National Income Accounting Class 12-Short Notes and hand outs

Class 12 - Macro Economics Hand Outs for Students on  National income accounting Compiled by Mr. Pankaj Bhanwani #9899971997 @Pankaj Bhanwani Board Covered - CBSE , ICSE Basic Definition National income is the (money) value of all the final goods and services produced by a country in a year. Gross domestic product (GDP): GDP is the money value of all final goods and services produced in the domestic territory of a country in an accounting year Before moving further must watch the video Domestic territory includes the following: 1) Territory lying within the political frontiers, including territorial waters of the country 2) Ships and aircraft operated by the residents of the country between two or more countries, fishing vessels, oil and natural gas rigs, and floating platforms operated by the residents of the country in the international waters or engaged in extraction in areas in which the country has exclusive rights of exploitation 3) Embassies, consulates and military establishments of the country located abroad. GDP at constant and current prices 1) GDP can be estimated at current as well as constant prices. If the GDP is estimated on the basis of the prevailing prices it is called GDP at current prices. In 1995-96, India's GDP at current prices was Rs. 8,57,570 crores - that is, measured on the basis of the prices prevailing in 1995-96. 2) If GDP is measured on the basis of some fixed prices - that is, prevailing at a point of time or in some base year - it is known as GDP at constant prices or real GDP. Th us, in 1995-96, the GDP was Rs. 2,36,738 crores at 1980-81 prices - that is, measured on the basis of the prices prevailing in 1980-81 Relationships of various aggregates A GNP at market price - depreciation = NNP at market price. A GNP at market price - net income from abroad = GDP at market price. A GNP at market price - net indirect taxes = GNP at factor cost. A NNP at market price - net income from abroad = NDP at market price. A NNP at market price - net indirect taxes = NNP at factor cost. A GDP at market price - net indirect taxes = GDP at factor cost. A GNP at factor cost - depreciation = NNP at factor cost. A NDP at market price - net indirect taxes = NDP at factor cost. Circular flow of income The circular flow of production, income and expenditure represents three related phases - production, distribution and disposal. These phases enable one to view national income in three ways - as a flow of goods and services, as a flow of incomes or as a flow of expenditure on goods and services. Corresponding to these phases, there are three methods of measuring national income. They are: value-added method (alternatively known as the product method); income method; and expenditure method. Precautions of all the methods of national income The following items need be included carefully: i) production of fixed assets by government, enterprises and households; ii) production for self-consumption; and iii) imputed rent of owner-occupied houses The following should not be included: i) sale of second-hand machines (because they were counted as a part of production in the year in which they were produced). (Brokerage and commission earned by the dealers of second-hand goods are a part of production and, hence, included while calculating the total value-added Income method: Factors of production pool their services for carrying out production activities. These factors of production are paid for their services in the form of factor incomes. Labor gets wages, land gets rent, capital gets interest and entrepreneur gets profits. Whatever is produced by a producing unit is distributed among the factors of production for their services and the aggregate of factor incomes of all the factors of production of all the producing units form the subject matter of calculation of national income by the income method. Transfer incomes are excluded from national income. Therefore, wages of labourers will be included, pensions of retired workers will be excluded from national income . Labour income includes, compensations in kind. Concept of mixed income of self employee It is difficult to separate labour income from capital income because in many instances people provide both labour and capital services as is the case with self-employed people such as lawyers, engineers, traders, proprietors, and so on. In sectors such as agriculture, trade, transport, and so on, of underdeveloped countries (including India), it is difficult to differentiate between the labour and capital elements of the people's incomes. For overcoming this difficulty, a new category of income, namely , mixed income, is introduced for incomes which are difficult to separate. Transfer incomes should not get included in the national income . Illegal incomes, windfall gains, death duties, gift tax and sale proceeds of second-hand goods are not included for calculating national income. Total expenditure in an economy consists of expenditure on financial assets, on goods produced in preceding periods, on raw materials, intermediate goods and services, and on final goods and services produced in the current period. Expenditure on financial assets which are produced and owned within the country is excluded, but expenditure on financial assets of foreign countries is included in national expenditure. But only the net expenditure, that is, the difference between expenditure on foreign financial assets by residents and expenditure on the country's financial assets by non-residents or foreigners is incorporated. The difference is known as net foreign investment. Expenditure on raw materials and intermediate goods and services are excluded, as otherwise, there would be double counting of some of the items.  Government expenditure on pensions, scholarships, unemployment allowance, and so on, should be excluded because these are transfer payments. Only expenditure on final goods and services produced in the period for which the national income is to be measured and net foreign investment are included in the expenditure method. These three methods should ideally lead to the same figure of national income and, therefore, national income of a country can be measured by these methods separately to get different views of the economy. Each method provides a check on the accuracy of the other.