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Income Calculation

National income accounting involves measuring the total economic output of an economy. Gross domestic product (GDP) measures the total market value of final goods and services produced within a country in a year. Gross national product (GNP) measures the output of a country's citizens and businesses regardless of location. GDP is a primary measure of economic activity that occurs within the borders of a country. There are three main methods to calculate national income: the product method, expenditure method, and income method.

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35 views

Income Calculation

National income accounting involves measuring the total economic output of an economy. Gross domestic product (GDP) measures the total market value of final goods and services produced within a country in a year. Gross national product (GNP) measures the output of a country's citizens and businesses regardless of location. GDP is a primary measure of economic activity that occurs within the borders of a country. There are three main methods to calculate national income: the product method, expenditure method, and income method.

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ranjandk
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© © All Rights Reserved
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Download as PPTX, PDF, TXT or read online on Scribd
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National Income Accounting

National Income Accounting

• In the mid-1930s, two Keynesians, Simon Kuznets and Richard Stone,


began to develop this terminology
• a set of rules and definitions for measuring economic activity in the
aggregate economy – that is, in the economy as a whole.
Measuring Total Economic Output of Goods
and Services
• Gross Domestic Product (GDP) is the total market value of all final
goods and services produced in an economy in a one-year period.
• Gross National Product (GNP) is the aggregate final output of citizens
and businesses of an economy in one year.
• GDP measures the economic activity that occurs within a country.
• GNP measures the economic activity of the citizens and businesses of
a country.
GDP Measures Final Output
• Final output – goods and services purchased for final use.
• Intermediate products are used as inputs in the production of some
other product.
• Counting the sale of final goods and intermediate products would
result in double and triple counting.
The National Income Accounting Identity
• The equality of output and income is an accounting identity in the
national income accounts.
• The identity can be seen in the circular flow of income in an economy.
Methods of Calculating National income
• There are three methods of calculating national income:
(i) The product method
(ii) The expenditure method
(iii) The income method.
Product Method
• In this method, national income is measured as a flow of goods and
services.
• We calculate money value of all final goods and services produced in
an economy during a year.
• To avoid the problem of double counting we can use the value-
addition method.
• The money value is calculated at market prices so sum-total is the
GDP at market prices
The Expenditure Approach
• In this method, national income is measured as a flow of
expenditure.
• Specifically, GDP is sum-total of private consumption expenditure.
Government consumption expenditure, gross capital formation and
net exports.

GDP = C + I + G + (X - IM)
The Incomes Approach
• Under this method, national income is measured as a flow of factor
incomes.
• There are generally four factors of production labour, capital, land and
entrepreneurship When we add indirect taxes (less subsidies) and
depreciation to nations income, we have GDP.
• Accordingly there are four factor payments, namely rent,
compensation of employees, interest, and profit.
GDP and NDP
• Net domestic product is GDP adjusted for depreciation:
GDP = C + I + G + (X - IM)
NDP = C + I + G + (X - IM) - Depreciation
Gross Vs. Net
• Depreciation or capital consumption is the amount by which an assets
value falls in a given period.
Net Investment = Gross Investment less depreciation.

Capital stock at end of period = capital stock at beginning of period


+net investment
NNP
• National Income = net national product at factor cost
• NNP at factor cost = GDP at market prices less indirect taxes plus
subsidy+ NFIA less depreciation
• NFIA can be positive or negative= receipt of factor income from the
rest of the world minus the payment of factor income to the rest of
the world.
Other National Income Terms
• Personal income (PI) is national income plus net transfer payments
from government minus amounts attributed but not received.
• PI = NI + transfer payments from government - corporate retained
earnings - corporate income taxes – employment taxes (CPP, EI)
• Disposable personal income is personal income minus personal
income taxes and payroll taxes
• Disposable personal income is what people have readily available to
spend.
DPI = PI - personal taxes
Calculate Gross National Disposable Income from the following data:
Items (` in crore)
(i) National income 2,000
(ii) Net factor income from abroad (-)50
(iii) Consumption of fixed capital 200
(iv) Net current transfers from rest of the world 150
(v) Net indirect taxes 250
• Gross National Disposable Income = National income + Consumption
of fixed capital + Net current transfers from rest of the world + Net
indirect taxes
• = ` 2,000 crore + ` 200 crore + ` 150 crore + ` 250 crore = ` 2,600 crore

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