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Module 4

The document provides an overview of national income aggregates, including GDP, GNP, NNP, and methods for measuring national income. It also discusses inflation, fiscal and monetary policy, the impact of liberalization, privatization, and globalization (LPG), foreign direct investment (FDI), and the balance of payments (BoP). Key concepts include the nature and causes of inflation, the role of fiscal and monetary policy in economic stabilization, and the implications of FDI and BoP disequilibrium.

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20 views4 pages

Module 4

The document provides an overview of national income aggregates, including GDP, GNP, NNP, and methods for measuring national income. It also discusses inflation, fiscal and monetary policy, the impact of liberalization, privatization, and globalization (LPG), foreign direct investment (FDI), and the balance of payments (BoP). Key concepts include the nature and causes of inflation, the role of fiscal and monetary policy in economic stabilization, and the implications of FDI and BoP disequilibrium.

Uploaded by

kirti13gautam
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Module 4

National Income Aggregates and Their Measurement


Definition of National Income

National income refers to the total monetary value of all final goods and services produced
within a country's boundaries in a specific period, usually one year. It represents the
economic health of a nation.

Key Aggregates of National Income

1. Gross Domestic Product (GDP): The total market value of all final goods and services
produced within a country's borders in a given period.
- GDP at Market Prices = GDP at Factor Cost + Indirect Taxes - Subsidies.
2. Gross National Product (GNP): GDP plus net income from abroad.
- GNP = GDP + Net Factor Income from Abroad.
3. Net National Product (NNP): GNP adjusted for depreciation.
- NNP = GNP - Depreciation.
4. National Income (NI): Total income earned by a nation's residents and businesses.
- NI = NNP at Factor Cost.
5. Per Capita Income (PCI): National income divided by the population.
- PCI = NI / Total Population.

Methods of Measuring National Income


1. Production Method (Value Added Method): Summing the value added at each stage of
production in the economy.
2. Income Method: Aggregating all incomes earned by factors of production, including
wages, rents, interests, and profits.
3. Expenditure Method: Summing all expenditures on final goods and services, including
consumption, investment, government spending, and net exports.

2. Inflation: Nature and Causes


Nature of Inflation

Inflation refers to the sustained increase in the general price level of goods and services
over a period. It reduces the purchasing power of money.

Types of Inflation
1. Demand-Pull Inflation: Caused by excessive demand in the economy.
2. Cost-Push Inflation: Triggered by rising costs of production.
3. Hyperinflation: Extremely rapid and out-of-control inflation.
4. Creeping Inflation: Slow and manageable inflation.
5. Stagflation: A situation with stagnant economic growth and high inflation.

Causes of Inflation
1. Demand-Side Factors: Increase in disposable income, Expansionary fiscal and monetary
policies, High demand for goods and services.
2. Supply-Side Factors: Rising input costs (e.g., wages, raw materials), Supply chain
disruptions, Natural disasters and geopolitical events.
3. Structural Factors: Infrastructural bottlenecks, Inefficient markets.
4. Imported Inflation: Rise in prices of imported goods.

3. Fiscal Policy
Definition
Fiscal policy refers to the use of government spending and taxation to influence economic
activity.

Key Components
1. Taxes:
- Direct Taxes: Levied directly on individuals and businesses (e.g., income tax, corporate
tax).
- Indirect Taxes: Levied on goods and services (e.g., GST, excise duty).

2. Transfer Payments:
- Non-reciprocal payments by the government to individuals or groups (e.g., subsidies,
unemployment benefits).

Role of Fiscal Policy


1. Economic Stabilization: Counteract inflation or deflation.
2. Redistribution of Income: Reduce inequality through progressive taxation and welfare
programs.
3. Resource Allocation: Encourage investment in priority sectors.
4. Promoting Growth: Boost infrastructure and education funding.

4. Monetary Policy
Monetary policy involves the management of a country's money supply and interest rates
by the central bank to achieve economic objectives.

Role of Monetary Policy in India


1. Price Stability: Controlling inflation and deflation.
2. Economic Growth: Ensuring adequate credit flow to productive sectors.
3. Exchange Rate Stability: Managing currency fluctuations.
4. Employment Generation: Facilitating conditions for job creation.

Instruments of Monetary Control


1. Quantitative Instruments:
- Bank Rate Policy: Adjusting the interest rate at which the central bank lends to
commercial banks.
- Open Market Operations (OMO): Buying or selling government securities in the open
market.
- Cash Reserve Ratio (CRR): Mandatory reserves banks must hold with the central bank.
- Statutory Liquidity Ratio (SLR): Reserves banks must maintain in the form of liquid
assets.

2. Qualitative Instruments:
- Selective Credit Control: Directing credit to specific sectors.
- Moral Suasion: Persuading banks to follow certain policies.

5. Liberalization, Privatization, and Globalization (LPG)


Liberalization
- Refers to reducing government control over economic activities.
- Includes reforms such as deregulation, lowering trade barriers, and financial sector
liberalization.

Privatization
- Transfer of ownership or management of enterprises from the public sector to private
entities.
- Methods include disinvestment, outright sale, and public-private partnerships (PPP).

Globalization
- Integration of a country's economy with the global economy through trade, investment,
technology, and cultural exchange.

Impact of LPG in India


1. Positive:
- Increased foreign investments.
- Improved infrastructure and technology.
- Expansion of export-oriented industries.
2. Negative:
- Increased competition for domestic industries.
- Greater income inequality.
6. Foreign Direct Investment (FDI)

FDI refers to investments made by a foreign entity in the business or production sectors of
another country.

Types of FDI
1. Greenfield Investment: Establishing new facilities.
2. Brownfield Investment: Acquiring or merging with existing businesses.

Importance of FDI
1. Technology transfer.
2. Employment generation.
3. Boost to infrastructure development.
4. Enhances foreign exchange reserves.

7. Balance of Payments (BoP)

The BoP is a record of all economic transactions between residents of a country and the rest
of the world over a specific period.

Components of BoP
1. Current Account:
- Trade in goods and services.
- Net income from abroad.
- Net transfer payments.
2. Capital Account:
- Foreign investments.
- Loans and borrowings.
- Other capital transfers.

BoP Disequilibrium
Occurs when there is a persistent imbalance between a country’s inflow and outflow of
foreign exchange. Causes include:
1. High import dependency.
2. Low export competitiveness.
3. Excessive foreign debt.

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