National Income

NATIONAL INCOME & ITS CONCEPTS
III Module
NATIONAL INCOME
National Income Different measure of National Income Methods of Measuring National Income Value added method Factor Income Method Expenditure approach Inflation ,Types of Inflation ,Price Level Employment ,Types of Employment Unemployment
Doc/MBA/ Tchng Mtrl/B06/ 04/R00
MEANING OF NATIONAL INCOME

National Income is flow of goods & services produced in an economy in a year. It is the total income of the nation National Income is the aggregate economic performance of the whole economy.
CONCEPT OF NATIONAL INCOME
1. 2. 3.
The concept of National Income has been interpreted in 3 ways National Product National Dividend National Expenditure
CONCEPT OF NATIONAL INCOME

National Product: It consists of all goods & services produced by the community and exchanged for money during one year. It does not include goods & services which are not paid for ex: Hobbies, Charity work National Dividend: It consists of all the incomes in cash or in kind accruing to the factors of production in course of producing the national product National Expenditure: It represents the total expenditure or spending by the country on various goods & services produced during one year
COMPONENTS OF NATIONAL INCOME

Aggregate Demand Aggregate Supply Aggregate Consumption Expenditure Aggregate Savings & Investments Total Exports & Total Imports
IMPORTANCE OF NATIONAL INCOME

ACCOUNTING The performance & behavior of the economy is based the performance of national income(GDP or GNP), Aggregate Demand, Aggregate Supply, Aggregate Consumption Expenditure, Aggregate Savings & Investments, price level, Total Employment National Income is important variable from both theoretical and practical point of view
ECONOMIC PRODUCTION & NON ECONOMIC PRODUCTION
1. 2.
Production of Goods & services are categorized in 2 categories Economic Production Non Economic Production Economic Production: It refers to the production of goods & services which are meant for sale and have market value and those goods which are produced and provided to people jointly by Govt and public organizations for which people pay directly through tax payments
ECONOMIC PRODUCTION
Economic Production Includes both marketable production & non Marketable production Goods & services produced by farmers ,firms, hotels, lawyers, medical practitioners are marketable production Goods & services produced & supplied by Govt, social organizations, charitable societies fall in non marketable production All marketable production are economic production but all economic production is not marketable
NON ECONOMIC PRODUCTION
It includes those products & services that are not meant to be sold, nor do they have any market or any market price Service rendered to self ex: exercising, washing clothes, Cooking for self Services provided to family members like parents teaching their own children, doctors treating their own family members Services provided by neighbors to each other These production are not included in measurement of national income
INTERMEDIATE GOODS & FINAL GOODS

Goods that flow from one stage to another in the process of production of a good, with their form changing are called intermediate products. A product sold from one form to another for resale or for further processing or value addition in the process of production is called intermediate product The goods that reach the final stage of production and reach the end consumers are called final products A product that is finally sold to ultimate customer is called final product
FINAL GOODS
Final Goods are classified under 2 categories Final Consumer Goods: These goods flow to ultimate consumers Final Producer Goods: These goods are finally used by the firms for production process. These are also called as Investment Goods
DOUBLE COUNTING
The value of same product being counted more than once in national income accounting Avoiding Double counting is a necessary condition for estimating national income
Transfer Payments: These are the payments made by people to people and people to Govt without corresponding transfer of goods & services It refers to flow of money without reverse flow of goods & services Transfer payments are not taken in calculating the national income as they do not lead to addition in total production
CONSUMER GOODS & PRODUCER GOODS
1.
2.
Final Goods are grouped in 2 categories Consumer Goods Producer Goods
Consumer Goods: The goods & services that consumed by people to directly satisfy there needs are consumer goods Producer Goods: These are final goods which are not used for direct consumption by people but they are used for increasing the production capacity of nation, to increase the flow of money into the economy
NATIONAL INCOME MEASURES

Gross Domestic Product Gross Domestic Product at Constant Prices Gross Domestic Product at Current Prices Gross National Product Net National Product Personal Income Disposable Income Private Income
GROSS DOMESTIC PRODUCT

It is defined as market value of final goods & services produced in a country during one year It includes the income earned by foreigners in India It excludes the income earned by Indians abroad
PROBLEMS IN ESTIMATING GDP

Determining what is Final god and hat is not to avoid the problem double counting Accounting for incomes from illegal activities and professions e.g. smuggling, sale of drugs Unsold stock & inventories
GROSS DOMESTIC PRODUCT AT CONSTANT PRICES & CURRENT PRICES
GDP at constant prices: It is the market value of final goods & services produced in a country for one year after adjusting for inflation GDP at current prices: It is the market value of final goods & services produced in a country for one year at current prevailing prices
GROSS NATIONAL PRODUCT

It is another measure of National Income It is similar to GDP It includes the income earned by residents abroad and excludes the income earned by foreigners in India
GDP=Market Value of Final Goods+ income earned by foreigners in India- income earned by Indians abroad
GNP=Market Value of Final Goods+ Income earned by Indians abroad- Income earned by foreigners in India
NET NATIONAL PRODUCT

It is the measure of national income which is available for consumption & net investment The concept of National Product includes both final consumer goods & capital goods NNP is obtained by deducting depreciation from GNP NNP=GNP- depreciation It is the actual measure of National Income NNP divided by total population of a country gives per capita income
PERSONAL INCOME
It is defined as sum of all kinds of incomes received by the individuals from all sources of incomes It includes wages,salaries,fees,comission,interest, dividends, unemployment allowances,pensions,income earned through illegal means like smuggling,bribe,cheating,theft
DISPOSABLE INCOME
It refers to the personal income against which they do not have any legal payment obligation Legal obligations include Income tax, Payment due for Govt Loan, fines or penalties imposed by legal authorities

Disposable Income=Personal Income-(Income Tax+Fees+Fines)
NATIONAL INCOME CONCEPTS SUMMARIZED

GDP=Market Value of Final Goods+ income earned by foreigners in India- income earned by Indians abroad GNP=Market Value of Final Goods+ Income earned by Indians abroad- Income earned by foreigners in India NNP=GNP-Depreciation Disposable Income=PI-Personal Taxes
NOMINAL GNP & REAL GNP

GNP estimated at current market prices are is called as Nominal GDP GNP estimated at constant prices in a chosen year is called as Real GDP The Need for estimating the Real GNP or GDP GNP at current prices produces a misleading picture of economic performance Nominal GDP/GNP leads to inflated estimate of the national income and creates false sense of richness or economic growth
CONDITIONS SHOWING HIGHER GNP AT

CURRENT PRICES Actual Production is decreasing but prices are rising Actual Production remains constant but price rises
GNP DEFLATOR & ITS APPLICATION

It is essentially an adjustment factor that is used to convert nominal GNP to Real GNP GNP Deflator is ratio of Price Index Number(PIN) of a chosen year to the Price Index Number(PIN) of the base year The PIN of base year=100 GNP Deflator=PIN of Chosen Year/100 Formula for converting Nominal GNP to Real GNP Real GNP=Nominal GNP GNP Deflator
EXAMPLE
Estimated GNP at current prices for year 2000=600 Billions and price index number(PIN) for base year=100 Estimated GNP increases to Rs 600 Billion in Year 2005 and PIN increases to 110 GNP Deflator=PIN of Chosen Year=110=1.1 PIN of base Year 100
Real GNP=Nominal GNP=Rs 600 Bill=Rs 545.45 Bill GNP Deflator 1.10
GNP IMPLICIT DEFLATOR

It is the ratio of Nominal GNP to Real GNP GNP Implicit Deflator=Nominal GNP Real GNP
It is also called Implicit Price Deflator
Rate of Inflation
Rate of Inflation=PIN of Chosen Year-PIN of Base year
Methods of Measuring National Income
1.
2. 3.
The three methods of Measuring National Income Net Product method or Value Added method Factor Income method Expenditure Method
The estimated GDP is then adjusted for Net income from abroad to arrive at GNP
Net Product Method - Value Added method
I.
II.
III.
Net Product method is also called as Value added method This method consists of three stages Estimating the gross value of the output of several sectors of the economy Estimating the cost of materials & services used & depreciation of physical assets to produce the gross output. Deducting the Cost of Materials & services & depreciation amount from the Gross output of several sectors of the economy
I Stage-Estimating the Gross Value
1.
2.
Out put is classified into categories based on Nature of Industry Significance of industry in the total economic activities of nation Availability of data Gross Value of output is computed in any of the 2 methods below By multiplying the output of each category or sector with their respective market prices & adding them together Collecting data on gross sales & inventories from records of the companies and adding them together
II-Estimating Cost of Materials, Services & Depreciation

The costs are computed either in absolute terms or as an overall Input to Output ratio Estimating depreciation adopts the same practice as followed by business firms Depreciation is estimated as some % of the original cost of physical asset or capital In some countries it is some % of total output rather than total cost of capital
III-Deducting Cost of Materials, Services & Depreciation from Gross value of output
After estimating the Cost of Materials and Depreciation, it is deducted from the estimated gross value of output to arrive at sectoral product The GDP of different sectors of the economy are then added together to arrive at total GDP GDP of a sector 1=Gross Value of 1 Sector-Cost of Materials-Total Depreciation of Sector 1 GDP of a sector 1=Gross Value of 2 Sector-Cost of Materials-Total Depreciation of Sector 2 Total GDP= GDP of a sector 1 + GDP of a sector 2
Value Added method

Value added method is used to avoid double counting Double counting refers to counting the value of an output more than once
Value addition by Flour Mill

Cost of Wheat Transportation Cost Labour Charge Electricity Charge Storage cost Depreciation Profit Margin Sale Price Less: Cost of Wheat( Raw Material) Value Added Rs 1000 Rs 50 Rs 150 Rs 100 Rs 50 Rs 50 Rs 100 Rs 1500 Rs 1000 Rs 500 Tchng Mtrl/B06/ 04/R00 Doc/MBA/
Valuation process till the Final Product Sandwich

Product(1) Value of Inputs(2) Nil Rs 1000 Rs 1500 Rs 2000 Rs 4500 Value of Final Output(3) Rs 1000 Rs 1500 Rs 2000 Rs 3000 Rs 7500 Gross Value Added (3-2) Rs 1000 Rs 500 Rs 500 Rs 1000 Rs 3000
Wheat Wheat Flour Bread Sandwich Total
Value Added method

This method avoids counting the value of wheat more than once The same method of value added is used for each enterprises product & service The following steps need to be followed to estimate Valued Addition Identifying the Production Units & classifying them under different sectors Estimating Net Value added by each production unit in each industrial sector Adding up the total value added of each final product to arrive at GDP
Factor Income method

It is also known as Factor Share method In this method National Income is treated to be equal to all the income accruing to the factors of production used in producing the national products The factors of Production traditionally categorized as Land,Labour,Capital & Organization National Income is treated as the sum of all Factor payments i.e. Wages,Rent,Interest,Profits including depreciation National Income=Wages+Rent+Interest+Profits+Depreciation
Factor Income method
National Income consists of three components Labour Income Capital Income Mixed Income
Labour Income
Labour Income Includes Wages,Salaries,Commision,Bonus paid to residents of the country Supplementary Labour including Employers contribution to social security,EPF,VPF, Employee welfare funds, pension payments to retire employees Labour income paid in Kinds ex Free of cost health check up,food,accomodation called perks Transfer payments like old age pensions,grants,compensation to victims are not included in Labour Incomes
Capital Incomes
It includes income in the form of Dividends Undistributed before tax profits of company Interest on Bonds, Debentures Interest earned by insurance companies Interest paid out by commercial banks for its depositors Rents from Land & Building Royalties Copyrights
Mixed Incomes
It includes earnings from Farming enterprises Other Professions like Doctors,Lawyers,Bankers,Consultancy services, Transportation, trading
All the three incomes i.e Labour Income, Capital Income & Mixed Incomes are added together to obtain National Income under Factor Income Method
Expenditure Method
It is also known as Final Product method It measures the National Income at the Final Expenditure stage of buying the final product It uses 2 methods Income Disposal Method: Under this method all the money expenditures at market prices are added up together to obtain final expenditure Product Disposal Method: Under this method the value of the products finally disposed off are computed and added together. This gives a measure of total final expenditure and a measure of National Income
Income Disposable Method

It includes Private Consumption Expenditure Direct Tax Payments Payments made to Non-Profit Orgn Private savings & investments
Product Disposable Method

It includes money spent on Private consumer goods & services Private Investment Goods Public Goods & Services Net Investment Abroad
Double Entry System of Accounting

This is another method used in estimating National Income National Income is systematic recording of all economic transactions carried out in different sectors of the economy which result in output Economic transactions involve 2 transactors one who receives & one who pays Each party of the conomic transaction is allocated an account having 2 sides Credit & Debit What a person receives is recorded on the credit side What a person pays is recorded on Debit side
Double Entry System of Accounting

Double entry system of accounting is one in which both receipts & payments are recorded-Receipts on Credit side & payments on Debit side Account of a person need not balance in double entry system of accounting Sum of savings is equal to sum of borrowings
Types of Transactions in Double entry system

Private Consumption Government Consumption Savings & Investments Government Taxes & Spending Inventories Exports & Imports
Classification of Economy
1.
2. 3. 4. 1. 2. 3. 4.
Primary Sector Agriculture Forestry & Logging Fishing Mining & Quarrying Secondary Sector Manufacturing Registered & Unregistered Manufacturing Construction Electricity,Water & Gas Supply
Classification of Economy
Tertiary Sector Transport, Trade & Communication Railways Other means of Transport Hotels & Restaurants
Sectors under Net Product Method

Agricultural & allied services Forestry & Logging Fishing Mining & Quarrying Registered Manufacturing
Sectors under Income Method

Unregistered Manufacturing Banking & Insurance Transportation, Communication & Storage Real estate, business services Hotels & Restaurants Defense Other Services
Sectors under expenditure Method

Private consumption expenditure including expenditure on Durable goods, Semi durable goods, non-durable goods, services Government Final Consumption expenditure Gross capital formation including machinery, equipments etc Change in Inventory Net exports of Goods & Services
Definition: Inflation
It is a continuous rise in the general level of prices of product & services is Inflation. Inflation means consistent & continuous increase in the prices of commodities over a long period of time It means any price rise over & above the base year level is called as inflation
Desirable Rate of Inflation & its uses
The rate of inflation which is needed for an economy to grow & develop is called as Desirable rate of inflation It is linked to the economic & social needs of the nation. Moderate rate of inflation keeps the economic outlook optimistic, promotes economic activity and prevents economic stagnation It is helpful in the mobilization of resources by increasing the overall rate of savings & investments Moderate of inflation is essential for the progress of the economy 2-3 % inflation is considered moderate rate for developed economies & 4-5% inflation is considered moderate for the developing economies
Methods of Measuring the Inflation

Percentage change in price index number( Rate of Inflation) Change in GNP Deflator
Rate of Inflation
Two widely used PIN numbers are WPI & CPI WPI is whole sale price index which measures increase in prices of products at a producers level CPI is Consumer Price Index number which increase in level of prices at consumer level or it measures cost of living
Table showing Average Annual rate of inflation

Year 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 Annual Average Annual Inflation Rate(%) 3.6 3.4 5.5 6.5 4.4 23.4/5=4.68%
Measuring Inflation BY GNP Deflator

GNP Deflator is ratio of Nominal GNP to Real GNP Nominal GNP is GNP at current prices & Real GNP is GNP at constant prices The percentage change in GNP deflator between any two years gives a measure of inflation
Problem on Measuring Inflation by GNP deflator

Year 1991 1992 1993 1994 1995 Nominal GNP 470269 542691 618969 719548 843294 Real GNP 208481 209621 220489 233805 249903
GNP Deflator
Rate of Inflation
Types of Inflation
Moderate Inflation: When general level of prices rises at a moderate rate over a long period of time, it is called a s moderate inflation or creeping inflation Galloping Inflation: It refers to inflation that increases at an exceptionally high rate in double digits Hyper Inflation: It refers to price rise at more than 3 digits rate per annum Open & Suppressed Inflation: When there is no control on the increase in prices & prices are free to find their own level its called as Open Inflation Increase in the level of prices after using the control measures is called as suppressed inflation
Difference between Inflation, Disinflation & Deflation

Inflation refers to consistent increase in prices Disinflation refers to decrease in the inflation rate Deflation refers to the fall in the general price level below the base year level
Illustration of Inflation, Disinflation & Deflation

Year Base year 20002001=100
2001 2002 2003
Price Index Number
% Change in Price Index Number

10 4.5
Nature of Price Change
100 110 105
Inflation Disinflation(5.5 %)
2004
2005 2006
100
100 95
5
0.0 -5.0
Disinflation(5.0%)
Zero rate of Inflation Deflation
Economic effects of Inflation

Effect of Inflation on Distribution of Income Effects of Inflation on Distribution of wealth Effects of Inflation on Wage earners Producers Govt Borrowers & lenders Fixed Income class
EFFECT OF INFLATION ON DISTRIBUTION OF INCOME

The effect of inflation on distribution of income depends on how it is affects the prices received and prices paid by different sections of the society Prices received are same as Incomes earned Prices paid represent the expenditure involved in consumer goods and production inputs Inflation changes the income-distribution pattern only when it creates a divergence between total prices received and total prices paid by different sections of the society If price rise is so evenly distributed that wages increase proportionately to the rise in profit incomes, the income distribution remains unaffected
EFFECT OF INFLATION ON DISTRIBUTION OF WEALTH

Wealth can be represented in the form of accumulated assets Assets are classified in 2 categories Price Variable Assets : The value of these assets vary depending on the general level of prices Fixed Value Assets: The value of these assets are fixed and does not depend on the general level of prices The effect of Inflation on net wealth depends on how inflation affects the money value of price-variable assets If prices of Price variable asset increases at the same as the rate of inflation, then there will be no change in distribution of wealth
EFFECT OF INFLATION ON DISTRIBUTION OF WEALTH
If prices of Price variable asset increases at rate higher than the rate of inflation, then there will be change in distribution of wealth Inflation changes wealth distribution by changing the wealth accumulation ability of different sections of the society The ability to acquire wealth depends on ability to save and invest. The ability to save depends on ability to earn income High income groups have higher ability to earn and save and hence higher ability to accumulate wealth During the period of inflation income of high income groups increase at a higher rate than low income groups and hence wealth accumulation will be higher for high income groups than low income groups
EFFECT OF INFLATION ON Producers & fixed Income class

Producers gain or lose during inflation depends on rates of increase in prices that they receive (Sale Price) & the prices that they pay for factors of production. In general product prices rises first and faster than cost of production, hence profit margin increases and producers gain during inflation Product prices increases due to increase in demand and increase in income level Time lag between increase in product prices and increase in wages or salaries. Producers gain during inflation because of wage lag
EFFECT OF INFLATION ON Borrowers & Lenders, Government

In general Borrowers tend to gain during the period of Inflation than lenders Government is the net gainer during the period of Inflation Inflation increases the tax revenue from both direct tax and Indirect tax Inflation increase tax revenue from personal income tax in at least three ways Inflation redistributes the income in favor of higher income groups, hence increases the tax base of people Inflation increases the nominal income at the rate of inflation, real income remaining the same, as a result income which was not taxable before inflation becomes taxable after inflation Incomes taxable at lower rates become taxable at higher rates after inflation
EFFECT OF INFLATION ON Economic Growth
Rate of economic growth depends primarily on rate of capital formation which again depends on rate of savings & investments. Whether inflation affects economic growth positively or negatively depends on whether if affects the savings & investments positively or negatively There is positive relationship between Inflation & savings & investments During the period of inflation there is time lag between increase in output prices and input prices, particularly wage rates The time lag between increase in output prices and input prices is called as wage-lag Persistent Wage-lag enhances profit margin of producers
EFFECT OF INFLATION ON Economic Growth

The enhances profits provide & motivate producers to save and invest more funds leading to economic growth, production capacity and higher level of output Inflation tends to redistribute income in favor of high income groups whose income mostly consists of profits and non wage incomes This helps then to save as they have higher propensity to save and invest leading to economic growth
MEASURES ADOPTED TO CONTROL INFLATION

Monetary Measures Fiscal Measures Price & Wage Control Indexation
MONETARY MEASURES
These are the measures which are used by the Central bank to control the money supple in the economy The monetary measures are classified in 2 categories
1. 2.
Traditional Measures Bank Rate Policy Cash Reserve Ratio Open Market Operations Non-Traditional Measures Statutory Liquidity Ratio Selective credit controls Moral suasion Credit Authorization Scheme
TRADITIONAL MEASURES

Bank Rate Policy: The rate at which RBI lends money to the commercial bank is called bank rate. Cash Reserve Ratio: It is the percentage of total deposits which commercial banks are required to maintain in the form of Liquid cash. Open Market Operations: It is the sale & purchase of Government securities and treasury bills by the central bank of the country to control the supply of money. Repo & Reverse Repo Rate: The rate at which RBI lends money to commercial banks for short period is called as Repo Rate Reverse Repo: Rate at which RBI borrows money from the commercial Banks
NON-TRADITIONAL MEASURES
Statutory Liquidity Ratio: The banks are required to maintain certain minimum % of daily total demand in the form of liquid assets (Govt Securities & Debt Instruments like bonds) Selective credit controls: This method concentrates on distribution of bank credit to essential and priority sectors and avoid flow of credit to non priority sectors of economy Moral Suasion : It is a method of persuading and convincing the commercial banks to advance credit in accordance with the RBI direction for the overall economic interest of the economy. Credit Authorization Scheme: Under this scheme Commercial
banks are required to take prior permission from RBI to lend money in bulk to large private organization and public sector companies
FISCAL MEASURES
These measures are used by the Government or Finance ministry. These measures are adopted to control inflation if the inflation is caused because of Excess demand When excess demand is caused because of Govt Expenditure then Govt decides to cut down its expenditure programs . When excess demand is caused because of Private Expenditure, then Govt decides to Increase Tax rates to reduce disposable income of consumers and there by reducing the expenditures and lowering the demand.
PRICE & WAGE CONTROL

Price control: This method is used during war period when inflation tends to increase very high. The maximum retail price for goods & services is fixed beyond which the sellers will not be allowed to sell. It can be applicable to selected goods & services or to all goods & services Under price control system selling a product at a price higher than the price fixed by authorities would be declared as an offence or crime. The primary objective of Price control is to prevent the price rise for the scarce goods & services and to ration the use of commodities
WAGE CONTROL
It is used to control inflation when wages tend to rise much faster then productivity or cost of living Under this method the government tries to control hike in wages directly by imposing the ceiling on the wage incomes in both private and Govt Sectors. Wage push inflation is controlled by using the method known as Wage guideposts Wage Guideposts means plan of action against inflation The plan of action is prepared by mutual consent & agreement among the Govt, Trade unions, and Business organizations for the control of hike in wages Doc/MBA/ Tchng Mtrl/B06/ 04/R00 & salaries
Unemployment
In general sense, unemployment means lack of jobs even for those who are able and willing to work at prevailing wage rates . According to ILO, only those belonging to age group between 15 years & 65 years should be included in the labour force of country. Unemployment is defined as gap between the potential full employment and the number of employed persons Full employment is a situation in which employment cannot be increased y an increase in effective demand and the unemployment does not exceed the minimum allowance that must be made for effects of frictional and seasonal factors. Unemployment=Labour force- (No.of Employed+ frictionally unemployed)
Employed, Unemployed, Not in the Labor Force, Labor Force

Employed: A person is considered employed if he or she has spent most of the previous week working at a paid job. Unemployed: A person is unemployed if he or she is on temporary layoff, is looking for a job, or is waiting for the start date of a new job. Not in the Labor Force: A person who fits neither of these categories, such as a full-time student, homemaker, or retiree, is not in the labor force.
Labor Force
The labor force is the total number of workers and the it is defined as the sum of the employed and the unemployed.
Labour force: It consists of group of persons belonging to age group of 15 years to 65 years who are employed and those who are unemployed but looking out for a job
How Is Unemployment Measured?

Unemployment Rate=(Labour Force-Employed Labour)/LabourForce Unemployment rate=No.of Unemployed/Labour Force The labor-force participation rate is the percentage of the adult population that is in the labor force.
Labor-force Participation Rate= (Labor Force/Adult Population)*100
Three concepts of Unemployment

Usual Status of Unemployment: It is measured in terms of No.of people who are unemployed for major part of the year Current Weekly Status of Unemployment: This measures in terms of No.of persons who did not find the job even for one day in the survey week Current Daily Status of Unemployment: This measures in terms of No.of persons who did not find the job even for one hour on any day in survey week
Types of Unemployment
Frictional Unemployment Structural Unemployment Natural Unemployment Cyclical Unemployment
Frictional Unemployment
Frictional Unemployment is also called temporary unemployment The temporary unemployment can be caused because of economic disturbances and friction in the labour market,recession,company specific problems Frictional unemployment is defined as number of unemployed persons under the conditions that No.of Job vacancies equals the number of job seekers who somehow fail to get the job. Frictional unemployment is said to exist when Job vacancies equals job seekers and yet some persons are unemployed.
Structural Unemployment

Structural unemployment occurs due to structural changes in the economy making some workers go out of work. Structural changes include change in sectoral composition of the economy & change in technology Change in sectoral composition of the economy means gradual decline of some kinds of industries and emergence of new industries. Changes in technology means change in the skill sets required and expected by employers from workers for getting work done In Structural employment there are vacancies and job seekers and yet there is unemployment because of mismatch between the expected skills and actual skills of labour force Structural unemployment remains for long period of time
Structural unemployment
Structural unemployment occurs when the quantity of labor supplied exceeds the quantity demanded. Structural unemployment is often thought to explain longer spells of unemployment. It occurs when labour market is unable to provide jobs for every one. It occurs because of mismatch between skills of unemployed and expectations of employers or population overgrowth.
Difference between Frictional Unemployment & Structural Unemployment

Frictional Unemployment It is temporary in nature Here the unemployed person gets job after some time
Structural Unemployment It exists for long period of time Here the unemployed person will not get job till he learns new skills
Cyclical Unemployment
This employment is also known as Okuns Law Okuns law brings out the relationship between the output & unemployment According to this lawEvery1 % increase in unemployment rate results in 2.5 % reduction in GNP of a nation. The number 2.5% is known as Okunss Coefficient It occurs because of changes trade cycle ex Depression or recession,
Types of Unemployment
Voluntary Unemployment: In this type a person is out of job because of his own desire not to work on the prevailing wage rates. Involuntary Unemployment: In this type a person is separated from work and devoid of salaries although he is capable of earning his wages and is willing to earn. Seasonal Unemployment: Certain industries and traders engage workers for a particular season. When the season is ended, workers will be out of work
Philips Curve
Philips Curve brings out the relationship between Inflation and Rate of Unemployment Philips curve found there is inverse relationship between increase in money wages rate and unemployment rates. As Money wage rates increases, the unemployment rate decreases. As Money wage rates decreases, the unemployment rate increases. General conclusion drawn from Philips Curve is that Rise in salaries reduces unemployment rates and drop in salaries increases unemployment rates
Explanation of Philips Curve

The inverse relationship between the Inflation Rate & Unemployment Rate is because of 2 below factors Demand Pull Factor Wage Push Factor
Demand Pull Factor

As per Philips Curve, during demand pull inflation, demand for labour is increased with increase in prices leading to increase in profits. It leads the employers to pay higher salaries during demand pull inflation to attract the best talent from industry and firms. It leads the employees shifting jobs from one firm to another creating job vacancies for unemployed persons. Thus increase in wage rates leads to increase in employment opportunities and reduction in unemployment rates.
Wage Push Factor

During the period of high inflation, the firms profits and market shares would be high there by motivating the firms to offer higher salaries to laborers This leads to increase in wage rates and decline in unemployment rates Lower the unemployment rate higher will be the bargaining power of labour unions Higher the unemployment rate lower will be the bargaining power. Thus at high rate of inflation wages tend to decline.
Natural Rate of Unemployment

The amount of unemployment that the economy normally experiences and does not go away on its own even in the long run. It is the unemployment that exists because of structural changes in the economy, which cannot be avoided or reduced. It is the unemployment rate that exists irrespective of the inflation rate or any other macro economic variable
Issues in Measuring Unemployment
It is difficult to distinguish between a person who is unemployed and a person who is not in the labor force.
Discouraged workers, people who would like to work but have given up looking for jobs after an unsuccessful search, dont show up in unemployment statistics. Other people may claim to be unemployed in order to receive financial assistance, even though they arent looking for work.
Summary
The unemployment rate is the percentage of those who would like to work but dont have jobs. One reason for unemployment is the time it takes for workers to search for jobs that best suit their tastes and skills. Types of Unemployment Frictional Structural Short Term Long term

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National Income

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NATIONAL INCOME & ITS CONCEPTS

Doc/MBA/ Tchng Mtrl/B06/ 04/R00

MEANING OF NATIONAL INCOME

Doc/MBA/ Tchng Mtrl/B06/ 04/R00

CONCEPT OF NATIONAL INCOME

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CONCEPT OF NATIONAL INCOME

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COMPONENTS OF NATIONAL INCOME

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IMPORTANCE OF NATIONAL INCOME

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ECONOMIC PRODUCTION & NON ECONOMIC PRODUCTION

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NON ECONOMIC PRODUCTION

INTERMEDIATE GOODS & FINAL GOODS

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CONSUMER GOODS & PRODUCER GOODS

Final Goods are grouped in 2 categories Consumer Goods Producer Goods

NATIONAL INCOME MEASURES

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GROSS DOMESTIC PRODUCT

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PROBLEMS IN ESTIMATING GDP

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GROSS DOMESTIC PRODUCT AT CONSTANT PRICES & CURRENT PRICES

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GROSS NATIONAL PRODUCT

NET NATIONAL PRODUCT

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Disposable Income=Personal Income-(Income Tax+Fees+Fines)

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NATIONAL INCOME CONCEPTS SUMMARIZED

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NOMINAL GNP & REAL GNP

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CONDITIONS SHOWING HIGHER GNP AT

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GNP DEFLATOR & ITS APPLICATION

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GNP IMPLICIT DEFLATOR

It is also called Implicit Price Deflator

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Rate of Inflation=PIN of Chosen Year-PIN of Base year

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Methods of Measuring National Income

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Net Product Method - Value Added method

I Stage-Estimating the Gross Value

II-Estimating Cost of Materials, Services & Depreciation

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Value Added method

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Value addition by Flour Mill

Valuation process till the Final Product Sandwich

Wheat Wheat Flour Bread Sandwich Total

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Value Added method

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