Gross Happiness Index (GHI)<\/a><\/li>\n<\/ol>\n<\/li>\n<\/ol>\nWe will cover the above 6 topics in two posts. In this post we will be covering Topic 1 and Topic 2.<\/p>\n
What is National Income Accounting?<\/h3>\n
National Income Accounting refers to a set of rules and techniques that are used to measure the output of a country<\/strong>. Various macroeconomic identities like GDP,GVA, NNP are used for calculation of national income. Now let’s understand each one of them clearly.<\/p>\n1. Concepts and aggregates related to National Income<\/strong><\/h3>\n1.1 Gross Domestic Product (GDP)<\/b><\/h5>\n1.1.1 Measuring the size of Economy : Gross Domestic Product<\/b><\/h5>\n
What if somebody asks you – How big is Indian Economy? The question here is how do you measure the overall size of an economy of a nation<\/span><\/p>\nThe size of a nation\u2019s overall economy is typically measured by its Gross Domestic Product (GDP). It involves\u00a0<\/span><\/p>\n\n- \n
\n- \n
\n- Counting of all the the production of goods and services (such as – smart phones, laptops, cars etc) within the nation\u2019s boundary<\/span><\/li>\n
- Finding their market value.\u00a0<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n
1.1.2 Definition<\/b><\/h5>\n
GDP is the <\/span>market value<\/span><\/span> of all the <\/span>final<\/span><\/span> goods and services<\/span> produced <\/span>within a country<\/span><\/span> for a given time period.<\/span><\/p>\n1.1.3 Breaking Down the Definition<\/b><\/h5>\n
The following things must be kept in mind while calculating the GDP of a country<\/span><\/p>\n\n- The word “domestic” in Gross Domestic Product pertains to the fact that only the goods and services produced within a country are counted in the GDP.<\/span>For example – an Indian company – Haldiram produces potato chips\u00a0 and USA company PespiCo also produces potato chips in India. Since both these companies produce Chips within India – their product will be considered for calculation of GDP of India. Similarly – Tata motors producing Car in Gujarat is counted in India\u2019s GDP. But, Tata motors producing Car in UK is not counted in India\u2019s GDP<\/span><\/li>\n
- Only <\/span>\u2018final\u2019<\/span> goods and services are included in the calculation of GDP. A final goods and services means goods and services meant for final consumption (for final user). It is unlike the intermediate goods and services which acts as component for final goods and services.<\/span><\/li>\n
- Goods and Services <\/span>produced during a certain period<\/span> (usually an year) is counted. In India, GDP is computed quarterly and yearly.<\/span><\/li>\n<\/ol>\n
1.2 Gross National Product (GNP)<\/b><\/h5>\n
GNP is another measure for National Income of the country.<\/span><\/p>\nIndian economy is not closed economy but an open economy. India has transactions with the rest of the world in the form of exports, imports loans etc. This give rise to the concept of national or domestic Income.<\/span><\/p>\nIn case of GDP, we calculate the market value of all the final goods and services produced within the country.\u00a0<\/span><\/p>\nHowever, It may be the case that resident of India work and earn in some other foreign countries. Similarly, Conversely, some production taking place within a country may be attributed to temporary and seasonal foreign labour.<\/span><\/p>\nThis is measured by the Gross National product.<\/span><\/p>\nIt is measured as the GDP plus the Net Factor income from Abroad<\/span><\/p>\n\n\n\n| GNP = GDP + \u2018Net\u2019 factor income from abroad<\/span><\/p>\n Net Factor income from abroad = income earned by the domestic factors of production employed in the rest of the world \u2013 Factor income earned by the factors of production of the rest of the world employed in the domestic economy.<\/span><\/p>\nFor example, in case of India<\/p>\n Net Factor Income from abroad will be = income earned by Indian resident in foreign countries – Income earned by foreign resident in India.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Let us understand this through an example.<\/span><\/p>\nMany Indians reside and work in Saudi Arabia. They earn their wages in the same country. The wages earned by Indians in Saudi Arabia will be counted in the Saudi Arabia\u2019s GDP. It will not be counted in the India\u2019s GDP<\/span><\/p>\nSimilarly, Switzerland firm Nestle produces Maggi in in India. This will be counted in the Indian\u2019s GDP.<\/span><\/p>\nGross national Product provides a way to capture the trans boundary economic activity of nationals.<\/span><\/p>\nFor example –\u00a0<\/span><\/p>\nProfits earned by Chinese Company Xiaomi by selling smartphones in India will not be included in the GNP of India. Similarly, Profits earned by ONGC Videsh from its subsidiaries in different countries will be included in the GNP of India.<\/span><\/p>\n1.3 Net National Product (NNP)<\/b><\/h5>\nFactors of production under go wear and tear. This wear and tear is called Depreciation. A part of capital is used for this wear and tear which is not used in production of goods and services.<\/span><\/p>\nIf we deduct depreciation from the GNP, we get is NNP<\/span><\/p>\n\n\n\n| Net National Product (@Market Price) = Gross National Product – Depreciation<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Now<\/span><\/p>\n\n\n\n| NNP (@Factor Cost) = NNP (@Market Price) – Taxes + Subsidies<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Note:<\/b><\/p>\n The Net National Product at factor cost is known as National Income (as mentioned in the class XI NCERT)<\/b><\/p>\n \u00a0However, the Central Statistics Office (CSO) under the Ministry of Statistics and Program Implementation defines National Income of India as Net National Income at Market Price<\/b><\/p>\n1.4 Personal Income (PI)<\/b><\/h5>\n Personal Income is the part of National Income which is received by the households.<\/span><\/p>\nThe formula for calculating Personal Income (PI) is<\/span><\/p>\n\n\n\n| Personal income (PI) \u2261 NI \u2013 Undistributed profits \u2013 Net interest<\/span><\/p>\n payments made by households \u2013 Corporate tax + Transfer payments to<\/span><\/p>\nthe households from the government and firms.<\/span><\/p>\nNote<\/strong><\/p>\n\n- \u00a0 Undistributed profits – these are the profits which is not distributed to\u00a0 \u00a0 \u00a0 \u00a0 the households<\/span><\/li>\n
- \u00a0 \u00a0Corporate Tax – It also does not accrue to the households\u00a0<\/span><\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n
1.5 Personal Disposable Income<\/b><\/h5>\nPersonal Disposable Income refers to the income that is available to the households that they can spent as they wish.\u00a0<\/span><\/p>\nAll the Personal Income is not available to individuals to spend. They have to pay taxes (eg – Income tax) and non tax payment such as fines.<\/span><\/p>\nThe formula for Personal Disposable Income is\u00a0<\/span><\/p>\n\n\n\n| Personal Disposable Income (PDI ) \u2261 PI \u2013 Personal tax payments \u2013 Non-tax <\/span>payments (such as fines etc)<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Thus, Personal Disposable Income is the part of aggregate income which belong to the households. They may decide to consume a part of it, and save the rest.<\/span><\/p>\n1.6 National Disposable Income<\/b><\/h5>\nNational Disposable Income gives us an idea of what is the maximum amount of goods and services the domestic economy has at its disposal<\/span><\/p>\nThe formula for National Disposable Income is\u00a0<\/span><\/p>\n\n\n\n| National Disposable Income = Net National Product at market prices + Other current transfers from the rest of the world<\/span><\/p>\n Note<\/span><\/p>\n\n- \u00a0Current transfers from the rest of the world includes items such as gifts, aids etc<\/span><\/li>\n<\/ul>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n
1.7 Private Income<\/b><\/h5>\nThe formula for Private Income is<\/span><\/p>\n\n\n\nPrivate Income = Factor income from net domestic product accruing\u00a0<\/span>to the private sector + National debt interest + Net factor income from <\/span>abroad + Current transfers from government + Other net transfers <\/span>from the rest of the world<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n2. Few important concepts to know<\/b><\/h3>\n2.1 Gross vs Net value added<\/b><\/h5>\nProduction factors such as machines, equipment, tools, factory buildings, tractors etc depreciate over a period of time during the process of production. It may be the case that after certain time these capital goods needs replacement.<\/span><\/p>\nThe capital used for the this wear and tear and is not part of any body\u2019s income.<\/span><\/p>\nThus we subtract depreciation from the GDP to get Net GDP<\/span><\/p>\nNet GDP = GDP – Depreciation<\/span><\/p>\nSimilarly, Net National Product (NNP) = GNP – depreciation<\/span><\/p>\n2.2 Current vs Constant Prices\u00a0<\/b><\/h5>\nNational income can be measured in terms of money in two ways –\u00a0<\/span><\/p>\n\n- At Current Prices<\/span><\/li>\n
- At Constant Prices<\/span><\/li>\n<\/ol>\n
2.2.1 National Income at Current Prices [Nominal National Income]<\/b><\/h5>\nIt means that goods and services which are produced in an year are valued at prices prevailing that year.<\/span><\/p>\nCurrent prices refer to the prices prevailing in the year in which goods and services are produced.<\/span><\/p>\nFor example – when goods and services produced during the year 2018-19 are valued at prices of the same year i.e. 2018-19, it will be called National Income at current prices for the year 2018-19<\/span><\/p>\nIn Simple Terms<\/span><\/p>\n | | | | | | |