CHANAKYA GROUP OF ECONOMICS SESSION 2020-21 12th class ECONOMICS

Macro Economics: Part-5 Market price & Factor cost Aggregates related to national Income. Domestic product at Market price and factor cost

1.Gross domestic product at Market Price

GDP at Market price is the market value of final goods and services produced within the domestic territory of a country during an accounting year inclusive of depreciation. (GDPmp include Indirect taxes and deduct subsidies)

2.Gross domestic product at factor cost.

GDP at factor cost is the sum total of factor cost incurred on the production of final goods and services within the domestic territory of a country during an accounting year inclusive of depreciation. (GDPfc=Compensation of employee+ Rent+ Interest+profit.) (GDPfc include subsidies and deduct Indirect taxes ) Formulas of GDPmp and GDPfc

1. GDP at Market price = GDPfc + indirect taxes- subsidy.

1. GDP at Factor cost = GDPmp - indirect taxes+ subsidy.

Net indirect taxes= indirect taxes - subsidies 1.Gross National Product: Gross National Product (GNP) is defined as the total market value of all final goods and services produced in a country during a specific period of time, usually one year. It measures the output generated by a country’s organizations located domestically or abroad.

2.Gross Domestic Product: Gross Domestic Product (GDP) refers to the market value of final goods and services produced in a country in a given time period. It includes income earned by foreign players locally minus income earned by national players in abroad.

The GNP can be calculated with the help of the following formula: GNP = GDP +Net Factor Income from Abroad (NFIA)

From the above mentioned formula, we can calculate GDP as follows: GDP = GNP- NFIA 3.NDPmp refers to the market value of final goods and services produced by all the production units in the domestic territory of a country during a given time period. It excludes depreciation and includes indirect taxes. It is equal to the net value added at market price.

NDPmp can be calculated as follows: NDPmp = GDPmp – depreciation 4.NDPfc refers to the market value of final goods and services produced by all the production units in the domestic territory of a country during a given time period excluding depreciation and net indirect taxes. NDPfc is also known as Net Domestic Income (NDI).

It can be calculated as follows: NDPfc = GDPmp – depreciation – Net Indirect taxes Or NDPfc = NDPmp – Net Indirect Taxes = NDPmp – Indirect Taxes + Subsidies 5.Net National Product: Net National Product (NNP) is equal to GNP minus depreciation. It indicates the net output available for the consumption by society where society includes consumers, producers and government. NNP is the actual measure of the national income.

It can be calculated as follows: NNPmp = NDPmp + NFIA NNPfc is defined as the measure of the factor earnings of the residents of a country, both from economic territory and abroad. Therefore, NNPfc is equal to national income of country.

It can be calculated as follows: NNPfc = NDPfc + NFIA Aggregates related to national income

1.Domestic product

GDPmp NDPmp GDPfc NDPfc

GDPMP- GDPFC- Dep NDPMP+Dep+indi GDPMP- Dep. indirect taxes + OR rect taxes – Subsidy.(- net OR GDPMP- Subsidy. OR (+ net indirect taxes) indirect taxes + indirect taxes) GDPMP- Subsidy.(- net Dep+indirect taxes indirect taxes)- – Subsidy. dep DOMESTIC PRODUCT

NATIONAL 2.National Product PRODUCT GNPmp NNPmp GNPfc NNPfc

GDPmp + NDPmp+ GDPfc+ NDPfc+ NFIFA NFIFA NFIFA NFIFA NFIFA = Income earned by normal residents – income earn by non- residents.

or

NFIFA = factor income from abroad – factor income to abroad. All the types of transfer incomes are kept out of the national income estimates. For recipients of transfer payment, it is called transfer income, while for payers; it is termed as transfer expenditures. There are two types of transfers namely current and capital transfers.

The following are some of the examples of current transfers: a. Tax payments to the government b. Donations to non-profit institutions c. Scholarship to students d. Old age pensions e. Unemployment allowances f. Gifts and lottery prizes g. Aid provided by one country to another country in case of emergencies h. Transfer of money by resident of one country to relatives residing in other country On the other hand, capital transfers are the transfers made out of the wealth or capital of the payer and added to the wealth or capital of the recipient. The example of capital transfers are as follows: a. Capital grants from government to organizations b. Lump-sum payments to households in case of natural disasters c. Payment of taxes on capital and wealth CHANAKYA GROUP OF ECONOMICS SESSION 2020-21 12th class ECONOMICS Macro Economics: Part-6 Real GDP & Nominal GDP Methods of calculating National income. Concept of GDP

1.Nominal 3.GDP 2.Real GDP GDP deflator

1. Nominal GDP

The Nominal GDP is the total value of all of the final goods and services that an economy produces during a given year, measured on the basis of current prices.

Nominal GDP is measured on the basis of current price .

Nominal values of GDP from different time periods can differ due to changes in quantities of goods and services and/or changes in general price levels nominal GDP would also change even though output remained constant. Price index Nominal GDP = Real GDP × 100

Nominal GDP = Q × P Q- quantity of final goods and services produced during an accounting year. P- prices prevailing during the accounting s year.

Price index- it is difference between the price of two different periods.

If there is no inflation or deflation, nominal GDP will be the same as real GDP. 2.Real GDP The real GDP is the total value of all of the final goods and services that an economy produces during a given year, measured on the base year prices.

It is calculated using the prices of a selected base year.

GDP is calculated on the basis of fixed prices in some year.

To find out the real GDP a base year is chosen when the general prices level is normal, ie it is neither to high nor too low.

If prices change from one period to the next but actual output does not, real GDP would be remain the same. Real GDP reflects changes in real production.

GDP at current prices Real GDP = × 100 Price index

Real GDP = Q*P Price index- it is difference between the price of two different periods. Q- quantity of final goods and services produced during an accounting year. P- prices prevailing during the base year. Real GDP = Q*P

Real GDP increases only when Q increases .

Because prices remain constant.

So when real GDP increases there is an increases in the flow of goods and services, Other things remaining constant.

Real GDP increases- output or goods and services increases- quality of life improve. Real GDP example

In an economy total production of notebooks is 100 and current price of each notebook is 12 rupees in 2019-20, and base year price is 10rs

Real GDP = Q*P

Real GDP = 100 × 10 = 1000 Nominal GDP example

In an economy total production of notebooks is 100 and current price of each notebook is 12 rupees in 2019-20 and base year price is 10rs

Nominal GDP = Q*P

Nominal GDP = 100 × 12 = 1200 3.GDP deflator

GDP deflator is an index of price changes of goods and services included in GDP. It is a price index which is calculated by diving the nominal GDP in a given year by the real GDP for the same year and multiplying by 100.

Nominal (current price) GDP GDP Deflator = × 100 Real( constant price) GDP 1.If real GDP is 50 , and Price index is 400 , then Nominal GDP?

2.If Nominal GDP is and Price index is 400 , then Real GDP?

3.If Nominal GDP is and Real GDP is then Price index ?

GDP and Welfare

There is positive relation between GDP of a country and Welfare of people.

Real GDP is considered as an index of welfare of the people. Because it increase in real GDP means increase in level of output in the economy.

Welfare of the people measured in terms of the availability of goods and services per person. GDP and Welfare

1.Higher GDP Growth

6.Increase in investment. 2.Rise in level of Employment.

5.Rise in inducement 3.Rise in income of to invest. people

4.Rise in aggregare demand. Limitation of GDP and Welfare Increase in GDP always not lead to welfare of people, some time high GDP lead to reduction in welfare of the people. these are-

1. Unequal distribution of income – benefit of growth goes to richer section of the society.

2. Composition of GDP -more production of capital goods.(luxury goods)

3. Non-monetary transactions- (barter system) these goods are not recorded in GDP.

4. Externalities- good and bad impact of economic activities. If GDP increases by pollution related production activities then welfare will be reduced. home-work Q1. if real GDP is 520 and Price index.(base = 100) is 125 , calculat Nominal GDP. Q2. If the real GDP is 300 and nominal GDP is 330 , calculate price index.(base = 100)

Q3. if nominal GDP is 1200 and price index.(base = 100) is 120, calculate real GDP. CHANAKYA GROUP OF ECONOMICS 12th class ECONOMICS Macro Economics: Part-7

Methods of calculating National income 1.product method- I

calculating GDP OR GVA at Market prices and factor cost. Methods of calculating national income

1.Product1.Product 2.Income 3.Expenditure method/valuemethod/value method method. addedadded methodmethod Value Added Method

This method is used to measure national income in different phases of production in the circular flow. It shows the contribution (value added) of each producing unit in the production process. i. Every individual enterprise adds certain value to the products, which it purchases from some other firm as intermediate goods. ii. When value added by each and every individual firm is summed up, we get the value of national income. Value added Method is also known as:

(I) Product Method; (ii) Inventory Method; (iii) Net Output Method; (iv) Industrial Origin Method; and Concept of value added

Value added is the difference between value of output of an enterprise and the value of its intermediate consumption.

Value added= value of output – intermediate consumption.

Domestic sale + exprot Domestic consumption + import Value of Output: Value of output refers to market value of all goods and services produced during a period of one year.

How to Measure the Value of Output? (i) When the entire output is sold in an accounting year, then:

Value of Output = Sales (ii) When the entire output is not sold in an accounting year, then the unsold stock is added to the value of sales. Unsold stock is the excess of closing stock over opening stock and is termed as ‘Change in Stock’.

It means, Value of Output = Sales + Change in Stock, Change in stock = Closing stock – Opening stock One More way to Calculate Value of Output:

Value of Output can also be calculated as: Value of Output = Quantity x Price For example, if a firm manufactures 1,000 pairs of shoes annually and sells them @ Rs 500 per pair, then: Value of Output = 1,000 x 500 =Rs 5, 00,000

Exports are not separately Included: Like imports, exports are also not separately included in value of output if ‘Sales’ are given (and domestic sales are not specifically mentioned).

In case of an open economy, sales include both domestic sales and exports. Calculate Value of Output:

Case 1: (i) Sales = Rs 2,000; (ii) Exports = Rs 400 Value of Output = Rs 2,000 As exports are already included in the value of sales.

Case 2: (i) Domestic Sales = Rs 700; (ii) Exports= Rs 200 Value of Output = Rs 700 + Rs 200 = Rs 900 Exports are included as domestic sales are specifically mentioned. Estimating value added or value addition.

Output Value of Intermediate Value added output cost

1.Farmer(wheat) 500 200 300

2. Flour mill 700 500 200

3.Bakery 900 700 200

4.Shopkeeper 1000 900 100

Total 3100 2300 800 the gross value added by all the producing enterprises is 300+200+200+100=800 example: 1. Farmer sells wheat to flour mill in RS 500 it include the cost of inputs like seeds, fertilsers etc. so value adde by farmer is 500- 200=300

2. Flour mill buys wheat for 500 and sell it at 700 . Then value added by flour mill is 700-500= 200.

3. Beker buy flour for rs 700 and sell the bread for 900 . Then value added by baker is 900-700=200.

4. The shopkeeper buys the bread for 900, and sell them for 1000 to the consumer , then value added by shopkeeper is 1000-900=100

Thus, the gross value added by all the producing enterprises is 300+200+200+100=800 Value added by each producing enterprise is also known as Gross value added at market price( GVAmp) . GDPmp = GVAmp

1.Value added by primary sector.

2.Value added by secondary sector.

3.Value added by tertiary sector.

= GDPmp Calculation of national income by using Value added method.

Steps of Value Added Method:

Step 1: Identify and classify the production units: The first step is to identify and classify all the producing enterprises of an economy into primary, secondary and tertiary sectors.

Step 2: Estimate Gross Domestic Product at Market Price:

In the second step, Gross Value Added at Market Price (GVAMP) of each sector is calculated and sum total of GVAMP of all sectors give GDPMP, i.e. ∑GVAMP = GDPMP. Step 3: Calculate Domestic Income (NDPFC): By subtracting the amount of depreciation and net indirect taxes from GDPMP, we get domestic income, i.e. NDPFC = GDPMP – Depreciation – Net Indirect Taxes.

Step 4: Estimate net factor income from abroad (NFIA) to arrive at National Income: In the final step, NFIA is added to domestic income to arrive at National Income.

National Income (NNPFC) = NDPFC + NFIA

HOME WORK Calculate the value of 1. Gross value added at Market price. 2. National Income ( NNPfc)

(viii) Subsidies 20 (ix) Net factor income from abroad (-100) CHANAKYA GROUP OF ECONOMICS 12th class ECONOMICS Macro Economics: Part-8 Methods of calculating National income 1.product method- II

Problems of double counting and precautions related with product method

HOME WORK Calculate the value of 1. Gross value added at Market price. 2. National Income ( NNPfc)

(viii) Subsidies 20 (ix) Net factor income from abroad (-100) HOME WORK Calculate the value of 1. Gross value added at Market price. 2. National Income ( NNPfc)

(viii) Subsidies 20 (ix) Net factor income from abroad (-100) Problem of Double Counting:

In measuring the National Income, the value of only final goods and services is to be included.

However, the problem of double counting arises when value of intermediate goods is also included along with value of final goods.

Double counting refers to counting of an output more than once while passing through various stages of production. A commodity passes through various stages of production before reaching the final stage.

When value of the commodity is taken at each stage, it is likely to include the cost of inputs more than once. This leads to double counting. 1. Farmer: Suppose, farmer produces 50 kg of wheat and sells it for Rs 500 to miller (flour mill). For farmer, wheat of Rs 500 is a final product. (If he does not have to incur any expenditure on the cultivation of wheat then his value added will be Rs 500).

2. Miller: For miller, wheat is an intermediate good. Miller converts wheat into flour and sells it for Rs 700 to a baker. Now, flour of Rs 700 is a final product for the Miller. (Value added by miller = 700 – 500 = Rs 200)

3. Baker: For baker, flour is an intermediate good. Baker manufactures bread from flour and sells the entire bread to shopkeeper for Rs 900. Bread of Rs 900 is a final product for the baker. (Value added by baker = 900 – 700 = Rs 200) 4. shopkeeper For shopkeeper, bread is an intermediate good. He sells the entire bread to final consumer for Rs 1000. Bread of Rs 1000. is a final product for the shopkeeper. (Value added by shopkeeper = 1000 – 900 = Rs 100)

In the given example, wheat is a final product for farmer, flour for miller and bread for baker and shopkeeper.

As a general practice, every producer treats his commodity as the final output. It means: Total value of output = 500 + 700 +900+ 1,000 = Rs 3100. However, a careful examination reveals that each transaction contains the value of intermediate goods. 1. The value of wheat is included in the value of flour. 2. The value of flour is included in the value of bread. As a result, the values of wheat and flour are counted more than once. This causes the problem of double counting. It leads to over estimation of value of goods and services produced. How to Avoid Double Counting?

There are two alternative ways of avoiding double counting: (i) Final Output Method: According to this method, value of only final goods should be added to determine the national income.

In the given example, value of bread of Rs1, 000 sold to final consumers should be taken in the national income. (ii) Value Added Method: According to this method, sum total of the value added by each producing unit should be taken in the national income.

In the given example, value added by farmer (Rs 500), miller (Rs 200) and baker (Rs 200), and shopkeeper (100) i.e. total of Rs 1000 should be included in the National Income. Estimating value added or value addition.

Output Value of Intermediate Value added output cost

1.Farmer(wheat) 500 - 500

2. Flour mill 700 500 200

3.Bakery 900 700 200

4.Shopkeeper 1000 900 100

Total 3100 2300 1000 Precautions of Value Added Method:

The various precautions to be taken in Value Added Method are: 1. Intermediate Goods are not to be included in the national income since such goods are already included in the value of final goods. If they are included again, it will lead to double counting.

2. Sale and Purchase of second-hand goods is not included as they were included in the year in which they were produced and do not add to current flow of goods and services.

However, any commission or brokerage on sale or purchase of such goods will be included in the national income as it is a productive service. 3. Production of Services for self-consumption (Domestic Services) are not included. Domestic services like services of a housewife, kitchen gardening, etc. are not included in the national income since it is difficult to measure their market value.

It must be noted that paid services, like services of maids, drivers, private tutors, etc. should be included in the national income.

4. Production of Goods for self-consumption will be included in the national income as they contribute to the current output. Their value is to be estimated or imputed as they are not sold in the market. 5. Imputed value of owner-occupied houses should be included. People, who live in their own houses, do not pay any rent. But, they enjoy housing services similar to those people who stay in rented houses. Such an estimated rent is known as imputed rent.

6. Change in stock of Goods (inventory) will be included. Net increase in the stock of inventories will be included in the national income as it is a part of capital formation. HOME WORK CHANAKYA GROUP OF ECONOMICS 12th class ECONOMICS Macro Economics: Part-9 Methods of calculating National income 2.Income method-I Classification of Income method & Precautions regarding income method

2. 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.

Besides, there are some self-employed persons who employ their own labour and capital such as doctors, advocates, CAs, etc.

Their income is called mixed income.

The sum-total of all these factor incomes is called NDP at factor costs. Measurement of national income through income method involves the following main steps:

1. The first step in income method is also to identify the productive enterprises and then classify them into various industrial sectors such as agriculture, fishing, forestry, manufacturing, transport, trade and commerce, banking, etc.

2. The second step is to classify the factor payments. The factor payments are classified into the following groups: Classification of FACTOR INCOME

1.Compensation 2.Operating 3. Mixed of Employee surplus Income

ii. Rent and also which includes v. Mixed royalty, if any. i. Wages, income of the iii. Interest. ii.salaries, both in cash self-employed: iv. Profits: and kind, iii. employers’ Profits are divided into three contribution to social sub-groups: (i) Dividends security schemes. (ii) Undistributed profits iv.Pension on retirement. (iii) Corporate income tax 1.Compensation of Employee

1. Compensation of employees which includes

I. Wages, II. salaries, both in cash and kind, III. as well as employers’ contribution to social security schemes. IV. Pension on retirement. 2.Operating surplus

ii. Rent and also royalty, if any.

iii. Interest.

iv. Profits:

Profits are divided into three sub-groups: (i) Dividends- it is part of profit which is distributed among the shareholders. It is also known as distributed profit. (ii) Undistributed profits- it is part of profit which is kept by the firm for future use, to meet some contingent expenses. It is also known as corporate saving or undistributed profit. (iii) Corporate income tax- it is part of profit which is paid to the govt as profit tax. 3. Mixed Income

Mixed income refers to the Mixed income of the self-employed persons using their own labour, land , capital, and entrepreneurs in their household enterprises. These incomes are mixture of wages, rent, interest and profit. 1.Compensation of Employee + 2.Operating surplus + 3. Mixed Income = Net domestic product at factor cost ( NDPFC) + NFIA=NNPFC ( NATIONAL INCOME) 3. The third step is to measure factor payments. Income paid out by each enterprise can be estimated by gathering information about the number of units of each factor employed and the income paid out to each unit of every factor.

4. The adding up of factor payments by all enterprises belonging to an industrial sector would give us the incomes paid out to various factors by a particular industrial sector.

5. By summing up the incomes paid out by all industrial sectors we will obtain domestic factor income which is also called net domestic product at factor cost (NDPFC).

6. Finally, by adding net factor income earned from abroad to domestic factor income or NDPFC we get net national product at factor cost (NNPFC) which is also called national income. Precautions:

While estimating national income through income method the following precautions should be taken:

1. Transfer payments are not included in estimating national income through this method.

2. Imputed rent of self-occupied houses are included in national income as these houses provide services to those who occupy them and its value can be easily estimated from the market value data.

3. Illegal money such as hawala money, money earned through smuggling etc. are not included as they cannot be easily estimated. 4. Windfall gains such as prizes won, lotteries are also not included.

5 The receipts from the sale of second-hand goods should not be treated as a part of national income. This is because the sale of second-hand goods does not create new flows goods and services in the current year.

6. Income equal to the value of production used for self- consumption should be estimated and included in the measure of national income. CHANAKYA GROUP OF ECONOMICS 12th class ECONOMICS Macro Economics: Part-10 Methods of calculating National income 2.Income method-II Calculation of N.I by using Income method