Module-3
Module-III
• National Income (GDP, GNP and NNP)-
Final goods and intermediate goods.
Methods of measuring national income –
Output, expenditure & income method.
Inflation- causes and effects – Measures to
control inflation. Monetary and fiscal
policies
Final goods & Intermediate goods
• Goods which are used in the production of
other goods & services are called
intermediate goods. Raw materials, electricity
etc are examples.
• Goods which are ready for final consumption
or investment are called final [Link]. Dress,
vehicles etc
National income
• National income is the money value of all the final
goods and services produced by a country during
an accounting year. National income consists of a
collection of different types of goods and services
of different types.
• Concepts of National income
• Gross domestic product at market price: is the
money value of all final goods and services
produced in the domestic territory of a country
during an accounting year.
concepts
GDP FC = GDP at Mp- NIT
• (Mp includes subsidy & indirect tax, when we eliminate these
from value of output then we get factor cost)
• NDP mp (Net Domestic Product at mp)= GDPmp -
Depreciation.
• GNPmp = GDPmp + NFIA.
• NNPmp = GNP mp – Depreciation
• OR
• NNPmp = NDPmp + NFIA
Concepts
• NNP at factor cost or National Income= NNPmp-NIT
• Personal income may be defined as the current income
of persons or households from all services/ possible
sources.
• DPI = Personal income – Personal Direct taxes
• Per capita income: Per head income
• PCI= NI/Total population
• NI at current and constant price: NI esimation according
to the price prevailed in the market is NI at current price
& NI estimation on the basis of price of goods prevailing
in the base year is called NI at constant prices.
Problems
• From the data given below estimate GNP mp, GNP fc, NNPmp, and
National income
• GDP mp= 5000
• NFIA= -50
• Indirect tax= 70
• Subsidy= 20
• Depreciation= 30
• GNPmp= GDPmp+NFIA=5000+-50= 4950
• GNPfc= GNPmp- NIT(indirect tax-subsidy) = 4950-(70-20)=4900
• NNPmp= GNPmp-Depreciation (or GDPmp-Depreciation+ NFIA)
• = 4950-30=4920
• National income (NNPfc) = NNPmp-NIT= 4920-(70-20)= 4870
Problems
• (Qn.) GDP of a country-= 1500 crores
• Depreciation= 150 crores
• NFIA= 50 crores
• Estimate GNP, NDP and NNP
• GNP= GDP+ NFIA= 1500+50= 1550 crores
• NDP= GDP- Depreciation= 1500- 150= 1350
• NNP= GNP- Depreciation (or NDP+ NFIA)
• =1550-150= 1400 ( or 1350+50= 1400)
Methods of measuring National income
• 1. Product Method/ Value added method/ Output method
• In this method, national income is measured as a flow of goods and services.
We calculate money value(MV) of all final goods and services produced in
an economy during a year. MV= P*Q For this the economic activities are
classified in to three sectors as: Primary(agriculture and allied), Secondary
(manufacturing ) & Tertiary (Service)
• NI= Money value of final goods & services produced in primary sector+
secondary sector+ tertiary sector
• Under this method there arise the problem of double counting, ie, counting
the value of an item more than [Link] calculating the value of the final
good bread we calculate the value of intermediate goods wheat and wheat
flour.
• Precaution
• Exclude the value of intermediate [Link], While calculating value of Bread
only take the value of bread alone
• G V added at market price(GVAmp)= GDPmp= GVOmp-intermediate
consumption.
Methods
• Income Method:
• Under this method, national income is measured as a flow of factor
incomes. There are generally four factors of production labour, capital, land
and entrepreneurship. Labour gets wages and salaries, capital gets interest,
land gets rent and entrepreneurship gets profit as their remuneration.
• NDPfc= Rent +wage+ interest+ profit+ self employed income
• NNPfc= NDPfc+NFIA
• Precautions
• Prize money from lottery
• All transfer payments
• Illegal income
• Income from second hand goods
• Transactions in shares & securities etc are to be excluded.
Methods
• Expenditure Method:
• In this method, national income is measured as
a flow of expenditure. GDP is sum-total of
private consumption expenditure(C),
Government consumption expenditure (G),
Investment Expenditure (I) and net exports
(Export(X)-Import (M)).
• GDPmp= C+I+G+X-M
Difficulties in the estimation of NI
• Conceptual Difficulties
• Service without remuneration(service of housewives)
• Classification of goods as intermediate & final goods(milk)
• Estimating value of output in the govt sector(free/nominal price)
• Practical Difficulties
• Inadequacy of statistical data
• Illiteracy of farmers(do not keep accounts)
• Production for self consumption
• Existence of a non monetized sector(barter)
• Lack of occupational specialization(unskilled workers earned
income from more than one source)
Significance of NI
• To evaluate the performance of a country over the
years
• For economic planning and for the formulation of
economic policies
• To understand the contribution of each sector to NI
• To make comparison between economic
performance of two countries
• To measure inequalities in the distribution of
income
Problems
• (Qn) From the data given below estimate NI according to Value
added method, expenditure method and income method
• Gross value of output at market price= 8000
• Intermediate consumption= 2000
• Private consumption expenditure= 3000
• Investment expenditure= 2000
• Govt expenditure= 700
• Export=600 Import= 300
• Wage and salaries= 2000
• Rent= 500 Interest= 500
• Profit= 1500 Depreciation= 1000
• Indirect tax= 800 Subsidy= 300
• NFIA=-500
Solution
• Value added method
• GDPmp= Gross value of output mp-
intermediate consumption= 8000-2000=6000
• NDPmp= GDPmp-Depreciation= 6000-
1000=5000
• NNpmp= NDPmp+NFIA= 5000+-500= 4500
• NI or NNPfc= NNPmp-NIT= 4500-500=4000
Solution
• Expenditure method
• GDPmp= C+I+G=(X-M)=3000+2000+700+(600-
300)=6000
• NDPmp= GDPmp-Depreciation= 6000-
1000=5000
• NNPmp=NDPmp+NFIA=5000+(-500)4500
• NNPfc or NI= NNPmp-NIT=4500-(800-
300)=4000
Solution
• Income method
• NI= NDPfc+NFIA
• NDPfc= W+R+I+P
• = 2000+500+500+1500=4500
• NI= 4500+(-500)= 4000
INFLATION
• A general rise in price level & a fall in the value of
money. Too much of money chasing too few
commodities. It is calculated as a percentage increase in
price per unit of time.(week, month, year) ie, 2%
increase in price per year is creeping inflation, 5%-
walking, 10%- running and price rise at every moment-
hyper inflation. The following are the causes of inflation.
• a) Demand pull inflation(Increase in DD & Deficiency in
SS)
• b) Cost push inflation
Increase in Decrease in
Demand(Reason) Supply(Reason)
Rise in disposable income Lack of capital
Increase in wage, salary Lack of infrastructural
facilities
Black money Increase in Export
Increase in Export Natural calamities
Large population Industrial disputes
Increase in money supply Scarcity of raw materials
Demand-pull inflation
Cost Push inflation
• (Increase in cost leads to fall in production,
shortage of supply leads to increase in prices)
cost increases as a result of increase in tax,
increase in price of LPG, petroleum etc. This
can be explained with the help of a diagram
Cost-push Inflation
Effects of Inflation
• Fixed income are the worst sufferers of inflation
• Debtors (gainers)& Creditors(losers)
• Salaried people & wage earners are the sufferers
• Investors & business men –gainers
• Farmers are the gainers as they get high price for their products
• Less saving & investment which adversely affect production.
Similarly inflation discourages foreign investment.
• Black marketing is another impact
• Inflation makes rich richer and poor poorer.
• Corruption spread every walks of life
• Social unrest- demand for high wage, manufacture of
substandard products etc
Anti-inflationary measures(measures to control inflation)
• Monetary measures
• Measures adopted by the central bank (RBI) of a country to control the circulation of
money supply in the economy. They are quantitative and qualitative measures.
Important quantitative measures are change in bank rate, CRR, SLR & Open market
operation.
• Bank rate, also known as discount rate, is the rate of interest which a central bank
charges on its loans and advances to a commercial bank.(6.75). It changes the interest
rate, so an increase in bank rate leads to increase in interest rate
• CRR (Cash Reserve Ratio- 4 %)- the reserve kept by scheduled banks with RBI( ie,
those banks comes under RBI should keep a certain percentage of their deposit with
RBI). During inflation RBI increase the CRR
• SLR, (Statutory Liquidity Ratio 18%)- Every scheduled banks should keep a certain
percentage of their deposit as reserve against lending money. During inflation SLR
increases.
• Open market operation- Purchase and sale of securities in the open market, During
inflation sell securities in the open market.
• Repo rate- (6.5%) - The rate at which RBI provides loans to commercial bank.
Increases during inflation.
• Reverse repo-(3.35) – The rate at which RBI borrow money from other banks .
Qualitative or selective measures
• The important measures are :
• Increase margin requirements- The difference between
market value of a security and the actual amount given
against that security
• regulating consumer credit- to control consumption
expenditure
• moral suasion - morally persuading,
• direct action etc
Fiscal policy
• These are the measures adopted by the government
of a country with regard to taxation, expenditure
and borrowing.
• High direct taxes (causing a fall in disposable
income).
• Lower Government spending.
• A reduction in the amount the government sector
borrows each year .
• .Government can curb it’s expenditure to bring the
inflation in control.
Other measures
• Direct wage controls –to reduce cost inflation
• Price control: Essential goods can be distributed
through the Public Distribution System.
• Increase the supply of goods & services : import
essential products, promote the production of
essential commodities etc