Macro Economics
Learning Outcome
To understand the meaning of Macro economics
To understand the scope of Macro economics
To understand the importance of Macro economics
Methods of measuring national
income
Product (or Output) Method
Income Method
Expenditure Method
Product (or Output) Method
Product method is also called Value Added Method or
Industrial Origin Method
The market value of all the goods and services produced in the
country by all the firms across all industries are added up
together.
Steps of Value Added or Product Method:
Step 1 : Identification and Classification of Producing
Enterprises
a) Primary Sector: refers to that sector wherein
goods are produced by exploiting natural
resources
b). Secondary Sector: This sector is also called
manufacturing sector. Enterprises of this sector
transform one type of good into another type.
c) Tertiary Sector: provides services and so is called
service sector. It includes trade, hotels, transport and
communication, financing, insurance. Service alone
are provided by this sector. Public administration and
defence and other services also form part of it.
Step 2: Estimation of Value Added
• Value added is the difference between value of
output of an enterprise and the value of its
intermediate consumption (non-factor inputs).
• Value added = Value of output- Value of non-factor
input
• Value of Output= Sales + Change in stock (C.S –O.S)
Value added may be of the following kinds:
1. Gross Value added at Market Price: Gross value
added is the difference between value of output
and intermediate goods. Gross domestic value
added is equal to gross domestic product at
market price.
2. Net Value Added at Market Price
3. Net Value Added at Factor Cost
Estimating Value Added
Item Producing Value of Cost of Value Added
Enterprise Output (Rs) Intermediate
Goods
Farmer 600 200 400
Flour Mill 800 600 200
Baker 1000 800 200
Shopkeeper 1200 1000 200
Total 3600 2600 1000
Limitations of Product Method
Problem of Double Counting:
– unclear distinction between a final and an intermediate
product.
Not Applicable to Tertiary Sector:
– This method is useful only when output can be measured
in physical terms
Exclusion of Non Marketed Products
– E.g. outcome of hobby or self consumption
Self Consumption of Output
– Producer may consume a part of his production.
Product (or Output) Method
The market value of all the goods and services produced
in the country by all the firms across all industries are
added up together.
Process
– The economy is divided on basis of industries, such as agriculture,
fishing, mining and quarrying, large scale manufacturing, small
scale manufacturing, electricity, gas, etc.
– The physical units of output are interpreted in money terms
– The total values added up. (GDP at market price)
– The indirect taxes are subtracted and the subsidies are added.
(GDP at factor cost)
– Net value is calculated by subtracting depreciation from the total
value (NDP at factor cost).
Limitations of Product Method
Problem of Double Counting:
– unclear distinction between a final and an intermediate
product.
Not Applicable to Tertiary Sector:
– This method is useful only when output can be measured
in physical terms
Exclusion of Non Marketed Products
– E.g. outcome of hobby or self consumption
Self Consumption of Output
– Producer may consume a part of his production.
Income Method
The net income received by all citizens of a country in a particular year,
i.e. total of net rents, net wages, net interest and net profits. (GDP at
factor cost).
It is the income earned by the factors of production of a country.
Add the money sent by the citizens of the nation from abroad and
deduct the payments made to foreign nationals (individuals and firms)
(GNP at factor cost) or Gross National Income (GNI).
Process:
• Economy is divided on basis of income groups, such as wage/salary
earners, rent earners, profit earners etc.
• Income of all the groups is added, including income from abroad and
undistributed profits.
• The income earned by foreigners and transfer payments made in the
year are subtracted.
GNI = Rent + Wage + Interest +Profit + Net Income from Abroad- Transfer
payments
Step-I
• Identification and classification of producing
enterprises
Primary Sector
Secondary Sector
Tertiary sector
Step-II
• Classification of factor income
• Factor income: a factor income refers to income
earned by a person as a reward for rendering his
factor services.
• Factor income are only earned incomes. It does not
include that income which is not earned.
Step-II
• National income= sum of all the factor incomes
Classification of factor incomes
• Compensation of employees: wages and salaries,
payment in kind, employers contribution to social
security schemes, pension on retirement.
• Operating surplus: it is the income from the
property and entrepreurship. [Link], interest,
profit etc
• Mixed income= it refers to the income of the self
employed persons using their labor land capital
• Net factor income
Precautions while estimating factor
income
• Transfer payment
• Income from illegal activities
• Sale proceeds of second hand goods
• The sale proceeds of shares and bonds are not included in
national income
• Windfall gains should not be included.
• Imputed rent of owner houses is included in NI
• Indirect taxes like sales tax excise duty tend to increase the
market price of goods and services. These are included in the
estimation of national income at market prices but are not
added while calculating national income at factor cost
• Income tax is paid out of compensation of
employees. It should not be added separately in the
estimation of national income.
Limitations of Income Method
Exclusion of non monetary income: Ignores the non-
monetized section of economic activities.
Exclusion of Non Marketed Services: People undertake
a particular activity that are difficult to ascertain in money
value. E.g. mother’s services to the family.
Expenditure method
• One man’s income is another man’s expenditure
• Therefore national income can be arrived at by
adding the total expenditure of individual and
business firms during a year
• Expenditure or outlay on final products takes place
in three ways
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Expenditure method
Expenditure or outlay on final products takes place
in three ways
Expenditure by consumers on goods and services(
Consumption Expenditure)
Expenditure by entrepreneurs on capital or
investment goods (Investment Expenditure)
Expenditure by government on consumption and
capital goods (Government Expenditure)
Net Exports
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Expenditure method
The formula for this method is
Y = C + I + G +(X-M)
• Here Y stands for total expenditure
• C stands for consumption expenditure
• I stands for investment expenditure
• G stands for Government expenditure
• (X-M) Difference between exports and imports
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Limitations
Neglects Barter System
Ignores over consumption
Affected by Inflation
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Difficulties in the computation of
National Income
In backward economies like India, particularly in the rural sector, the
cultivators and small producers are illiterate and they do not keep books of
account. This is a serious difficulty in the calculation of national income
Avoidance of double counting becomes complicated
Existence of Non-monetized sector is dominant
The village money lenders maintain absolute secrecy of their transactions
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Uses of National Income Data
National income is the most dependable indicator of a country’s economic
health.
Difference between GDP and GNP indicates the contribution of net income
earned abroad
Necessary for Economic planning: useful aid in judging which sectors should
be given more emphasis
A measure of economic welfare.
• higher aggregate production implies more and more goods and services being available to people
Helps in determining the regional disparities, income inequality and level of
poverty in a country.
Helps in comparing the situations of economic growth in two different
countries.
Summary
GDP is the sum of money values of all final goods and services produced within
the domestic territories of a country during an accounting year. It can be
measured at current or constant prices.
GNP is the aggregate final output of citizens and businesses of an economy in
one year. NNP is GNP less depreciation.
The average income of the people of a country in a particular year is per capita
income for that year.
National income can be measured by product method, income method and
expenditure method.
National income accounting data are of utmost importance for the economy of
any country; such data reveal the aggregate production of the economy and
also help to determine the total expenditure and total income of that country.
Difficulties in measuring national income include multiple counting, exclusion of
non market transacted services, self consumption of output, inflation or
deflation, confusion about informal sector, etc.
National income is considered as a measure of economic welfare. As national
income rises, the aggregate production of goods and services rises. Therefore,
there is a positive relation between increase in national income and welfare.
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