National Income

Measures and Measurement

GNP
It is the sum of all final goods and services produced during a specified time period, usually a year, with each class of goods and services measured at this market value, that is, at price usually paid.

Measures of National Income

Gross Domestic Product (GDP) Gross National Product (GNP) Net Domestic Product (NDP) Net National Product (NNP) They can be expressed:
At market price At factor cost

Measures of National Income ..

Important to remember:
Gross = Net + Depreciation Market Price = Factor Cost + [Indirect Taxes Subsides] National = Domestic + Net Factor Income from abroad

Question
Which of the statutory body responsible for compiling national income accounts in India? a. Planning Commission b. Finance Ministry c. Reserve Bank of India d. Central Statistical Organization e. National Informatics Centre

Question
In national income accounting, market prices equals to a. Factor cost [ Indirect taxes Subsidies] b. Factor cost + [ Indirect taxes Subsidies] c. Factor cost [ Indirect taxes + Subsidies] d. Factor cost + [ Indirect taxes + Subsidies] e. Factor cost Net indirect taxes

Question
Which of the following variable follows flow approach a. National income b. Unemployment c. Foreign Exchange Reserves d. Wholesale Price Index e. Money supply

Question
From the following information , calculate GNP at market prices NNP at market prices Rs 3467 Net factor income from abroad Rs 675 Exports Rs 1267 Depreciation Rs 378 2320 3764 3845 4356 4520

Question
The difference between the profit of an informal unit and that of a registered company is that a. The former is included in GDP while the latter is not b. The former is not included in GDP while the latter is c. The former is not included in GNP while the latter is d. The former is included in personal income but that of latter is not e. There is no difference

Question
From the following information , calculate GDP at market prices NNP at market prices Rs 3467 Net factor income from abroad Rs 675 Exports Rs 1267 Depreciation Rs 378 a. 2320 b. 3170 c. 3845 d. 4356 e. 4520

Question
Which of the following is an example of stock variable? a) Wages b) Taxes c) Exports d) Inflation e) Price index

Question
The figures given below pertain to the year 200X200X0X. (All figures in Rs. Crore) GNP at Factor Cost = 395023 Indirect taxes = 58213 NDP at market prices = 400422 NNP at market prices = 400575 GNP at market prices = 407226 Compute the values of
Depreciation Net Factor income from abroad Subsidies NDP at factor cost

Answers
Depreciation = GNP at Market Prices NNP at market prices = Rs. 407226 Rs. 400575 = Rs. 6651 Crore Net Factor income from abroad = NNP at market prices NDP at market prices = Rs. 400575 - Rs. 400422 = Rs. 153 Crore Subsidies = GNP at factor cost + Indirect taxes GNP at market prices = Rs. 395023 + Rs. 58213 Rs. 407226 = Rs. 46010 Crore NDP at factor cost = NDP at market prices Indirect taxes + subsidies = Rs. 400422 - Rs. 58213 Rs. 46010 = Rs. 388219 Crore

Measuring National income

Three methodsmethodsIncome method Output (Value added method) Expenditure method

Income method
It gives national income as aggregate of all incomes of the nation Income of only residents of the nation (individual & corporate) who participate in current production Transfer payments are excluded Stocks adjusted Net factor income from abroad included

Output/ Value Added method

Valuing all final goods & services produced in an economy Normally value added at each stage of production is calculated & added The NFI is then added

Expenditure Method
Aggregates all money spent by private citizens, firms & the government Expenditures on all intermediate goods are excluded Expenditures on indirect taxes excluded Subsidies added Exports and FI from abroad added Imports and FI paid abroad is subtracted

A problem
An economy has a farm and a bakery. Households own all of the labour services and all of the capital, which they rent out to farm and bakery. Farm produces wheat using labour services worth Rs. 100 and capital services worth Rs. 200. It sells Rs. 50 worth of sugar to households and Rs. 250 worth of sugar to bakery. Bakery produces bread worth Rs. 800, which it sells directly to households. Households earn Rs. 300 in wages from the farm and bakery combined. a) What is the value of GDP in this economy? b) What is the value added by the farm? c) What is the value added by the bakery? d) How much do the households earn in profit from farm and bakery combined? e) What is the total value of intermediate goods produced in this economy?

Answers
a. Rs. 850 b. Rs. 300 c. Rs. 550 d. Rs. 550 e. Rs. 250

Problems
GNP 4,800 Gross Investment 800 Net Investment 300 Consumption 3,000 Government purchases 960 Government budget surplus 30 What is  NNP, net exports, government tax?

Problem:
GNP at market price 4000 Corporate taxes 800 Personal income tax 600 Subsidies 350 Factor income received from abroad 1000 Factor income paid abroad 800 Undistributed profits 150 Indirect taxes 600 Depreciation 400 Calculate: Personal disposable income, GDP at FC

Solution
Personal disposable income = Personal income Personal taxes Personal income = National income Retained earnings Corporate tax National income = NNP at factor cost NNP at FC = GNP at FC - Depreciation GNP at FC = GNP at MP - Indirect Taxes + Subsidies

Role of Prices
Movements in prices have two aspectsaspectsThe changes in relative prices which affect microeconomic resource allocation The changes in the overall price level which affect the purchasing power of money over goods & services in general A variety of price indices are devised to capture this second aspect

Types of Price Indices

Three main indices Consumers Price Index (CPI) Wholesale Price Index (WPI) The GDP deflator (Other indices like index number of industrial
production, index of agricultural production are also possible refer text book pages 35-37) 35-

Consumers Price Index (CPI)

It compares over time the money outlays required to purchase a given basket of consumption goods & services. The basket represents the actual consumption pattern of a typical family from a specific group for which the CPI is being constructed Tastes vary across families & relative prices can also vary geographically, so a separate CPI is constructed for each of a few well-defined population groups. wellExample Urban Industrial workers; Agricultural laborers

Measurement of CPI
CPIs normally employ Laspeyers Index

Suppose in the year 0 (the base year) a typical family purchased quantities q10, q20, q30qn0 of n goods at prices p10, p20, p30pn0 . In year t (the current year) the prices of the same goods are p1t, p2t, p3tpnt . Then the Laspeyers index is given by

It = [( pit q0i)/( pi0 qi0)]*100

Measurement of CPI
CPIs normally employ Laspeyers Index

Suppose in the year 0 (the base year) a typical family purchased quantities q10, q20, q30qn0 of n goods at prices p10, p20, p30pn0 . In year t (the current year) the prices of the same goods are p1t, p2t, p3tpnt . Then the Laspeyers index is given by

It = [( pit q0i)/( pi0 qi0)]*100

Measurement of CPI
CPIs normally employ Laspeyers Index

Suppose in the year 0 (the base year) a typical family purchased quantities q10, q20, q30qn0 of n goods at prices p10, p20, p30pn0 . In year t (the current year) the prices of the same goods are p1t, p2t, p3tpnt . Then the Laspeyers index is given by

It = [( pit q0i)/( pi0 qi0)]*100

Measurement of CPI contd..

It = Cost of purchasing the base year basket in current year
*100

Cost of purchasing the base year basket in base year = [w1 (pit/pi0) + w2 (p2t/p20) +.]*100 Where, wk = (pk0 qk0)/ ( pi0qi0) expenditure in base year Wk pkt/pk0 share of kth good in total consumption

weight attached to the kth good the price relative for good k

Thus, Laspeyre CPI = It = wi (pit/pi0 )

Requirements to construct the CPI

Consumption basket in the base year Prices of the items in the basket in the base year Price relatives for each item in the given year

Wholesale Price Index (WPI)

This index can be interpreted as an index of prices paid by the producers for their inputs Method of constructing is quite analogous to those behind CPI with differences like items included are different, prices are not retail but wholesale etc

The GDP deflator

It is defined as the ratio of current price GDP to constant price GDP It is a price index which covers all final goods & services Unlike CPI, it covers investment goods Unlike WPI, it does not cover industrial raw materials & intermediates The goods basket entering the calculation is the basket produced in the current year
It is the ratio of value of this years final outputs in this years prices to the value of the same outputs in the base years prices

Real Vs Nominal GDP

Real refers to the fact that the data have been adjusted for changes in the level of prices Real GDP is the GDP at current prices deflated fro changes in the prices of the items included in GDP Thus, two ways of expressing GDP
GDP at current prices (nominal value) GDP at constant prices (real value)

Real Vs Nominal GDP

GDP deflator
It is a measure of the current price level compared to the price level during the base year

Real GDP (2003-04) (2003= Nominal GDP (2003-04) * [GDP (2003deflator (1993-94) / GDP deflator (2003(1993(200304)]

Problem
From the table given below calculate (a) the nominal GDP for the year 2001 and 2005 (b) the real GDP for the year 2005 (c) the GDP deflator for the year 2005. 2001 2005 Units Price/unit Units Price/unit

A B C D E

50 100 80 60 120

Rs.1.50 Rs.7.50 Rs.6.00 Rs.5.00 Rs.2.00

60 120 100 70 140

Rs.1.60 Rs.8.00 Rs.7.00 Rs.5.50 Rs.2.50

Answer
A B C D E GDP 2001 75 750 480 300 240 1845 2005 96 960 700 385 350 2491 Real 2005 90 900 600 350 280 2220

The GDP deflator for the year 2005 is 112.2, found by dividing 2005 nominal GDP by 2005 real GDP and multiplying by 100. That is, 112.2 = 2491/2220*100

Difficulties
NonNon-market production Imputed values Underground economy Side effects & economic bads bads Leisure & Human Costs Double counting

Usefulness of national income

To assess effectiveness of policies To assess the standard of living To indicate economic growth To make cross country comparison