EEP-4 National Accounts Prof. Tarun Das

8/9/2019 EEP-4 National Accounts Prof. Tarun Das

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Prof. Tarun Das, IILM EEP Session-2 1

Economic Environment andPolicy

Session-4: National Income-GDP,GNP,NDP, NNP

Prof. Tarun Das, Ph.D.Formerly, Economic Adviser, Ministry ofFinance


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Contents of this presentation

1. An introduction to UN System ofNational Accounts (UN-SNA)

2. Basic concepts of national incomeand circular flows of income,expenditure, production

3. Basic concepts of GDP, GNP, NDP,NNP

4. Closed versus open economy, andThree Gaps Analysis

5. Examples from Indian Economy


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1. UN Systemof National Accounts


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1.1 What is UN System ofNational Accounts (UN-SNA)

A coherent, consistent, integrated system thatmeasures stocks of resources and production,flow and distribution of goods and servicesproduced by these resources

Resources: Human, Natural, Produced Production- Goods and services

Distribution- Consumption, investment, exports


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1.2 Resources of the Country

HumanHuman

resourcesresources

NaturalNatural

resourcesresources

ProducedProducedresourcesresources

FinancialFinancial

resourcesresources


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1.3 Human Resources-Population

(Children, Adult, elderly)

Provides labour for the economy- mostimportant means of production

Can reproduce itself Capable of managing other resources Consumes and uses other resources Basic object of economic and social

development- Enhancing general welfareof the people is the basic task of anygovernment


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1.4 Natural Resources(Air, Land, Water, Atmosphere, Bio,

Forest) Provides means and material

inputs for production

Absorb waste and residuals Reproduce itself, mostly

Provide basic consumption

services and environment for living


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1.5 Produced Services(Buildings, Infrastructure,

Transports, Goods in Inventories,

Livestock etc.) Result of production process.

Used as means or material inputs forproduction

Help economic growth and development


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1.5 Financial Services(Currency, Deposits, Bonds, Equities

etc.)

Used as medium of transactions Used as store for assets and wealth

Facilitate economic development

Provide means for flows and use ofresources

Most financial resources have

counterpart liabilities


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2. Basic Concepts of

National Accounts


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2.1 Stocks and Flows

All data recorded in National Accounts

are either flows or stocks.

Stock is the value of an economicvariable at a point of time.

Flow is the change of value of anyeconomic variable during the accountingperiod.

Example: Income is a flow, wealth is a

stock. Investment is a flow, capital is a stock.


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2.2 OPENING STOCK OF RESOURCE

HumanHumanProducedProducedNaturalNaturalFinancialFinancial

PRODUCTIONPRODUCTION

IncomeIncome Goods & ServicesGoods & Services ResidualsResiduals

Intermediateconsumption

Final

ConsumptionAccumulation Exports

DISTRIBUTION & USEDISTRIBUTION & USE

CHANGE:

human

CHANGE:

produced, natural, financial+Other changes

(volume, price)

CLOSING STOCK OF RESOURCES

HumanHumanProducedProducedNaturalNaturalFinancialFinancial


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2.3 Three Broad Types ofProduction

1. Primary Production- Extracting goodsand services from natural resources(agriculture, fishery, forestry, mining)

2. Secondary Production- Transforminggoods into other goods- (manufacturing,

construction, utilities i.e. electricity, gas andwater supply)3. Tertiary Production- Services- remaining

economic activities- (Trade, hotels andrestaurants; Transport, storage and

communications; Financial, insurance andbusiness services, Real estate and Housing;Public Administration, Defense, Community,Personal and other services.


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2.4 Generation of Income andUses

Resources Primary Incomes

Human Compensation tolabor

Natural: Rents, Royalties,

CessLand RentMinerals Royalty, CessForestry Royalty, Cess

Produced Factor cost, market

priceFinancial InterestEntrepreneurship Profits

Technology Royalty


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2.5 Distribution of Goods andservices

1. Final Consumptiona) Household consumption expenditureb) Private non-profit institutions final

consumption expenditurec) Government final consumption

expenditure

2. Accumulation (Investment)a) Fixed capital formationb) Additions to stocks and inventoriesc) Improvement I the value of natural

assets

3. Exports- Net of Imports


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2.6 National Accounts Economic

AgentsP

Households

Non-ProfitInstitutions

ServingHouseholdsRest Of World

(ROW)

General Government

(Central, State, Local)

Non-FinancialCorporations

FinancialCorporations


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Govt.

Households/

Consumption

Consumption

Expenditure

Income

Govt.

Expenditure

Financial

Market

Saving

Invest-

mentRest of

the

World

Imports

Exports

2.7 Circular Flow ofIncome and Expenditure

Taxes

Firms/Production


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3.1 Basic Concepts-GDP, GNP, NDP, NNP.

Gross Domestic ProductGross Domestic Product ((GDP) is the totalGDP) is the totalvalue of all final goods and servicesvalue of all final goods and servicesproduced within the geo-politicalproduced within the geo-politicalboundary of an economy in one-yearboundary of an economy in one-year

periodperiod.. Gross National ProductGross National Product ((GNP) is theGNP) is the

aggregate final output of citizens andaggregate final output of citizens andbusiness houses of an economy,business houses of an economy,

irrespective of their locations in theirrespective of their locations in theworld, within one year.world, within one year. Thus GDP is a residency concept, while Thus GDP is a residency concept, while

GNP is a nationality concept.GNP is a nationality concept.


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3.2 Basic Concepts-GDP, GNP, NDP, NNP.

GNP of India = GDP of India + NetGNP of India = GDP of India + NetFactor Incomes from abroad toFactor Incomes from abroad toIndiaIndia

Net Factor Incomes from abroadNet Factor Incomes from abroadto Indiato India= Incomes of Indian factors of= Incomes of Indian factors of

production earned abroadproduction earned abroad minusminus

Incomes of foreign factors ofIncomes of foreign factors ofproduction earned within Indianproduction earned within Indianterritory.territory.


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3.3 Three Basic Methods

for GDP Estimation1) Production Method

2) Income Method

3) Expenditure method


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3.4 Production Methodalso called Value Added method

(a)Value Added Method:

GDP of an economy is the monetary value ofproduction of all goods and services (alsocalledproducts), counted without duplication.

It is the sum of gross value added of allresident producer units within the economicborders of a country during a given period oftime.

Value added =Final price of Final price of aproduct less value of all intermediate goodsand services used to produce it


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3.5 Income MethodAlso called Factor Shares Method

(b) Factor Shares method: GDP is equal tothe sum of primary incomes (wages,rent, interests and profits) distributed byresident producer units.

Y = W + R + r + Where

W = Wages, salaries, compensation tolabor

R = Rent earnings of landr = Interest earnings of Capital

= Profits earned by entrepreneurs


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3.6 Expenditure Method

(c ) Alternatively, GDP is equal to the sum

of final uses of goods and services, orexpenditures less value of imports ofgoods and services.

Y = C + G + I +Stocks +X-MWhereC = Private consumption expenditureG = Government consumption expenditureI = Investment

Stocks = InventoriesX = Exports of goods and servicesM = Imports of goods and services


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3.7 Scope and Coverage of GDP1. GDP includes:a) All goods & services for which producers receive

compensation.b) Illegal and Concealed production.c) Production of goods for own consumption.d) Production of services by government and non profit

organization (pensions, provident, social security funds,trusts etc).

e) Services of own occupied dwelling unitsf) Domestic and personal services produced by householdsfor own consumption

2. GDP excludes:a) Production of Personal and domestic services by unpaid

Household member for own use

b) Social activities, Cultural activities and Unpaid Volunteersin NPI or Governmentc) Do-it-yourself decoration, Maintenance and Small Repairs

to Durables and Dwellings by Households


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3.8 Sectoral Disaggregation

For obtaining Gross Value Added (GVA) economy is divided into

mutually exclusive sectors (industries) Sectors include:1. Agric ulture and all ied-1.1 Agriculture,

1.2 Forestry and logging,

1.3 Fishing

2. Indu stry 2.1 Mining and Quarrying,

2.2 Manufacturing,

2.3 Electricity, gas and water,

2.4 Construction

3. Servi ces-3.1 Trade, hotels and restaurants;

3.2 Transport, storage and communications;

3.3 financial, insurance, real estate and business services;

3.4 community, social and personal services .


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3.9 Factor Cost versusMarket prices

Factor Cost: amount received by the producer frompurchaser for a unit of output, excluding taxes and duties

on products. It is factory gate or farm gate price.

Market Price = Factor Cost + Taxes and duties less

subsidies received from the government.

GDP at market price = GDP at factor cost

+ taxes less subsidies on products

GDP at factor cost = GDP at market price lesstaxesplus subsidies on products


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3.10 Gross / Net Domestic Product(GDP / NDP)

The Capital Stock (producedresource in the form of buildings,infrastructure, machinery &equipment) attracts Consumptionof Fixed Capital (CFC) in theprocess of production

Net Domestic Product (NDP) isobtained by subtracting the CFCfrom GDP:

NDP = GDP CFC GDP = NDP + CFC


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3.11 National vs. Domestic Income

Gross Domestic Income (GDI)plusprimary incomes receivable from ROW

lessprimary incomes payable to ROW

= Gross National Income (GNI) GDI + Net primary income earned from abroad

= Gross National Income (GNI)

NDI + Net primary income earned from abroad= Net National Income (NNI)

3 12 Gross National Disposable


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3.12 Gross National DisposableIncome (GNDI), Gross Savings, and

Gross Capital Formation

All GNI is not available for final uses domestically.

Some of the income is transferred to other countries,and vice-versa.

Gross National Disposable Income (GNDI)= GNI + current transfers from the ROW

- current transfers to the ROW

= GNI + Net current transfers from the ROW Gross National Disposable Income (GNDI)

= Final Consumption Expenditure + Gross SavingsGross Capital Formation = Gross savings + netcapital

transfers from the ROW = Investment

Gross Capital Formation = Gross Fixed Capital Formation+ Change in Stocks


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4.1 Closed Economy with Government

Two sector model: Households and BusinesSector

Y = C+S Income allocation Y = C+I Expenditure approachEquilibrium condition: S = I

Three sector model: Households, Business,

Government Y = C+S+T Income allocation Y = C+G+I Expenditure approachSo S+T = G+I Or, S-I = G-TSavings-Investment Gap equals Fiscal

Deficit.Alternatively, S + (T-G) = IPrivate savings plus government savings

equal investment.


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4.2 Open Economy withGovernment

Four sectors- households, business,government and external sector

Y = C+S+T-PTF Income allocation Y = C+G+I+X-M Expenditure

approach

Where PTF = Net private transfer fromabroadSo C+S+T = C+G+I+X-MOr, S+T-PTF = G+I +X-MOr, (S-I) + (T-G) = (X-M)+PTF

(Private Savings-Investment Balance)plus Government Fiscal Balance equalsCurrent Account Balance on ExternalAccount


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4.3 National Accounts for India

N a t i o n


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4.4 National accounts balances for Indiaat constant 1999-2000 prices Rupeesbillion

8 . N e t f a

Thank o


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Prof Tarun Das IILM EEP Session-2 34

Thank you Have a Good Day

EEP-4 National Accounts Prof. Tarun Das

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