22-05-2022

NATIONAL INCOME ACCOUNTING

• Estimation of National Income and related

Macroeconomic variables.
• Significance of NY Accounting:-
 estimation of national income
 structure of the economy
Principles of Macroeconomics-
 relative significance of different sectors
GDP, Fiscal, Monetary and other Policies  factoral distribution of income
Dr. Rajneesh Mishra  inter-regional and international comparisons

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GDP: A Definition GDP: A Definition

 …of all final…

• A nation’s gross domestic product When measuring production, we only
(GDP) is count goods and services that are sold to
• Total value of all final goods and their final users.
services produced for the market Avoids over-counting intermediate
during a given period within the products when measuring GDP.
nation’s borders.
Value of all intermediate products is
automatically included in value of final
products they are used to create.
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GDP: A Definition GDP: A Definition

• …for the market…
• …goods and services…

• Goods: cars, furniture, computers, beer, etc.

• Services: medical, financial, educational, etc.
• GDP does not include all final goods and
• …produced…
services produced in the economy
• In order to contribute to GDP, something • Includes only the ones produced for the market—that is, with the intention of being
must be produced. sold.

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Gross Domestic Product, GDP: A Definition Gross Domestic Product, GDP: A Definition

…during a given period… • …within the nation’s borders

GDP measures production during some specific • Indian GDP measures output produced within
period of time Indian borders.
Only goods produced during that period are counted. • Regardless of whether it was produced by
Indians
GDP is actually measured for each quarter, and
• Incomes Indians earned abroad are not counted.
reported as an annual rate.
• However, foreigners producing goods or
services within the country are included:

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Aggregates of national income

GDP and NDP
1. GDP at Market Price (MP) • Net domestic product (NDP) –
2. NDP at MP.
• G-N= Depreciation
the sum of consumption expenditures,
3. GNP at MP government expenditures, net foreign
• N-D= NFIA (Net factor income from abroad) expenditures, and investment less
4. NNP at MP
5. GDP at Factor Cost (FC)
depreciation.
FC= MP- Net Indirect Taxes (NIT). Where NIT = (Indirect Taxes – Subsidies)
6. NDP at FC
7. GNP at FC
8. NNP at FC

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GDP,NDP and GNP NDP & NNP

• Net domestic product is GDP adjusted for depreciation:

• NDP= GDP- DEPRECIATION

GDP = C + I + G + (X-M) • NNP( National Income at Market Prices)=
GNP- DEPRECIATION
NDP = C + I + G+ (X-M) – depreciation
GNP = GDP+ Net factor income from abroad

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National Income Other National Income Terms

• PERSONAL INCOME=
National Income – Social Security Contributions –
• N.I. or National Income at Factor Cost= Corporate Income Taxes – Undistributed Corporate
• N.N.P or National Income at Market Profits + Transfer Payments.
Prices – Indirect Taxes + Subsidies.

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Other National Income Terms Measuring GDP: A Summary

• Disposable personal income is personal income • Different ways to calculate GDP

minus personal income taxes and payroll taxes. • Expenditure Approach

• GDP = C + I + G + NX
• Value-Added Approach
• GDP = Sum of value added by all firms
Disposable personal income is what people • Factor Payments Approach
have readily available to spend. • GDP = Wages and Salaries + interest + rent +
profit
DPI = PI - Personal taxes
Therefore, Total output = Total income
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The Expenditure Approach to GDP

The Expenditure Approach to GDP

• Expenditure approach divides output into four

categories according to which group in the
economy purchases it as final users
• Consumption goods and services (C)—purchased by households • When we add up the purchases of all four
•
•
Private investment goods and services (I)—purchased by businesses
Government goods and services (G)—purchased by government agencies groups we get GDP
• Net exports (NX)—purchased by foreigners

GDP = C + I + G + NX

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Numerical
Find NDP at factor cost
• From the following data, calculate GDP at both factor
cost and market price
Items Rs. crore
Gross domestic fixed investment 10,000

ITEMS Rs. crore Inventory investment 5,000

Gross investment 90
Depreciation 2,000
Net exports 10
Indirect taxes 1,000
Net indirect taxes 05

Depreciation 15 Subsidies 2,000

Net factor income from abroad -05 Consumption expenditure 20,000

Private consumption expenditure 350 Residential construction investment 6,000

Govt. purchases of goods and services 100

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The Value-Added Approach Numerical

• In an economy consisting of two firms find
a) Value added by firm A & B
• Value added b) GDP at factor cost
• Firm’s contribution to a product or
ITEMS RS. LAC
• Revenue it receives for its output Sales by firm A 100
• Minus cost of all the intermediate goods Purchases from firm B by firm A 40
that it buys Purchases from firm A by firm B 60
Closing stock of firm A 20

• GDP is sum of values added by all firms in economy.

Closing stock of firm B 35
Opening stock of firm A 25
Opening stock of firm B 45
Sales by firm B 200
Indirect taxes paid by both firms 30
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• Calculate GDP at market price and National income • Calculate NDP at factor cost from the following data

ITEMS PRIMERY SECONDARY TERTIARY

ITEMS $ Billion SECTOR SECTOR SECTOR
Output of primary sector 800
Sales 100 150 130
Output of secondary sector 200
Closing stock 15 20 25
Output of tertiary sector 300
Value of inputs used by primary sector 400 Intermediate consumption 15 25 15

Value of inputs used by secondary sector 100 Opening stock 10 10 15

Value of inputs used by tertiary sector 50
Indirect Tax 12 13 17
Indirect taxes paid by all sectors 50
Subsidies 7 8 7
Consumption of fixed capital of all sectors 80
Consumption of fixed Capital 10 12 15
Factor income received from ROW 10
Factor income paid to non- residents 20 Expenses of electricity and fuel 3 4 3

Subsidies received by all sectors 20

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The Factor Payments Approach

Income/Factor Payment Method
• In any year, value added by a firm is equal to total factor payments made by that
firm.

• Thus, GDP = total factor payments made • Compensation of employees+ Operating

by all firms in the economy surplus+ Mixed income of the self
• Gives us an important insight into the macroeconomy employed = NDPFC
Total output of economy (GDP) = total • + Net factor income from abroad = NNPFC
income earned in the economy

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Using Income method calculate Calculate a) Domestic Income

a) Net Domestic Income b) Gross Domestic Income
b) National Income
c) Net National Income d) NNP at mkt. price
ITEMS RS. CRORE
ITEMS Rs. Crore Wages 10,000
Indirect Taxes 9000 Rent 5,000
Subsidies 1800 Interest 400
Depreciation 1700 Dividend 3,000
Mixed income of self employed 28000 Mixed Income 400
Operating surplus 10000 Undistributed Profits 200
Net factor income from abroad (-) 300 Social Security Contribution by employers 400
Compensation of employees 24000 Net Factor income from abroad 1,000
Corporate Profit Tax 400

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Summary
VALUE ADDAD METHOD INCOME METHOD EXPENDITURE METHOD
Gross value added in primary Compensation of employees Final consumption Problems With GDP Measurement
sector + GVA in secondary + Operating surplus + Mixed expenditure + Investment
sec. + GVA in tertiary sector income of self employed expenditure + Govt.
expenditure + Net Exports • Changes in Quality
= GDP at mkt. price = Net domestic income = GDP at mkt. price
- Depreciation + Net factor income from - Depreciation
• Underground Economy
abroad
= NDP at mkt. price = National Income (NNP at = NDP at mkt. price
• Non-market Production
FC)
• Not a perfect measure of economic well-
- Net Indirect Taxes - Net Indirect Taxes being
= NDP at factor cost = NDP at factor cost
+ Net factor income from + Net factor income from
abroad abroad
= National Income (NNP at = National Income (NNP at
FC) FC) 30

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Thank you Revision

National Income calculation

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Estimate national income by the output method From the data given below, calculate GNP mp
Rs. in Crores Rs (crores)
• Value of output of Primary Sector 800 Employer’s contribution to social security schemes 50
• Value of output of Secondary Sector 200
Depreciation 30
• Value of output of Tertiary Sector 300
Wages and salaries 350
• Intermediate goods purchased by Primary Sector 400
Interest 150
• Intermediate goods purchased by Secondary Sector 100
Subsidy 30
• Intermediate goods purchased by Tertiary Sector 50
• Indirect taxes paid by all the sectors 50 Royalty 20
• Consumption of fixed capital of the sectors 80 Rent 30
• Factor income from ROW 10 Indirect taxes 90
• Factor income to non-residents 20 Profit 120
• Subsidies received by all sectors 20 NFIA - 10

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ASSIGNMENT

Calculate a) NDPfc by output method. From the data given below, calculate GNP mp and NNP fc
b) NNPfc by income method
•NFIA -5
Rs. in Crores
• Value of output 800 •Net exports -7
• Value of intermediate cons 400
•Net Indirect Taxes 47
• Subsidies 10
• Indirect taxes 60 •Net change in stocks 13
• Factor income from abroad 10
• Factor income paid to abroad 20 •Private final consumption expenditure 263
• Mixed income of self employed 120 • Govt. final consumption expenditure -50
• Rent and royalty 40
• Interest and profit 20 •Consumption of fixed capital 45
• Wages and salaries 110
•Gross domestic capital formation 100
• Consumption of fixed capital 50
• Employer’s contribution to social
security schemes 10

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Calculate national income by income and expenditure Calculate national income by income and expenditure methods
methods
Rs. in Crores • NFIA 110
• COE 250 • Net Indirect Taxes 100
• Imports 20 • Direct personal taxes 75
• Mixed Income 50 • Private consumption expenditure 2000
• Gross fixed capital formation 120 • Public consumption expenditure 1200
• Pvt final cons exp 550 • Consumption of fixed capital 80
• Cons of fixed capital 10 • Gross domestic investment 1500
• NFIA 20 • Net investment abroad 310
• Ind taxes 100 • Transfer payments 130
• Change in stocks 20 • Wages and salaries 3065
• Subsidies 20 • Interest 700
• Operating surplus 350 • COE in kind 65
• Exports 10 • Rent 400
• Govt final cons exp 60 • Profit 500
• Social security contribution by employers 60

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Calculate national income by income method.

Rs. in Crores
Salaries and wages - 1997 On the following basis, calculate GDP.
Transfer payments by government - 25 Rs. in Crores
Rent - 132 Personal cons exp - 45000
Indirect taxes - 200 Govt cons exp - 5000
Subsidies - 89 Gross domestic fixed inv - 5000
Compensation of workers in kind - 95 Increase in inventories - 1000
Depreciation - 81 Exports of gds and services - 6000
Net income increase in assets abroad - 52 Imports of gds and services - 7000
Interest - 92 NIT - 3500
Government exp on gds and services - 574 Depreciation - 4500
Personal exp on gds and services - 1805
Corp profit tax - 10
Income of self employed - 264
Undistributed corporate profit - 26
Dividends - 201
Social security contribution by employers - 54
Gross investment - 107

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Estimate NI.
Rs. in Crores
Op st - 50
Cl st - 60
Cons of fixed cap - 10
Pvt final cons exp - 500
Net exports - - (5)
NFIA - - (10)
Compensation of employees paid by General Govt -
Direct purchase of non durable gds from abroad by gen govt-
100
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Principles of Macroeconomics
Net purchase of gds and services by gen govt in domestic mkt- 100
Net fixed capital formation - 60 Macroeconomic Policies- (Monetary and Fiscal Policy)
NIT - 50
Dr. Rajneesh Mishra

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Macroeconomic Policy Steps in Macroeconmic policy formulation

• Determining the policy objectives

Macro economic policy can be defined as a program of action undertaken to
control, regulate and manipulate macroeconomic variables to achieve the • Choosing the appropriate policy
macroeconomic goals of the society. • Choosing the target variables (adequate supply of money, aggregate demand for
money, created created by the banks, disposable income, consumption
Objectives: expenditure, savings and investment, wealth holdings of people etc.)
• Economic growth • Choosing appropriate policy instruments:
• Creating employment Monetary policy instruments (Bank Rate, Cash Reserve Ratio CRR, Statutory
Liquidity Ratio SLR, Open Market Operations etc.
• stabilising the prices
Fiscal policy instruments (Public Expenditure, Taxation, Public Borrowings, Deficit
• Economic equality Financing etc.)
• Stabilising balance of payments

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Monetary Policy
• “Monetary policy is essentially a program of action undertaken by the What is Monetary Policy?
monetary authorities, generally the central bank to control and regulate • The term monetary policy refers to actions taken by central banks to
the supply of money with the public and the flow of credit with a view to affect monetary magnitudes or other financial conditions.
achieving pre-determined macroeconomic goals”
• Monetary Policy operates on monetary magnitudes or variables such as
money supply, interest rates and availability of credit.
• In macroeconomic policy the central bank has to decide whether to • Monetary Policy ultimately operates through its influence on expenditure
increase or decrease the supply of money and credit to achieve the larger flows in the economy.
macro economic goals • In other words affects liquidity and by affecting liquidity, and thus credit,
it affects total demand in the economy.

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Monetary System and Money Supply

Instruments of monetary policy
• Quantitative measures
Bank Rate (current rate of RBI 4.25%)
Open market operations (REPO- 4%. Reverse REPO 3.35%)
Cash Reserve Ratio (current rate of RBI 4%)
Government Commercial Statutory Liquidity Ratio (current rate of RBI 18%)
Central Bank Public
Banks
• Qualitative or selective measures

Refer: https://rbi.org.in/scripts/FS_Overview.aspx?fn=2752
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Bank Rate
RESERVE REQUIREMENTS
• Standard rate at which bank is prepared to buy or rediscount • The reserve requirement (or required reserve ratio) is a bank regulation
bills of exchange or other commercial papers eligible for that sets the minimum reserves each bank must hold to customer
purchase
deposits and notes. These reserves are designed to satisfy withdrawal
• The rate of interest charged by central bank on their loans to
commercial banks is called bank rate(Discount rate). demands, and would normally be in the form of fiat currency stored in a
bank vault(vault cash), or with a central bank.
• An increase in bank rate makes it more expensive for commercial
banks to borrow . This exerts pressure to bring about the rise in
interest rates (lending rates) charged by commercial banks on
their lending to public. This leads to a general tightening in
economy.
• Whereas decrease in bank rate has the opposite effect and leads
to general easing of credit in the economy.

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CRR
RESERVE REQUIREMENTS
• Thus central bank makes it legally obligatory for commercial • Banks are required to maintain a certain percentage of
banks to keep a certain minimum percentage of deposits in their deposits in the form of reserves or balances with
reserve. the RBI
• These are of 2 types:-
• It is called Cash Reserve Ratio or CRR
• Cash reserves
• Liquidity reserves • Since reserves are high-powered money or base money,
by varying CRR, RBI can reduce or add to the bank’s
required reserves and thus affect bank’s ability to lend.

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STATUTORY LIQUIDITY RATIO STATUTORY LIQUIDITY RATIO

• Statutory Liquidity Ratio (SLR) is a term used in the regulation of • The quantum is specified as some percentage of the total
banking in India. It is the amount which a bank has to maintain demand and time liabilities of a bank. This percentage is fixed by
the Reserve Bank of India. The maximum and minimum limits for
in the form: the SLR are 40% and 25% respectively.
• Cash
• Gold valued at a price not exceeding the current market price, • The objectives of SLR are:
• To restrict the expansion of bank credit.
• Unencumbered approved securities (G Secs or Gilts come under
this) valued at a price as specified by the RBI from time to time. • To augment the investment of the banks in Government
securities.
• To ensure solvency of banks. A reduction of SLR rates looks
eminent to support the credit growth in India.

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QUALITATIVE MEASURES CREDIT RATIONING

• Credit rationing • More popular techniques in developing countries
because financial infrastructure is not fully developed.
• Moral suasion • A credit ceiling is allotted to each sector and to each bank
• Because of its non interest nature, suitable for controlling
• Changing lending margin Islamic banks.
• Issue of Penalty
• Direct controls

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MORAL SUASION CHANGING LENDING MARGIN

• Informal contacts, consultations, meetings, to explain • The difference between the value of mortgaged property
position of central bank on various issues. and the amount advanced as loan is lending margin.
• It implies the central bank exerting pressure on banks by • The central bank is empowered to change the lending
using oral and written appeals to expand or restrict credit margin with a view to change the credit with the banks.
in line with its credit policy.

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DIRECT CONTROLS What is fiscal policy?

•When all other methods prove ineffective, the • Govt. programme of making discretionary changes in the
central bank imposes direct controls with a clear pattern and level of its expenditure, taxation and borrowings
to achieve macro economic goals
directive to banks to carry out their lending activity
in a specified manner.

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Types of fiscal policy Automatic stabilization fiscal policy

• Automatic stabilization fiscal policy
• Automatic stabilization fiscal policy • Built-in flexibility of tax revenue and govt. spending in response to a rise
and fall in GNP and unemployment
• Compensatory fiscal policy • Compensatory fiscal policy
• Discretionary fiscal policy • Deliberate policy action taken by the govt. to compensate for the
deficiency in or excess of aggregate demand.
• During depression, the measures include tax reduction and enhanced
govt. spending
• During inflation, the measures include higher taxation and a cut in govt.
spending

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• Discretionary fiscal policy

• Ad hoc changes made at the discretion of the govt. in its spending and taxation system • Changes in public borrowings
• The changes could be in the form of: 1) Internal borrowings from:
• Changes in taxation
a) public by means of govt. bonds and treasury bills
a) increasing or decreasing the tax rates
b) imposition of new taxes or abolition of old taxes b) central bank (deficit financing)
c) imposition of taxes on new tax bases 2) External borrowings from:
• Discretionary changes in govt. expenditure a) foreign governments
a) change in the size of expenditure b) international organizations like World Bank and IMF
b) composition of expenditure
c) market borrowings
c) methods of financing expenditure
d) transfer payments
e) overall budgetary surplus or deficit
f) methods of deficit financing

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Features of Foreign Trade Policy

Other Macroeconomic Policies

• Commercial Policy/Trade Policy/Foreign trade Policy/ Exim Policy • Control the internal/external trade and other commercial activities of the economy
• A commercial policy or trade policy is a governmental policy governing trade with other countries. This covers • To improve & extend international aid/co-operation through the exchange of goods & making a contract with
tariffs, trade subsidies, import quotas, voluntary export restraints, and restrictions on the establishment of foreign- different countries.
owned businesses, regulation of trade in service, and other barriers to international trade.
• To create a favorable environment for foreign trade/exchange.
• To import raw materials, machinery, parts & accessories necessary for producing goods.
• To stabilize the foreign exchange rate.
• Encourage domestic and foreign investment in overall industrial development.

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Instruments of Foreign Trade Policy

Tariff
Quotas
Export Subsidies
Voluntary Export Restraint
Thank you
Export Credit Subsidies
Exchange Control

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