Presentation on National Income by Dr. Suchita Singh

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About the Author: Dr. Shuchita Singh is presently working as Assistant Professor in JSS Academy of Technical Education, Noida. She has rich experience of 12 years of Teaching and Banking and Insurance Industry. She is awarded with her doctorate from CMS, Jamia Millia Islamia, Delhi. Her area of expertise is Behavioural Finance and also authored the book for the same, prescribed in UPTU. She has more than 10 publications in National and Refreed Journals. She has attended and presented papers in many National and International Conferences. She is also a registered advisor in AMFI.

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INTRODUCTION: NATIONAL INCOME : INTRODUCTION: NATIONAL INCOME Definition: National Income is the monetary value of all the final goods and services produced by a country during a period of one year. Related Concepts: Gross Domestic Product is the money value of all final goods and services produced in the domestic territory of a country during an accounting year. Domestic Territory is including territorial water, ships and aircrafts operated, fishing vessels, oil and natural gas rigs and embassies GDP at Current Price GDP at Factor Cost Symbolically, GDP (F.C)= GDP (M.P)-IT+S   INDIA IS 9 TH LARGEST ECONOMY BY CALCULATING NOMINAL GDP

Related Concepts Contd. : Related Concepts Contd. Net Domestic Product is calculated after setting aside the depreciation allowance from the GDP. Hence, NDP= GDP- Depreciation Allowance Gross National Product is calculated after considering the contribution of non – resident producers in the form of wages, rent interest etc. Gross National Product is defined as the sum of Gross Domestic Product and Net Factor Income from Abroad. Symbolically, GNP= GDP+NFIA Net National Product is calculated as a sum of Net domestic product and Net Factor Income from Abroad. Symbolically, NNP= NDP+NFIA

Net National Product or National Income : Net National Product or National Income When the Net National Income is calculated at factor cost, it is defined as National Income. Symbolically, NI or NNP(F.C)= NNP(M.P)-IT+S or NI= FID+ NFIA Where FID is Factor Income From Domestic Territory NFIA= Net Factor Income from Abroad National income is further divided in Personal Income and Personal Disposable Income

International Comparison of GDP : International Comparison of GDP International Comparison of GDP provides an estimation about the living standards of various different countries. As the exchange rate of currency across the countries is not stable, hence converting GDP in US Dollars may give misleading results. Another method of comparison of GDP at International Level and checking the standard of living in various countries, is the calculation of Purchasing Power Parity (PPP). PPP is a method which adjusts the different relative prices across the countries before making comparison in common currency. In other words NI at Factor cost is also called PPP. INDIA IS 3 RD LARGEST ECONOMY BY PPP

WHY TO ESTIMATE NATIONAL INCOME : WHY TO ESTIMATE NATIONAL INCOME Calculation of National Income provides an estimation of national expenditure, further divided in consumption and investment. Provides the structure of economy by calculating the income from different sectors. Helpful in a estimating income distribution in the country. Helpful in forecasting the growth and contribution of different economic sectors. For comparing the performance of public and private sector. Helpful in doing economic planning for the country. Comparison of living standard across the nations. Helpful in collecting data for poverty and productivity across society and economic sectors respectively.

METHOD FOR MEASUREMENT OF NATIONAL INCOME : METHOD FOR MEASUREMENT OF NATIONAL INCOME There can be three perspectives to look at the measurement of national income: As a flow of goods and services As a flow of income As a flow of expenditure on goods and services. Hence there are three methods to calculate the national Income. Value Added (Product) Method Income Method Expenditure Method

METHODs Contd. : METHODs Contd. Product Method: It calculates the contribution of each producing enterprise in domestic territory. Steps of calculation are below: Identifying and classifying enterprises in Industrial Sectors. Industries are divided in Primary (A), Secondary (B) and Tertiary Sectors (C). Estimating Net Value added by each producing enterprise. Net value is calculated by subtracting Depreciation form the Gross value added by products and services across the sectors.

Product Method contd. : Product Method contd. Precautions for Calculation: Items to Include Production for self consumption Imputed rent for self occupied house Brokerage earned by dealers for second hand sale Net increase in value of inventories Items not to Include Sale of Second hand Machines Value of services provided by Housewives Value of Intermediate Goods

INCOME METHOD : INCOME METHOD In this method National Incomes is estimated by adding incomes earned by all the factors of production for their factor services during the accounting year. The Domestic Factor income is calculated as a sum of total payments received by all the factors of production in domestic Territory. Precautions for Calculation: Transfer Income like, pension of retired workers, gifts and donations are to be excluded from National Income Imputed Income to be excluded Income earned through illegal activities Windfall gains like lottery income to be excluded Money received for sale and purchase of second hand goods. Limitations : Difficult to separate Capital Income and Labour Income

EXPENDITURE METHOD : EXPENDITURE METHOD According to this method, GDP is the sum total of all the final expenditures on various goods and services within the domestic territory of a country in an accounting year. The difference of net expenditure and expenditure on county’s assets by foreign residents is defined as net foreign investment. Precautions for Calculation: Goods produced in preceding years to be excluded Expenditure on Intermediate goods to be excluded Government Expenditure on pensions and scholarships to be excluded. Expenditure on purchase of bonds and shares to be excluded

PROBLEMS IN ESTIMATION OF NATIONAL INCOME : PROBLEMS IN ESTIMATION OF NATIONAL INCOME Availability of basic data required for calculation. Identification of stage of economy at which national income to be calculated Goods and Services should be measurable in monetary terms. Barter Transactions are not included. Income from unorganized and non registered enterprises can not be calculated. Services of house wife is not calculated in monetary terms Errors occurred because of Double Counting of Income

DOUBLE COUNTING : DOUBLE COUNTING When the benefits and contributions from different goods and services occur more than once, while calculating the National Income, it is defined as “ Double Counting Error”. e.g., Development of Highways and bridges to facilitate transportation, but different people derive different attached utilities from these services.

PER CAPITA INCOME : PER CAPITA INCOME Per capita Income is the average income of an individual living in a country. It is calculated by using the below mentioned formula: Per Capita Income= National Income at constant Prices/ Mid year Population Per Capita Income signifies the standard of living of citizens of a country. Causes for low Per capita Income in India: Growing Population Less Developed Infrastructure Resources are not utilized in economical manner Inflation

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