods and services produced during an accounting
year within an economy is estimated to obtain the value of domestic
income.

Final Expenditure is the expenditure on the purchase of final goods and

services during an accounting year.

It is broadly classified into 4 categories;

(i) Private final consumption expenditure

(ii) Government final consumption expenditure
(iii) Investment expenditure or gross domestic capital formation
(iv) Net exports (exports – imports)
Measurement of National Income: Expenditure
Method
The expenditure approach: A method of computing GDP that measures the
amount spent on all final goods during a given period.

Expenditure categories:

Personal consumption expenditures (C)—household spending on consumer

goods.

Gross private domestic investment (I)—spending by firms and households on

new capital: plant, equipment, inventory, and new residential structures.

Government consumption and gross investment (G)

Net exports (EX – IM)—net spending by the rest of the world, or exports (EX)
minus imports (IM)

GNP = C + I + G + (X-M)
GDP = C + I + G
Measurement of National Income: Expenditure
Method
Measurement of National Income: Expenditure
Method
Precautions while using Expenditure Method

(i) Final expenditure is to be taken into account to avoid error of double

counting
(ii) Expenditure on second hand goods will not be included
(iii) Expenditure on transfer payments by the government is not included
(iv) Good produced for self-consumption should be taken into account
(v) Expenditure on shares or bonds is not to be included

Calculate the National Income

Constraint or Limitations of National Income in India
(i) Non-monetized Sector
(ii) Lack of distinct differentiation in economic activities
(iii) Conceptual problems
(iv) Black money
(v) Inter-regional differences
(vi) Non-availability of data about certain incomes
(vii) Mass Illiteracy
(viii) Difficulty in obtaining data about income
(ix) Difficulties of sampling technique

Green GDP: National income or output adjusted for the depletion

of natural resources and degradation of environment
Thank you!