UNIT – 6NATIONAL INCOME

&EMPLOYEMENT

SUBMITTED TO: SUBMITTED BMRS.SHWETA CHOUDHARY JAYPAL SINGH CHOUDHARY

ANUPMA TRIPATHI MBA SGSITS

NATIONAL INCOME

CONCEPTS & MEASUREMENT

INTRODUCTION It means the total value of goods and

services produced annually in a country.

It includes payments made to all resources in the form of wages, interest, rent and profits.

It is the money value of the end result of all

economic activities of the nation.

CONCEPTS OF NATIONAL INCOME Gross National Product: It is the total measure of the flow of

goods and services at market value resulting from current production during a year in a country, including net income from abroad.

GNP at Market Prices: When the total output produced in one year is multiplied by their market prices prevalent during that year in a country, plus net income from abroad, it is called GNP at Market Prices.

GNP at Factor Cost: It is the sum of the money value of the

income accruing to the various factors of production in one year in a country.

GNP at Factor Cost = GNP at market prices – Indirect Taxes + Subsidies.

CONCEPTS OF NATIONAL INCOME Net National Product (NNP): NNP is GNP net of

depreciation. NNP = GNP – Depreciation.

NNP at Market Prices: Net value of final goods and services evaluated at market prices: NNP at Market Prices = GNP at Market Price – Depreciation.

NNP at Factor Cost: Net output evaluated at factor prices.

NNP at Factor Cost = NNP at Market Prices – Indirect Taxes + Subsidies (or)

= GNP at Market Prices – Depreciation – Indirect taxes + Subsidies

CONCEPTS OF NATIONAL INCOME

Domestic Income or Product: Income generated or earned by the factors of production within the country from its own resources is called domestic income or domestic product. Domestic Income = National Income – Net Income earned from abroad.

Personal Income: Personal Income is the total income received by the individuals of a country from all sources before direct taxes. Personal Income = National Income – Undistributed Corporate Profits – Profit Taxes – Social Security Contributions + Transfer Payments + Interest on Public Debt.

METHODS OF MEASURING NATIONAL INCOME Product Method: Total value of final goods and services produced

in a country during a year is calculated at market prices.

Income Method: The net income payments received by all citizens of a country in a particular year are added up i.e. net incomes that accrue to all factors of production.

Expenditure Method: The total expenditure incurred by the society in a particular year is added together- includes personal consumption expenditure, net domestic investment, government expenditure on goods and services and net foreign investment.

Value Added Method: Difference between the value of material outputs and inputs at each stage of production is the value added.

DIFFICULTIES IN NATIONAL INCOME MEASUREMENT

Capital gains or loss to property owners excluded from GNP because they do not result from current economic activities.

There are a number of goods and services which are difficult to be assessed in terms of money.

The failure to distinguish properly between a final and an intermediate product.

Income earned through illegal activities are not included in national income.

Transfer payments- these earnings are a part of individual income and also government expenditure.

Public services cannot be estimated correctly

DIFFICULTIES IN DEVELOPING COUNTRIES

Lack of occupational specialization.

Several productive activities do not enter market transactions.

Many people do not keep accounts.

Adequate and correct production and cost data are not available.

Medium of Exchange Unit of Account Store of Value

Characteristics of Money:-

Categories of Money:- Definitive Money Broad Money

Money is any object or record that is generally

accepted as payments for goods and services and repayment of debts in

a given socio-economic context or country.

A number of items may qualify as media of exchange. The decision as to what items are to be included in the money supply remains an issue in economic debates.

There is no universally applicable empirical definition of money supply and the choice may vary dependent on what issue is being examined.

There are varying degrees of liquidity or “moneyness” depending on how easily an asset can be converted into other assets.

In economics, the money supply or money stock is the total amount of monetary assets available in an economy at a specific time.

There are several ways to define money but standard measures usually include currency in circulation and demand deposits.

Money supply is the total stock of assets that are generally acceptable as media of exchange within an economy at a particular time.

M0 and M1, also called narrow money, normally include coins and notes in circulation and other money equivalents that are easily convertible into cash

M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds.

M3 includes M2 plus longer-term time deposits and money market funds with more than 24-hour maturity. The exact definitions of the three measures depend on the country.

M4 includes M3 plus other deposits.

The different types of money are typically classified as "M"s. The typical layout for each of the "M"s is as follows:

Reserve money (M0) :- Currency in circulation + Bankers deposit with the RBI + Other deposit with the RBI.

M1 :- Currency with the public + Deposit money of the public (Demand deposits with the banking system + Other deposits with the RBI).

M2 :- M1 + Saving deposits with Post office saving banks.

M3 :- M2 + Time deposits with the banking system.

M4 :- M3 + All deposits with post office saving banks (excluding National Saving Certificates)

The Reserve Bank of India defines the monetary aggregates as

Why is the Money Supply Important ?

Money is used in virtually all economic transaction, it has a powerful effect on economic activity.

An increase in the supply of money works both through lowering Interest Rates which spurs investment and through putting more money in the hands of consumers, making them feel wealthier and thus stimulating spending.

Business firms response to increased sales by ordering more raw materials and increasing production.

The spread of business activity increases the demand for labour and rises the demand for capital goods.

In a buoyant economy, Stock Market Price rise and firms issue equity and debt.

Opposite effects occur when the supply of money falls or when its rate of growth declines.

FUNCTION OF MONEY

The Meaning of Money

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country.

The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past, a standard of deferred payment

Money is the set of assets in an economy that people regularly use to buy goods and services from other people

Functions of Money Generally, economists have defined four types of functions of

money which are as follows:

(i) Medium of exchange

(ii) Measurement of value

(iii) Standard of deferred payments

(iv) Store of value.

Medium of exchange - When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange.

- Right from the beginning, money has been performing aim important function as medium of exchange in the society. - Money facilitates transactions of goods and service as a medium of exchange. - Producers sell their goods to the wholesalers in exchange of money. Wholesalers sell the same goods to the consumers in exchange of money.

Measurement of value Money acts as a standard measure and common denomination of

trade. It is thus a basis for quoting and bargaining of prices.

It is necessary for developing efficient accounting systems. But its most important usage is as a method for comparing the

values of dissimilar objects

Standard of deferred payment While standard of deferred payment is distinguished by some

texts,particularly older ones, other texts subsume this under other functions.

A "standard of deferred payment" is an accepted way to settle a debt – a unit in which debts are denominated, and the status of money as legal tender, in those jurisdictions which have this concept, states that it may function for the discharge of debts.

When debts are denominated in money, the real value of debts

may change due to inflation and deflation, and for sovereign and international debts via debasement and devaluation.

Store of value To act as a store of value, a money must be able to be reliably

saved, stored, and retrieved – and be predictably usable as a medium of exchange when it is retrieved.

The value of the money must also remain stable over time. Some have argued that inflation, by reducing the value of money, diminishes the ability of the money to function as a store of value.

Money Base, M1 and M2 in the US from 1981 to 2012

Functions Of Money Primary Functions :

Economic function is to facilitate the interchange of goods and services .

Common medium of exchange. To achieve Unified Monetary system. Establish Economic order

Secondary Functions : Facilitating credit transactions . Standard of deferred payments. As a transmitter of value through time and space . As a general medium of payment, Indirect exchange

divides a single transaction into two separate parts which are connected merely by the ultimate intention of the exchangers to acquire consumption goods.

Value Of MoneyThe Concept -:

The central element in the economic problem of money is the objective exchange value of money, popularly called its purchasing power.

Subjective value of money is conditioned by its

objective exchange value, that is, by a characteristic that falls within the scope of economics.

Objective Exchange Value Of Money Objective exchange value (or value in business

transactions), is the most important kind of value, because it governs the social and not merely the individual aspect of

economic life.

“The objective exchange value of goods is their objective significance in exchange, or, in other words, their capacity in given circumstances to procure a specific quantity of

other goods as an equivalent in exchange.”

Derived from the human process of valuing individual

goods

Theory of the Value of Money

In the case of money, subjective use-value and subjective exchange value coincide both are derived from objective exchange value, for money has no utility other than that arising from the possibility of obtaining other economic goods in exchange for it.

By “the objective exchange value of money” the possibility of obtaining a certain quantity of other economic goods in exchange for a given quantity of money; and by “the price of money” this actual quantity of other goods. It is possible to express the exchange value of a unit of money in units of any other commodity and speak of the commodity price of money. For nowadays money is the sole indicator of prices.

Problems Involved in the Theory of the Value of Money

Must take account of the fundamental difference between the principles which govern the value of money and those which govern the value of commodities.

Not necessary at first to pay any attention to objective exchange value.

Must eliminate those determinants that arise from the properties of the monetary material as a commodity, since these present no peculiarity that could distinguish the value of money from that of other commodities. 

monetary theory must take the value of the monetary material that arises from its industrial usefulness as given.

Central and Commercial Banks

& their functions

In India, the definition of the business of banking has been given in the Banking Regulation Act, (BR Act), 1949.

According to Section 5(c) of the BR Act, 'a banking company is a company which transacts the business of banking in India.

Definition of banks

CENTRAL BANK 

INTRODUCTION:

A universal monetary institute in modern times.

Constitutes the apex of the money structure of an economy.

Acts as the leader of the money market .

Supervises, controls and regulates theactivities of commercial banks.

CENTRAL BANKS

India Reserve Bank of India.

U.S.A. Federal Reserve bank.

U.K. Bank of England.

Pakistan Bank of Pakistan.

                                                                                                                                                                                                        

                                                                                                                                                                                                                                                                                                                                                                                                                 

India Reserve Bank of India. U.K. Bank of England.

U.S.A. Federal Reserve bank. Pakistan Bank of Pakistan.

CENTRAL BANK 

“Institute charged with there sponsibility of managing the expansion and contraction of the volume of money in the interest of the general public welfare.”

DEFINITION

IMPORTANCE :

  To control credit.

  To issue Paper currency.

To iron out economic crisis.

To implement Monetary and financialPolicies.

ESTABLISHMENT OF RBI

.

Established in April 1935 with a share capital of Rs. 5 crores.

Nationalized in the year 1949. 

Initially established in Calcutta but permanently moved to Mumbai in 1937

MONETARY NON-MONETARY 

Issue of Currency Notes Bank’s Supervision

Bankers to Government DevelopmentFunctions

Banker’s Bank Data Collection

Credit Controller Research

Custodian of Forex Reserves Clearness

FUNCTIONS OF CENTRAL BANK 

CREDIT CONTROL MEASURES

GENERAL CREDIT CONTROLS SELECTIVE CREDIT CONTROLS

Bank Rate Ceiling on Credit

Open market operations Margin Requirements

Cash Reserve Ratio Directives

Statutory Liquidity Ratio Moral Suasion

Commercial Banks in India

The commercial banking industry in India started in 1786 with the establishment of the Bank of Bengal in Calcutta.

The Indian Government at the time established three Presidency banks,viz., the Bank of Bengal (established in 1809), the Bank of Bombay (established in 1840) and the Bank of Madras (established in 1843).

In 1921, the three Presidency banks were amalgamated to form the Imperial Bank of India, which took up the role of a commercial bank,a bankers' bank and a banker to the Government.

The Imperial Bank of India was establishedwith mainly European shareholders.

It was only with the establishment of Reserve Bank of India (RBI) as the central bank of the country in 1935, that the quasi-central banking role of the Imperial Bank of India came to an end

Commercial Banks in IndiaIn 1860, the concept of limited liability was introduced in Indian banking, resulting in the establishment of joint-stock banks.

In 1865, the Allahabad Bank was established with purelyIndian shareholders.

Punjab National Bank came into being in 1895. Between 1906 and 1913, other banks like Bank of India, Central Bank of India, Bank

of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.

After independence, the Government of India started taking steps to encourage the spread of banking in India.

In order to serve the economy in general and the rural sector in particular,the All India Rural Credit Survey Committee recommended the creation of a state-partnered and state-sponsored bank taking over the Imperial Bank of India and integrating with it, the former state-owned and state-associate banks

Functions of Commercial Banks

Primary Functions of Commercial Banks

Accepting Deposits : Commercial bank accepts various types of deposits from public especially from its clients. It includes saving account deposits, recurring account deposits, fixed deposits, etc. These deposits are payable after a certain time period.

Making Advances : The commercial banks provide loans and advances of various forms. It includes an over draft facility, cash credit, bill discounting, etc. They also give demand and demand and term loans to all types of clients against proper security.

Credit creation : It is most significant function of the commercial banks. While sanctioning a loan to a customer, a bank does not provide cash to the borrower Instead it opens a deposit account from where the borrower can withdraw.

Secondary Functions of Commercial Banks

Agency Functions: 

Various agency functions of commercial banks are:

To collect and clear cheque, dividends and interest warrant

To make payment of rent, insurance premium, etc.

To deal in foreign exchange transactions.

To purchase and sell securities.

To act as trusty, attorney, correspondent and executor.

To accept tax proceeds and tax returns.

General Utility Functions :

The general utility functions of the commercial banks includeTo provide safety locker facility to customers.

To provide money transfer facility.

To issue traveller's cheque.

To act as referees.

To accept various bills for payment e.g phone bills, gas bills, water bills, etc.

To provide merchant banking facility.

To provide various cards such as credit cards, debit cards, Smart cards, etc

.