Module 6

Macro Economic Analysis and Policy

Dr. Prasanna Kumar Y N

BBM, MBA(HR&FINANCE), (PhD-MANAGEMENT),
[Link]
 National Income
• National Income or National product is a
monetary measure of the income generated
from within country plus net income received
from abroad during a year
 Aggregates of National Income
1. GDP at Market price
2. Gross national product at market price
3. Net national product at market price
4. Net domestic product at market price
5. Net domestic product at factor cost
6. Gross Domestic product at factor cost
7. Net National product at factor cost
8. Gross national product at factor cost
9. Private income
10. Personal Income
11. Personal Disposable Income
12. National Disposable Income
1. GDP at Market price
• It is the value of money of all final goods and
services produced in the domestic territory
of a country in a years time.
• GDP at Market price=market price of goods
produced+ Market price of service produced.
• GDP= P(O)+P(S)
• Where P= price per unit, O= Physical
commodities, S= physical services
 [Link] national product at market price

• GNP at market price is defined as “the market

value of all the final goods and services produced
in the domestic territory of a country by normal
residents during an accounting year including net
factor income from abroad.
• It is the sum of Gross domestic product and net
factor income from abroad
• GNP= GDP at Market price-NFIA
• DGP= Gross domestic product, NFIA- Net factor
income from abroad
 Difference between GDP and GNP
Basis For Comparison GDP GNP
Meaning The worth of goods and It refers to the money
services produced within value of all final goods and
the geographical limits of services by the normal
the country is known as residents of a country
Gross Domestic Product
(GDP
Nature It is a territorial concept as It is a national concept
it is concerned with the because it is concerned
domestic territory of a with the normal residents
country of a country
Basis Location Citizenship
Calculation price=market price of GNP = GDP - NFIA
goods produced+ Market
price of service produced
Scale of operation On a local scale On international scale
Focus on Domestic production Production by nationals
Basis For Comparison GDP GNP

Outlines The strength of the How the residents are

country's domestic contributing towards the
economy. country's economy.
Excludes The goods and services that The goods and services that
are being produced outside are produced by the
the economy are excluded. foreigners living in the
country are excluded.
Highlights It highlights the strength of It highlights
the country’s economy. the contribution of the
residents to the
development of the
economy
 [Link] national product at market price

• It is defined as the market value of the output

of final goods and services produced by the
normal residents of an economy in its
domestic territory during the accounting year
exclusive of depreciation and inclusive of net
factor income from abroad.
• NNP at Market price= GNP-Depreciation
• NNP at MP= GDP+NFIA-Depreciation
 4. Net domestic product at market price

• It is defined as the money value of final goods

and services produced by the residents within
the domestic territory of a country in year of
time with less consumption of fixed capital.
• NDP at MP= GDP- depreciation consumption
of fixed capital.
• NDP= NNP- NFIA
[Link] domestic product at factor cost
• It is defined as the total factor incomes earned by
the factors of production.
• NDP at FC= NDP at MP- Indirect taxes + Subsidies
6. Gross Domestic product at factor cost
• It can be estimated as the sum of domestic factors
incomes and consumption of fixed capital.
• In order to get more realistic results, indirect tax
has to be deducted and subsidies should be added.
• GDP at FC= GDP at MP-IT+S
• IT= indirect tax, S= subsidies
7. Net National product at factor cost
NNP at FC= NNP at MP-Net indirect Tax.
8. Gross national product at factor cost
GNP at FC= GNP at MP- Net Indirect Tax.
9. Private Income:
• It refers to that income which accrues to private
sector from all the sources, both within
domestic territory as well as from the rest of the
world.
• Private Income= NDP at FC- Income from
domestic product accruing to public sector+
Current transfer+NFIA
10. Personal Income:
• It is sum total of income actually received by a person
from all the resources in the form of current transfer
payments and factor incomes
• Personal Income= Private income-Corporation Tax-
Undistributed profits less Net retained earnings of
foreign companies
11. Personal Disposable Income:
• It is the part of personal income which the households
can spend the way they like. It reflects the purchasing
power of the households. Disposable income is either
spent or saved.
• Personal disposable income= Personal income-Direct
taxes- Miscellaneous Govt. receipts
12. National Disposable income(NDI)
• It refers to the net income at market price
available to a country for disposable.
• NDI= National Income+ net indirect tax+ net
current transfers from the rest of the world.
Methods of Measuring National Income
• There are mainly three methods of measuring
national income
1. Value added method
2. Income Method
3. Expenditure Method
 [Link] added method
• This method denotes the value added by various
enterprises at every level, starting from production to
the final sale.
• This method focuses on calculating this added value to
products to determine the national income of a country.
• It is determined by finding the distinction between the
value of output and value of intermediate consumption.
• Value Added or Value Addition = Value of Output -
Intermediate Consumption
• value of output: It stands for the market value of goods
produced by an enterprise during a financial year.
• Intermediate consumption: It stands for the value of
non-factor inputs like the value of raw materials
• Ex: Here is an example to clarify this point further,
a baker buys flour worth Rs.100 from a miller and
then converts that flour into bread worth Rs.120.
• Here, flour is an intermediate good valued at
Rs.100, and its value is regarded as ‘intermediate
consumption’.
• Bread, an output product valued Rs.120, is
regarded as ‘value of output’.
• Therefore, the difference of Rs.20 is the ‘value-
added’ and it is the net value added to the
economy by the baker.
 2. Income Method
• The Income Method measures national
income from the side of payments made to
the primary factors of production in the form
of rent, wages, interest and profit for their
productive services in an accounting year.
• Thus, national income is calculated by adding
up factor incomes generated by all the
producing units located within the domestic
economy during a period of account
 Steps Involved: Income Method

• Following are the main steps involved in estimating national

income by income method:
(i) Identify enterprises which employ factors of production
(land, labour, capital and enterprise).
ii) Classify factor payments into various categories like rent,
wages, interest, profit and mixed income (or classify factor
payments into compensation of employees, mixed income
and operating surplus).
(iii) Estimate amount of factor payments made by each
enterprise.
(iv)Sum up all factor payments made within domestic territory
to get Domestic Income (NDP at FC).
(V) Estimate net factor income from abroad which is added to
Domestic Income to derive National Income.
Income Method Formula
• National Income (NNPFC) = Net Domestic
Product at Factor Cost (NDPFC) + Net Factor
• Income from Abroad
• Here NDPFC = Compensation of Employees +
Operating Surplus + Mixed-Income
• Here Operating Surplus = Rent + Interest +
Profit
 3. Expenditure Method
• It measures the final expenditure on GDP at
market price during the year
• There are primarily four different types of
aggregated expenses that are utilized to
determine GDP. These are –
a. Investments made by businesses.
b. Government expenses on goods and services.
c. Household consumption.
d. Net export (total exports minus the value of
imported goods and services).
• The Expenditure Method Formula is as
Following –
• GDP = C + I + G + (X – M)
• Here, C is consumer spending on different
goods and services, I represents investments
made by businesses, and on capital goods, G
represents government’s spending on goods
and services provided to the public, X is
exports, and M is imports.
 Methods of measurements of National
Income in India
• To estimate national income in India, different
methods are applied for different sectors.
1. Value added method:
• In India for the commodity producing sectors
like agriculture production method is followed.
• Wherein the estimates of value of output and
value of input is prepared for each item and the
gross value added is estimated as a difference
of the value of output and value of input.
[Link] Method:
• In India income method or income approach is used to
estimate gross value added in various sectors like electricity,
gas and water supply, trade, hotels and restaurants.
3. Expenditure method.:
• For the purpose of estimating the value of output, the whole
construction activity – contractual as well as own account is
included.
• The estimates value of output from construction activity are
prepared separately for labor intensive “ Kutcha
construction”.
• The value of output of pucca construction is estimated by
the commodity flow of approach.
• The sum total value of kutcha construction and Pucca
construction gives gross value added from construction at
current prices
 Business cycle:
• A business cycle is a cycle of fluctuations in the Gross
Domestic Product (GDP) around its long-term natural
growth rate.
• It explains the expansion and contraction
in economic activity that an economy experiences
over time.
• The different phases of business cycles are shown in
Figure
[Link]:
• The line of cycle that moves above the steady growth line
represents the expansion phase of a business cycle.
• In the expansion phase, there is an increase in various
economic factors, such as production, employment,
output, wages, profits, demand and supply of products,
and sales.
• In addition, in the expansion phase, the prices of factor
of production and output increases simultaneously.
• In this phase, debtors are generally in good financial
condition to repay their debts;
• therefore, creditors lend money at higher interest rates.
This leads to an increase in the flow of money.
2. Peak:
• The growth in the expansion phase eventually slows down and
reaches to its peak.
• This phase is known as peak phase.
• In other words, peak phase refers to the phase in which the
increase in growth rate of business cycle achieves its maximum
limit.
• In peak phase, the economic factors, such as production, profit,
sales, and employment, are higher, but do not increase further.
• In peak phase, there is a gradual decrease in the demand of
various products due to increase in the prices of input.
• As a result, the demand for products, such as jewellery, homes,
automobiles, refrigerators and other durables, starts falling.
3. Recession:
• In peak phase, there is a gradual decrease in the
demand of various products due to increase in the
prices of input.
• When the decline in the demand of products becomes
rapid and steady, the recession phase takes place
• In recession phase, all the economic factors, such as
production, prices, saving and investment, starts
decreasing.
• Generally, producers are unaware of decrease in the
demand of products and they continue to produce
goods and services.
• In such a case, the supply of products exceeds the
demand.
4. Trough:
• During the trough phase, the economic activities
of a country decline below the normal level.
• In this phase, the growth rate of an economy
becomes negative.
• In addition, in trough phase, there is a rapid
decline in national income and expenditure
• In this phase, it becomes difficult for debtors to
pay off their debts.
• As a result, the rate of interest decreases;
therefore, banks do not prefer to lend money.
• Consequently, banks face the situation of increase
in their cash balances.
5. Recovery:
• In trough phase, an economy reaches to the lowest
level of shrinking.
• This lowest level is the limit to which an economy
shrinks.
• Once the economy touches the lowest level, it happens
to be the end of negativism and beginning of positivism.
• This leads to reversal of the process of business cycle.
• As a result, individuals and organizations start
developing a positive attitude toward the various
economic factors, such as investment, employment, and
production.
• This process of reversal starts from the labor market.