© Copyright PCTI Group 2009 ANALYSIS OF NATIONAL INCOME.

© Copyright PCTI Group 2009

ANALYSIS OF NATIONAL INCOME


PRODUCTION PRODUCTION

INCOMEINCOME

EXPENDITUREEXPENDITURE


METHODS OF MEASURING NATIONAL INCOME

Value added method(output method)

(net value added by all producing units is

measured)

Income method(sum of all products

incomes is measured)

Expenditure method(sum of all items of final expenditure is

Measured)


Value Added Method Measures The Value Added Value Added Method Measures The Value Added (Contribution) By Each Producing Enterprises In The(Contribution) By Each Producing Enterprises In TheProduction Process In The Domestic Territory Of A Production Process In The Domestic Territory Of A Country In An Accounting Year.Country In An Accounting Year.

In A Simple Meaning In A Simple Meaning(Value Added Is Defined As The Difference Between(Value Added Is Defined As The Difference Between Total Value Of Output Of A Firm And Value Of Inputs Total Value Of Output Of A Firm And Value Of Inputs Bought From Other Firm) Bought From Other Firm)

VALUE ADDED METHODVALUE ADDED METHOD


SYMBOLICALLY :-SYMBOLICALLY :-

Net value added at FCNet value added at FC = = Gross output Gross output - intermediate consumption- intermediate consumption

(NVAfc)(NVAfc) --depreciation-net indirect taxesdepreciation-net indirect taxes

• value of output = sales + change in stock ( it is always value of output = sales + change in stock ( it is always at MP) at MP)

• ^i.e. gross output^i.e. gross output

• Value added = value of output - value of intermediate Value added = value of output - value of intermediate goodsgoods

» = gross product = gross value added at MP= gross product = gross value added at MP

• NVA at MP = GVA at MP –depreciationNVA at MP = GVA at MP –depreciation

• NVA at FC = NVA at MP – net indirect taxesNVA at FC = NVA at MP – net indirect taxes


THE INCOME METHOD:THE INCOME METHOD:

The Income method measures national income The Income method measures national income from the side of payments made to the primary from the side of payments made to the primary factors of production in the form of rent, wages , factors of production in the form of rent, wages , interest and profit for their productive services in interest and profit for their productive services in an accounting year .an accounting year .

Thus if factor incomes generated by all the Thus if factor incomes generated by all the producing units located within the domestic producing units located within the domestic economy during a period of account are added economy during a period of account are added up to, the resulting total will be Domestic income up to, the resulting total will be Domestic income or or Net Domestic Product at FC (NDP at FC)Net Domestic Product at FC (NDP at FC)


Income method (NDPat fc)Income method (NDPat fc)

Compensation of employees

Compensation of employees Operating SurplusOperating Surplus Mixed income of

self employed

Mixed income of self employed

RENTRENT INTERESTINTEREST

PROFITPROFIT

CORPORATETAX

CORPORATETAX DIVIDENDDIVIDEND

UNDISTRIBUTEDPROFIT

UNDISTRIBUTEDPROFIT


a) Domestic income a) Domestic income = rent + wages = rent + wages

+ interest + mixed income +profit + interest + mixed income +profit tax + dividend tax + dividend

+ undistributed profit + surplus of govt. sector + undistributed profit + surplus of govt. sector (if shown separately)(if shown separately)

or or = Compensation of employees = Compensation of employees

+ operating surplus + mixed income + operating surplus + mixed income


b)National incomeb)National income = = Domestic income + net factor Domestic income + net factor income from income from abroadabroad

1) 1) Private incomePrivate income = = National income - surplus of National income - surplus of government government sectional sectional types of transfer income types of transfer income including national debt interestincluding national debt interest..

2)Personal income2)Personal income = = National income - surplus of National income - surplus of goverment goverment sector - sector -corporate tax - undistributed profit corporate tax - undistributed profit

+ all types of transfer income + all types of transfer income including including national debt interest.national debt interest.

3) 3) Personal incomePersonal income = = Private income - corporate tax Private income - corporate tax - undistributed profit.- undistributed profit.

..


4) 4) Personal Disposable incomePersonal Disposable income = = personal income - personal personal income - personal taxes (including taxes (including

miscellaneous miscellaneous receipt of the receipt of the government).government).

5) 5) Personal Disposable incomePersonal Disposable income = = private income-corporate private income-corporate tax-undistributed profit - tax-undistributed profit - personal taxespersonal taxes

6) 6) Personal Disposable incomePersonal Disposable income = = National income National income -surplus of govt. sector-surplus of govt. sector

- corporate tax - corporate tax-undistributed profit -undistributed profit

+ all types of transfer + all types of transfer comecome -personal taxes-personal taxes

7) 7) Private incomePrivate income = = Income from domestic product accruing to Income from domestic product accruing to private sector + net factor income from private sector + net factor income from abroad + all types of transfer income abroad + all types of transfer income

including national debt interestincluding national debt interest


EXPENDITURE METHODEXPENDITURE METHOD :- :-Expenditure method measures final Expenditure method measures final

expenditure on Gross Domestic Product at expenditure on Gross Domestic Product at market price (GDP at MP) during a period of market price (GDP at MP) during a period of account .By adding up all the items of final account .By adding up all the items of final

consumption consumption expenditure and final and final investment expenditure within the domestic investment expenditure within the domestic

economy, we get the aggregate called GDP at economy, we get the aggregate called GDP at mp.i.e. why expenditure method is also mp.i.e. why expenditure method is also knows as' Consumption and investment knows as' Consumption and investment method' or' income Disposable method'. method' or' income Disposable method'.


MEASURES GDP by MEASURES GDP by expenditure methodexpenditure method

GDPmp = private final consumption GDPmp = private final consumption expenditure+ final investment expenditure expenditure+ final investment expenditure

( government final consumption ( government final consumption expenditure+ gross fixed capital expenditure+ gross fixed capital

formation+change in stock+net export).formation+change in stock+net export).

GDP = C+I+G+(X-M)GDP = C+I+G+(X-M)


GDP at sum of expenditureGDP at sum of expenditure

private consumptionExpenditure

by household (c)

private consumptionExpenditure

by household (c)Investment

Expenditure (I)Investment

Expenditure (I)Govt. purchases

of goods and services(G)

Govt. purchases

of goods and services(G)

Business fixed

investmentBusiness fixed

investmentInventory

investmentInventory

investment

ResidentialConstructionInvestment

ResidentialConstructionInvestment

Public investment

Public investment


AGGREGATE DEMANDAGGREGATE DEMAND ;- ;-Aggregate demand broadly refers to the total Aggregate demand broadly refers to the total demand for goods and services in the economy. aggregate demand is demand for goods and services in the economy. aggregate demand is

also defined as " the total amount of money which all Sections also defined as " the total amount of money which all Sections ( households, firms,government) are ready to spend on purchase of ( households, firms,government) are ready to spend on purchase of

goods services produced in an economy during a given period ”.goods services produced in an economy during a given period ”." Aggregate demand is the total expenditure on consumption and " Aggregate demand is the total expenditure on consumption and

investment “investment “AD = C+IAD = C+I

AGGREGATE SUPPLYAGGREGATE SUPPLY;- ;- Aggregate supply is the value of total output Aggregate supply is the value of total output available for purchase by the economy during a given period, sum of the available for purchase by the economy during a given period, sum of the

factor incomes (rent, wages, interest & profit)factor incomes (rent, wages, interest & profit) at national level is called NATIONAL INCOME. at national level is called NATIONAL INCOME.

A major portion of income is spent on consumption of goods and services A major portion of income is spent on consumption of goods and services and the balanced is saved;and the balanced is saved;

AS = C+S AS = C+S


consumption functionconsumption function:- meaning - The relationship :- meaning - The relationship between between consumption and income is called consumption function [ or propensity to consumption and income is called consumption function [ or propensity to

consume ].consume ].we may bifurcate consumption in two partswe may bifurcate consumption in two parts;;

(i) first part relates to consumption when income is zero (i) first part relates to consumption when income is zero i.e. i.e. when minimum level of consumption has to be maintained for survival. this when minimum level of consumption has to be maintained for survival. this

is called autonomous consumption [denoted by c]is called autonomous consumption [denoted by c]

(ii) second part of consumption is when income (ii) second part of consumption is when income increases,consumption also increases but by a lesser amount increases,consumption also increases but by a lesser amount

i.e.additional consumption (c) is less than additional income i.e.additional consumption (c) is less than additional income (y).this (y).this may be represented,by may be represented,by b(i.e.,marginal propensity to b(i.e.,marginal propensity to consume).thus consume).thus

consumption function may be represented in the following equation.consumption function may be represented in the following equation. c = c + by c = c + by


measured APC and MPCmeasured APC and MPC

AVERAGE PROPENSITY TO CONSUME ( APC)AVERAGE PROPENSITY TO CONSUME ( APC)The ratio of total consumption expenditureThe ratio of total consumption expenditure

to total income is called APC. to total income is called APC. APC = C/YAPC = C/Y

WHEREWHEREC = CONSUMPTION EXPENDITUREC = CONSUMPTION EXPENDITURE

AND AND Y = TOTAL INCOME Y = TOTAL INCOME

{ The value of APC may be greater { The value of APC may be greater than 1 when at very lowthan 1 when at very low

level of income , consumption exceeds incomelevel of income , consumption exceeds income to meet the very basic necessities to meet the very basic necessities(then saving becomes negatives).}(then saving becomes negatives).}


MARGINAL PROPENSITY TO CONSUME (MPCMARGINAL PROPENSITY TO CONSUME (MPC))

The ratio of change in consumption(c) to change in The ratio of change in consumption(c) to change in income (Y) is called marginal propensity to consume. income (Y) is called marginal propensity to consume. literally marginal means additional (or incremental) and literally marginal means additional (or incremental) and

propensity to consume means desire ( or urge) to propensity to consume means desire ( or urge) to consume. thus consume. thus MPC is the ratio of additional consumption MPC is the ratio of additional consumption to to additional additional income. it indicates the proportion of income. it indicates the proportion of additional income that is additional income that is

being spent on additional being spent on additional consumption. consumption.

MPC =C/YMPC =C/Y

Hence, MPC is always greater than zero (MPC > 0)and less Hence, MPC is always greater than zero (MPC > 0)and less than 1(MPC < 1)because additional consumption (c) is less than 1(MPC < 1)because additional consumption (c) is less than additional income (y). thus value of MPC liesthan additional income (y). thus value of MPC lies between between

0 and 1 0 and 1 }}


Circular Flow ofCircular Flow of Macro Macro Economic ActivityEconomic Activity

National income accounting calls for an understanding of the structure National income accounting calls for an understanding of the structure of the macro economy. A pictorial illustration of this inter-of the macro economy. A pictorial illustration of this inter-independence between the major sectors of economic activity is called independence between the major sectors of economic activity is called the circular flow of income and product. The circular flow of income the circular flow of income and product. The circular flow of income involves two basic principles:involves two basic principles:

a) In any exchange process, the seller or producer receive the same a) In any exchange process, the seller or producer receive the same amount that the buyer or consumer spends; andamount that the buyer or consumer spends; and

b) Goods and services flow in one direction and money payments to b) Goods and services flow in one direction and money payments to acquire these, flow in the return direction, thereby causing a cicular acquire these, flow in the return direction, thereby causing a cicular flow. So, the output or product or real flow from the seller to the buyer flow. So, the output or product or real flow from the seller to the buyer necessarily creates the income or payment or money flow from the necessarily creates the income or payment or money flow from the buyer to the seller.buyer to the seller.


There are two types There are two types of marketof market

• First, market for goods and services – First, market for goods and services – Product Product marketmarket; and ; and

• second, market for factors of production – second, market for factors of production – Factor Factor marketmarket..

Circular flow of income can be depicted in two-Circular flow of income can be depicted in two-sector, three-sector and four-sector models.sector, three-sector and four-sector models.


FinancialSystem HouseholdsFirms

© Copyright PCTI Group 2009 ANALYSIS OF NATIONAL INCOME.

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