National Income
The study of National Income is important because of the following
reasons:
To see the economic development of the country.
To assess the developmental objectives.
To know the contribution of the various sectors to National Income.
Internationally some countries are wealthy, some countries are not wealthy and
some countries are in-between. Under such circumstances, it would be difficult
to evaluate the performance of an economy. Performance of an economy is
directly proportionate to the amount of goods and services produced in an
economy. Measuring national income is also important to chalk out the future
course of the economy. It also broadly indicates people’s
Standard of living.
Income can be measured by Gross National Product (GNP), Gross Domestic
Product (GDP), Gross National income(GNI),Net National Product (NNP) and
Net National Income (NNI).
In India the Central Statistical Organization has been formulating national
income.
However some economists have felt that GNP has a measure of national income
has limitation, since they exclude poverty, literacy, public health, gender equity
and other measures of Human Prosperity Instead they formulated other
measures of welfare like Human`Development`index.
Calculating National Income
There are various methods for calculating the national income such as
production method, income method, expenditure method etc.
Production Method
The production method gives us national income or national product based on
the final value of the produce and the origin of the produce in terms of the
industry.
All producing units are classified sector wise.
Primary sector is divided into agriculture, fisheries, animal husbandry.
Secondary sector consists of manufacturing.
Tertiary sector is divided into trade, transport, communication, banking,
insurance etc.
Income Method:
Different factors of production are paid for their productive services rendered to
an organization. The various incomes that includes in these methods are wages,
income of self employed, interest, profit, dividend, rents, and surplus of public
sector and net flow of income from abroad.
Expenditure Method:
The various sectors – the household sector, the government sector, the business
sector, either spend their income on consumer goods and services or they save a
part of their income. These can be categorized as private consumption
expenditure, private investment, public consumption, public investment etc.
Calculation of National Income of India: A Brief History
The first attempt to calculate National Income of India was made by Dadabhai
Naroji in 1867 -68. This was followed by several other methods. The first
scientific method was made by Prof. V.K.R Rao in 1931-32. But this was not
very satisfactory. The first official attempt was made by Prof.P.C.Mahalnobis in
1948-49, who submitted his report in 1954.
Difficulties in Calculation of National Income
In India there are various difficulties in calculating the national incomes .The
most severe one is the finding of reliable data. Most of the time, it is based on
assumptions. Soon after independence the National Income Committee was
formed to collect data and estimate National Income. The two major problems
which remain in the calculation of National Income are:
Most of the data is not from the current year.
Even if current data are available then values are underreported.
Obstacles in High Growth of National Income of India
Even if the Indian economy grows faster than the BRIC countries and G 6, the
benefits of the growth would not be evenly distributed. India’s progress in
education cannot be termed as satisfactory. In terms of higher education it has
achieved tremendous success, but its unsatisfactory performance in primary
education and secondary education has been a major obstacle to growth.
Similarly India’s healthcare system is in a less than desirable state.
Governments’ spending on public health has not been up to the required levels.
Growth Of National Income In India
Sector 1950-1980 1980-2005
GDP Total 3.5 5.6
GDP Per capita 1.4 3.6
Sectoral Composition Of National Income (in percent)
Year Primary Secondary Tertiary Total GDP
1950-51 59 13 28 100
1980-81 42 22 36 100
2002-03 24 24 52 100
INFLATION :
Inflation is caused due to several economic factors:
When the government of a country print money in excess, prices increase
to keep up with the increase in currency, leading to inflation.
Increase in production and labor costs, have a direct impact on the price
of the final product, resulting in inflation.
When countries borrow money, they have to cope with the interest
burden. This interest burden results in inflation.
High taxes on consumer products, can also lead to inflation.
Demands pull inflation, wherein the economy demands more goods and
services than what is produced.
Problems
The problems due to inflation would be:
When the balance between supply and demand goes out of control,
consumers could change their buying habits, forcing manufacturers to cut
down production.
The mortgage crisis of 2007 in USA could best illustrate the ill effects of
inflation. Housing prices increases substantially from 2002 onwards,
resulting in a dramatic decrease in demand.
Inflation can create major problems in the economy. Price increase can
worsen the poverty affecting low income household,
Inflation creates economic uncertainty and is a dampener to the
investment climate slowing growth and finally it reduce savings and
thereby consumption.
The producers would not be able to control the cost of raw material and
labor and hence the price of the final product. This could result in less
profit or in some extreme case no profit, forcing them out of business.
Manufacturers would not have an incentive to invest in new equipment
and new technology.
Uncertainty would force people to withdraw money from the bank and
convert it into product with long lasting value like gold, artifacts.
Inflation in India Economy
India after independence has had a more stable record with respect to inflation
than most other developing countries. Since 1950, the inflation in Indian
economy has been in single digits for most of the years
Between 1950-1960
The inflation on an average was at 2.00%
Between 1960-1970
The inflation on an average was at 7.2%
Between 1970-1980
The inflation on an average was at 8.5%.
Inflation At Present
Inflation in India a menace a few years ago is at a 30 year low. The inflation
ended at a low of 0.61% in the week ended May 9, 2009 this after reaching a 16
year high of 12.91 % in August 2008, bringing in a sigh of relief to
policymakers.
TRADE CYCLE:
Trade cycle is a cyclical process. The trade cycle refers to the ups and down in
the level of economic activity which extend over to a period of several years.
The trade cycle come in the capitalistic economies. J.M. Keynes says, “A trade
cycle is composed of periods of good trade characterized by rising prices and
low unemployment percentage, with periods of bad trade characterized by
following prices and high unemployment percentages.”This shows how
economic growth can fluctuate within different phases, for example:
i) Prosperity or boom (which is high growth causing inflation)
ii) Peak (top of trade cycle)
iii) Downturn or Recession ( fall in economic growth)
iv) Recovery (upturn of economic growth)
A trade cycle is composed of periods of good trade a characterized by rising
prices and low un-employment percentage. The average length of trade cycle is
a little more over eight years. The course of a trade cycle is generally traced
through its various phases. Each of the phases is characterized by different
economic conditions. In each phase the business face the different situation and
pas through different experience.
Pricing Strategies
There are many ways to price a product. Let's have a look at some of them and
try to understand the best policy/strategy in various situations
Premium Pricing.
Use a high price where there is a uniqueness about the product or service. This
approach is used where a a substantial competitive advantage exists. Such high
prices are charge for luxuries such as Cunard Cruises, Savoy Hotel rooms, and
Concorde flights.
Penetration Pricing.
The price charged for products and services is set artificially low in order to
gain market share. Once this is achieved, the price is increased. This approach
was used by France Telecom and Sky TV.
Economy Pricing.
This is a no frills low price. The cost of marketing and manufacture are kept at a
minimum. Supermarkets often have economy brands for soups, spaghetti, etc.
Price Skimming.
Charge a high price because you have a substantial competitive advantage.
However, the advantage is not sustainable. The high price tends to attract new
competitors into the market, and the price inevitably falls due to increased
supply. Manufacturers of digital watches used a skimming approach in the
1970s. Once other manufacturers were tempted into the market and the watches
were produced at a lower unit cost, other marketing strategies and pricing
approaches are implemented. Premium pricing, penetration pricing, economy
pricing, and price skimming are the four main pricing policies/strategies. They
form the bases for the exercise. However there are other important approaches
to pricing.
Psychological Pricing.
This approach is used when the marketer wants the consumer to respond on an
emotional, rather than rational basis. For example 'price point perspective' 99
cents not one dollar.
Product Line Pricing.
Where there is a range of product or services the pricing reflect the benefits of
parts of the range. For example car washes. Basic wash could be $2, wash and
wax $4, and the whole package $6.
Optional Product Pricing.
Companies will attempt to increase the amount customer spend once they start
to buy. Optional 'extras' increase the overall price of the product or service. For
example airlines will charge for optional extras such as guaranteeing a window
seat or reserving a row of seats next to each other.
Captive Product Pricing
Where products have complements, companies will charge a premium price
where the consumer is captured. For example a razor manufacturer will charge a
low price and recoup its margin (and more) from the sale of the only design of
blades which fit the razor.
Product Bundle Pricing.
Here sellers combine several products in the same package. This also serves to
move old stock. Videos and CDs are often sold using the bundle approach.
Promotional Pricing.
Pricing to promote a product is a very common application. There are many
examples of promotional pricing including approaches such as BOGOF (Buy
One Get One Free).
Geographical Pricing.
Geographical pricing is evident where there are variations in price in different
parts of the world. For example rarity value, or where shipping costs increase
price.
Value Pricing.
This approach is used where external factors such as recession or increased
competition force companies to provide 'value' products and services to retain
sales e.g. value meals at McDonalds.
