DOCSLIB.ORG

National Income and Its Concepts

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
National Income and Its Concepts National Income and its Concepts Dr. Vijay Kumar Gupta, Assistant Professor of Economics, Women’s College, Samastipur, L.N.Mithila University, Darbhanga(Bihar) 1. Gross Domestic Product at Market Price: It is the total market value of the final goods and service produced within the domestic territory of a country during one year. GDP has following features: (i) GDP is inclusive of the depreciation allowance or consumption of fixed capital. (ii) Here we take the value of all final goods and services produced by normal residents as well as by non-residents within the domestic territory of a nation in an accounting year. (iii) Prevailing market price or current price of goods and services produced is taken. (iv) To avoid double counting, only final goods and services are included in GDP. (v) Only new goods and services are considered. The value of second hand goods is not included in it. (vi) Value of financial capital like shares, bonds etc. is not a part of GDP but commission on transactions of second hand goods and financial capital is added in GDP. (vii) Goods coming to the market for sale are the ones to be counted in GDP. Goods for self-consumption are also a part of GDP but services for self- consumption are not included. (viii) Imputed value of free residential accommodation, food, clothing and other monetary benefits provided to workers and rent on self-occupied houses are included in GDP. (ix) Transfer payments, capital gains and income earned through illegal means are not included in GDP. According to Dernburg “Gross Domestic Product at market price is defined as the market value of output of final goods and services produced in the domestic territory of a country during an accounting year.” 2. Gross National Product at Market Price Gross National Product at market price is a wider concept. It is actually the sum of gross domestic product and net factor income from abroad. According to Dernburg, “The Gross National Product at market price is defined as the market value of the final goods and Page | 1 services produced in an economy during an accounting year including net factor income from abroad.” Thus Gross National Product at market price includes all the constituents of gross domestic product at market price and net factor income from abroad. GNP at Market Price = GDP at Market Price + Net Factor Income from Abroad Distinction between GDP at market price and GNP at market price. (i) The concept of GNP at market price is broader than GDP at market price as it also includes net factor income from abroad. (ii) National product can take place in any part of the world where normal residents of the specific country work. But domestic product is limited to the domestic territory of a country. Domestic production can be produced by normal residents or even foreigners. (iii) Factor income earned from abroad is added to the GDP at market price and factor income earned by foreigners in that country in subtracted from it. (iv) National product will be greater or less than domestic product if net factor income from abroad is positive or negative. 3. Net National Product at Market Price: It is equal to gross national product at market price minus the consumption of fixed capital or depreciation. It is more practical. According to Peterson, “Net National Product at market price is the market value of the net output of final goods and services produced by an economy during an accounting year and net factor income from abroad.” Difference between net national product at market price and gross national product at market price. Due to wear and tear of fixed capital in the process of production of goods and services, depreciation or consumption of fixed capital occurs. When the value of depreciation is deducted from GNP at market price, we get the value of Net National Product at market price. NNP at Market Price = GNP at Market Price - Depreciation GNP at Market Price = NNP at Market Price + Depreciation 4. Net Domestic Product at Market Price Net domestic product at market price is the market value of all final goods and services produced within the nation’s borders during a given interval (such as a year) minus consumption of fixed capital. According to Dernburg, “Net domestic product at market price is the market value of net output of final goods and services produced in the domestic territory of a country by its normal residents and non-residents during an accounting year.” Page | 2 Net domestic product at market price is the difference between net national product at market price and net factor income from abroad. It can also be estimated by deducting depreciation from gross domestic product at market price. Net Domestic Product at Market Price = Net National Product at Market Price – Net Factor Income from Abroad Net Domestic Product at Market Price = Gross Domestic Product at Market Price – Depreciation 5. Net Domestic Income or Net Domestic Product at Factor Cost Production is actually the result of the efforts of all factors of production like land, labor, capital and entrepreneurship. Payment made to these factors as rent, wages, interest and profit is known as factor cost and output produced is called output at factor cost. Factor payments are income for the owners of factors and cost for the firm. Net domestic product at factor cost is also known as domestic income. According to Peterson, “The net domestic product at factor cost is the sum of net values added by all the producers in the domestic territory of the country during an accounting year.” This is also called domestic income. Net domestic product at factor cost or net domestic income includes (a) Compensation of employees; (b) Operating surplus; (c) mixed income of the self-employed. (a) Compensation of Employees (i) Wages in cash and kind (ii) Contribution of employers on social security on behalf of the employees (b) Operating Surplus is the addition of rent, interest and profits. (c) Mixed income of the self employed Difference between net domestic product at factor cost and net domestic product at market price Net domestic product at factor cost is the total income received by the factors of production while net domestic product at market price is the market value of total production in the economy. Indirect taxes don’t go to the factors of production; they are paid to the government. But they are included in the market price. Subsidies are not included in market price but they are the income of the factors of production. So, net indirect taxes (indirect taxes – subsidies) are subtracted from the net domestic product at market price to estimate net domestic product at factor cost. Net Domestic Product at Factor Cost = Net Domestic Product at Market Price – Indirect taxes + Subsidies Page | 3 6. Gross Domestic Product at Factor Cost Gross domestic product at factor cost or gross domestic income includes compensating of employees, operating surplus and mixed income earned by the factors of production in an accounting year and depreciation or consumption of fixed capital. According to Hansen, “The Gross Domestic Product at factor cost is the sum of net value added by all the producers in the domestic territory of the country and the consumption of fixed capital during an accounting year.” Gross Domestic Product at Factor Cost = Net Domestic Product at Factor Cost + Depreciation Difference between gross domestic product at factor cost and gross domestic product at market price Net indirect taxes are subtracted from gross domestic product at market price to get gross domestic product at factor cost. GDP at factor cost = GDP Market Price - Indirect taxes + Subsidies 7. Net National Product at Factor Cost or National Income Net national product at factor cost is estimated by adding earnings of all factors of production (wages, rent, interest and profit) and net factor income from abroad. This is also known as National Income. According to Dernburg, “National Income is the factor income accruing to the residents of a country during a year. It is the sum of domestic factor income and net factor income from abroad.” NNP at factor cost = NDP at factor cost + ----------Net factor income from abroad. Difference between National Product at Factor cost and at Market price. Market price includes indirect taxes which go in government’s hands and are not a part of factor income and excludes subsidies which go to the factors of production. So, national product at factor cost includes all the elements of national product at market price except net indirect taxes (Indirect taxes - Subsidies). NNP at Factor Cost = NNP at Market Price - Net indirect taxes NNP at Market Price = NNP at Factor Cost + Net indirect taxes According to Hicks, “When economic welfare is to be measured it is more appropriate to use the concept of net national product at factor cost, and when the productivity of an economy is to be measured, it is more appropriate to use the concept of net national product at market price.” 8. Gross National Product at Factor Cost or Gross National Income Page | 4 Gross National Product at factor cost includes the earnings of all factors of production, depreciation and net factor income from abroad. According to Peterson, “Gross national product at factor cost is the sum of factor cost of the gross product attributable to the factors of production supplied by the normal residents of the country during a year and net factor income from abroad.” GNP at Factor Cost = NNP at Factor Cost + Depreciation GNP at Factor Cost = GNP at Market Price - Net indirect taxes Page | 5 .
Load more

Recommended publications
  • Capital Depreciation and Labor Shares Around the World: Measurement and Implications∗
    Capital Depreciation and Labor Shares Around the World: Measurement and Implications∗ Loukas Karabarbounis Brent Neiman University of Chicago and NBER University of Chicago and NBER October 2014 Abstract The labor share is typically measured as compensation to labor relative to gross value added (\gross labor share"), in part because gross value added is more directly measured than net value added. Labor compensation relative to net value added (\net labor share") may be more important in some settings, however, because depreciation is not consumed. We document that both gross and net labor shares have declined around the world over the past four decades. Some countries, including the United States, experienced increases in the value of depreciation and therefore their net labor share declined by less than their gross labor share. The average economy, however, experienced a similarly sized decline in both measures. Using a simple model, we analyze the relationship between technology, depreciation, factor shares, and inequal- ity. Consistent with our empirical findings, we demonstrate that gross and net labor shares move together in response to changes in the price of investment goods but not necessarily in response to other shocks. We illustrate that both labor share measures can be jointly informative about the structure of production, realization of shocks, and transitional dynamics of consumption inequality. JEL-Codes: E21, E22, E23, E25. Keywords: Depreciation, Labor Share, Inequality. ∗We gratefully acknowledge the support of the National Science Foundation and Chicago Booth. The Online Appendix that accompanies this paper can be found on the authors' web pages. 1 Introduction A recent wave of empirical work has invigorated interest in theories of factor shares, capital accumulation, growth, and inequality.
    [Show full text]
  • 14.54 F16 Lecture Slides: Production Functions
    14.54 International Trade Lecture 10: Production Functions 14.54 Week 6 Fall 2016 14.54 (Week 6) Production Functions Fall 2016 1 / 20 Today's Plan 1 Midterm Results 2 Properties of Production Functions (2 Factors) 3 Isoquants 4 Input Choice and Cost Minimization 5 Relative Factor Demand Graphs on slides 7, 10-17, and 19 are courtesy of Marc Melitz. Used with permission. 14.54 (Week 6) Production Functions Fall 2016 2 / 20 Introduction We will now introduce another factor of production: capital Can also think about other production factors: land, skilled versus unskilled labor, ... 14.54 (Week 6) Production Functions Fall 2016 3 / 20 What issues can be addressed when production requires more than a single factor? In the short-run, some factors are more ‘flexible’ than others: how quickly and at what cost can factors move from employment in one sector to another? Example of labor and capital: After a U.S. state is hit with a regional shock, unemployment rate falls back to national average within 6 years (most inter-regional employment reallocations also involve worker reallocations across sectors) In comparison, capital depreciates over 15-20 years and structures over 30-50 years In the short-run, labor is more ”flexible” than capital across sectors Distributional consequences across factors from changes in goods prices even in the long run 14.54 (Week 6) Production Functions Fall 2016 4 / 20 Production Function Under constant returns to scale, a production function with one factor can be summarized by a single number: unit input requirement (an overall productivity index) With more than one factor, a production function also characterizes the substitutability between the factors of production (as well as an overall productivity index) We will now assume that QC = FC (KC , LC ) and QF = FF (KF , LF ) We will continue to assume constant returns to scale: F (tK , tL) = tF (K , L) for any t > 0 And will also assume diminishing marginal returns to a single factor ..
    [Show full text]
  • National Income in India, Concept and Measurement
    National Income in India, Concept and Measurement National Income :- • National income is the money value of all the final goods and services produced by a country during a period of one year. National income consists of a collection of different types of goods and services of different types. • Since these goods are measured in different physical units it is not possible to add them together. Thus we cannot state national income is so many millions of meters of cloth. Therefore, there is no way except to reduce them to a common measure. This common measure is money. Basic Concepts in National Income:- • Gross domestic product • Gross domestic product at constant price and at current price • Gross domestic product at factor cost and Gross domestic product at market price • Net domestic product • Gross national product • Net national Product • Net national product at factor cost or national income Gross Domestic Product • Gross domestic product is the money value of all final goods and services produced in the domestic territory of a country during an accounting year. Gross Domestic Product at Constant price and Current price • GDP can be estimated at current prices and at constant prices. If the domestic product is estimated on the basis of the prevailing prices it is called gross domestic product at current prices. • If GDP is measured on the basis of some fixed price, that is price prevailing at a point of time or in some base year it is known as GDP at constant price or real gross domestic product. GDP at Factor cost and GDP at Market price • The contribution of each producing unit to the current flow of goods and services is known as the net value added.
    [Show full text]
  • The Concepts and Measurement of Output and Input
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Productivity Trends in the United States Volume Author/Editor: John W. Kendrick, assisted by Maude R. Pech Volume Publisher: Princeton University Press Volume ISBN: 0-87014-070-1 Volume URL: http://www.nber.org/books/kend61-1 Publication Date: 1961 Chapter Title: The Concepts and Measurement of Output and Input Chapter Author: John W. Kendrick Chapter URL: http://www.nber.org/chapters/c2237 Chapter pages in book: (p. 20 - 56) CHAPTER 2 The Concepts and Measurement of Output and Input IN THE first chapter we saw that there are various productivity concepts and that the movements of the corresponding measures differ accordingly. Given the general definition of a particular productivity measure, its movement will again be affected by the precise definitions given to the output and input components of the productivity ratios. This forms the subject matter of the first part of the present chapter. With respect to national output—the real value of the final goods and services produced in the nation's economy—the scope and movement of the measure will depend on the precise operational meaning given to such key words of the definition as "final," "nation," and "economy." These questions have been debated at length by national income experts; but we should like to indicate the significance for productivity analysis of the major issues that are resolved somewhat differently in the several important sets of available real product estimates. Industry output measures are likewise conditioned by industry classifications and output definitions, particularly as regards the distinction between gross and net output.
    [Show full text]
  • The Yen and the Japanese Economy, 2004
    8 The Yen and the Japanese Economy, 2004 TAKATOSHI ITO This chapter presents an overview of the Japanese macroeconomy and its exchange rate policy and monetary policy in the period 2003–04. It also examines the effects of the exchange rate changes on Japanese trade bal- ances. The monetary authorities of Japan—namely, the Ministry of Finance and the Bank of Japan (MOF-BOJ)—intervened in the foreign exchange market frequently heavily in 2003–04. The authorities sold ¥35 trillion (or $320 billion), 7 percent of the Japanese GDP, between January 2003 and March 2004. This chapter examines the presumed objectives of the large interventions and their effectiveness. Why the Japanese authorities inter- vened to this unprecedented extent is explained here in the context of the macroeconomic conditions and developments in the foreign exchange, spot, and futures markets. To summarize the chapter’s conclusions, interventions were conducted for several reasons—including to prevent “premature” appreciation in the midst of a weak economy, to help monetary policy by providing opportu- nities for unsterilized interventions, and to defuse excessive speculative pressure. These hypotheses on the motivations for intervention are sup- ported by data, but it is more difficult to judge whether the intended effects of the MOF-BOJ’s actions were achieved. Japan’s macroeconomic conditions are described in the chapter’s second section. The third section examines the relationship between the exchange rate and net exports of Japan. The next sections explains the reasons for heavy interventions from January 2003 to March 2004 and section provide data to back up these explanations.
    [Show full text]
  • Factor Proportions, Linkages and the Open Developing Economy
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Riedel, James Working Paper — Digitized Version Factor proportions, linkages and the open developing economy Kiel Working Paper, No. 20 Provided in Cooperation with: Kiel Institute for the World Economy (IfW) Suggested Citation: Riedel, James (1974) : Factor proportions, linkages and the open developing economy, Kiel Working Paper, No. 20, Kiel Institute of World Economics (IfW), Kiel This Version is available at: http://hdl.handle.net/10419/46955 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Kieler Arbeitspapiere Kiel Working Papers Working Paper No. 20 FACTOR PROPORTIONS, LINKAGES 'AND THE OPEN DEVELOPING ECONOMY by James,Riedel •\ Institut fiir Wfeltwirtschaft an der Universitat Kiel Kiel Institute of World Economics Department IV 2300 Kiel, Dusternbrooker Weg 120 Working Paper No.
    [Show full text]
  • Shared Producer and Consumer Responsibility — Theory and Practice
    ECOLOGICAL ECONOMICS 61 (2007) 27– 42 available at www.sciencedirect.com www.elsevier.com/locate/ecolecon METHODS Shared producer and consumer responsibility — Theory and practice Manfred Lenzena,⁎, Joy Murraya,1, Fabian Sackb, Thomas Wiedmannc aISA, School of Physics A28, The University of Sydney NSW 2006, Australia bSydney Water Corporation, 115–123 Bathurst St, Sydney NSW 2000, Australia cStockholm Environment Institute - York, University of York, Heslington, York, YO10 5DD, UK ARTICLE INFO ABSTRACT Article history: Over the past decade, an increasing number of authors have been examining the nexus of Received 7 March 2006 producer versus consumer responsibility, often dealing with the question of how to assign Received in revised form responsibility for internationally traded greenhouse gas emissions. Recently, a similar 15 May 2006 problem has appeared in drafting the standards for the Ecological Footprint: While the Accepted 26 May 2006 method traditionally assumes a full life-cycle perspective with full consumer responsibility, Available online 10 July 2006 a large number of producers (businesses and industry sectors) have started to calculate their own footprints (see www.isa.org.usyd.edu.au). Adding any producer's footprint to other Keywords: producers' footprints, or to population footprints, which all already cover the full upstream Producer responsibility supply chain of their operating inputs, leads to double-counting: The sum of footprints of Consumer responsibility producers and consumers is larger than the total national
    [Show full text]
  • Let's Take the Con out of Factor Content
    Let’s Take the Con Out of Factor Content Eric O’N. Fisher California Polytechnic State University, University of California at Santa Barbara, and Federal Reserve Bank of San Francisco Kathryn G. Marshall∗ California Polytechnic State University May 22, 2009 Abstract Factor price differences are of primary importance in explaining the fac- tor content of trade. They reflect local scarcity, and production techniques adapt accordingly. Since capital and labor are complementary inputs in al- most every industry, a country that is physically scarce in a factor may well be measured as abundant in its services. 1 Introduction The Heckscher-Ohlin-Vanek paradigm is a theory of trade in factor services, not in factors themselves. When factor prices are equalized, this difference causes little mischief. But if local shadow values of factors are disparate, then the theory and its proper empirical applications become more subtle. ∗The authors’ emails are efi[email protected] and [email protected]. They thank Shuichiro Nishioka and seminar participants at the Federal Reserve Bank of San Francisco for comments on an earlier draft. All the data, Gauss programs, and Eviews workfiles are available upon request. 1 The world economy consists of many countries producing similar goods using different technologies. The OECD has assembled 33 recent input-output matrices that can be used to construct consistent local measures of direct and indirect factor content in 48 sectors. They are an invaluable tool for the study of international trade or open economy macroeconomics. We take full advantage of them here. There is overwhelming evidence that factor prices are not equalized.
    [Show full text]
  • National Income and Product Accounts
    LECTURE NOTES_PARUL JAIN National Income and Product Accounts • National income and product accounts are data collected and published by the government describing the various components of national income and output in the economy. • The Department of Commerce is responsible for producing and maintaining the “National Income and Product Accounts” that keep track of GDP. LECTURE NOTES_PARUL JAIN Need for National Income Accounting • Indicates Economic Growth: – it indicates performance and the level of economic growth in an economy. The data on national income and per capita display the true picture of the health of an economy. If both are increasing continuously, it surely reflects an increase in economic welfare, otherwise not. • Helps in Policy Formulation: – Statistical data on national income not only helps in making economic analysis but also helps in policy formulation. Moreover it not only helps in formulating fiscal policy, monetary policy, foreign trade policy but also helps in making modifications and amendments wherever necessary. LECTURE NOTES_PARUL JAIN Need for National Income Accounting • Helpful in Making Comparisons – it helps us in comparing national income and per capita income of our country with those of other countries. This may lead us to make suitable changes in our plans and approach to achieve rapid economic development of our country. • Helpful to Trade Unions – National accounts throw light on distribution of factor incomes which is very helpful to trade unions and other labour organizations in making rational analysis of the remuneration the laborers are getting. • Distribution of income – National income accounting describes distribution of national income in terms of factors like interest, rent, profit & wages.
    [Show full text]
  • 1.4 I Production Method of Calculating National Income
    1.4 I Production Method of Calculating National Income In product method or value added method, we calculate the aggregate annual value of goods and services produced during a year. How to go about doing this? Do we add up the value of all goods and services produced by all the firms in an economy? The following example will help us to understand. Let us suppose that there are only two kinds of producers in the economy - wheat producers (or the farmers) and the bread makers (rhe bakers). The wheat producers grow wheat and they do not need any input other than human labour. They sell a part of the wheat to the bakers. The bakers do not need any other raw materials besides wheat to produce bread. Let us suppose that in a year the total value of wheat that the farmers have produced is ^100. Out of this they have sold ^50 worth of wheat to the bakers. The bakers have used this amount of wheat completely during the year and have produced ^200 worth of bread. What is the value of total production in the economy? If we follow the simple way of aggregating the values of production of the sectors, we would add ^200 (value of production of the bakers) to ^100 (value of production of farmers). The result will be ^300. A little reflection will tell us that the value of aggregate production is not ^300. The farmers had produced ^100 worth of wheat for which it did not need assistance of any inputs. Therefore, the entire ^100 is rightfully the contribution of the farmers.
    [Show full text]
  • Deciphering the Fall and Rise in the Net Capital Share: Accumulation Or Scarcity?
    MATTHEW ROGNLIE Massachusetts Institute of Technology Deciphering the Fall and Rise in the Net Capital Share: Accumulation or Scarcity? ABSTRACT In the postwar era, developed economies have experienced two substantial trends in the net capital share of aggregate income: a rise dur- ing the last several decades, which is well known, and a fall of comparable magnitude that continued until the 1970s, which is less well known. Over- all, the net capital share has increased since 1948, but once disaggregated this increase turns out to come entirely from the housing sector: the contribution to net capital income from all other sectors has been zero or slightly negative, as the fall and rise have offset each other. Several influential accounts of the recent rise emphasize the role of increased capital accumulation, but this view is at odds with theory and evidence: it requires empirically improbable elastici- ties of substitution, and it presumes a correlation between the capital-income ratio and capital share that is not visible in the data. A more limited narra- tive that stresses scarcity and the increased cost of housing better fits the data. These results are clarified using a new, multisector model of factor shares. ow is aggregate income split between labor and capital? Ever since HDavid Ricardo (1821) pronounced it the “principal problem of Polit- ical Economy,” this question of distribution has both puzzled and inspired economists. Views differ. In one popular interpretation, the division between labor and capital remains remarkably stable over time: John Maynard Keynes (1939) called this stability “one of the most surprising, yet best-established, facts in the whole range of economic statistics” (p.
    [Show full text]
  • The Concept and Measurement of Savings: the United States and Other Industrialized Countries
    The Concept and Measurement of Savings: The United States and Other industrialized Countries Derek W. Blades and Peter H. Sturm* Introduction 1. It has long been recognized that conventionally measured saving ra- tios differ widely between countries, and that among the 24 member coun- tries of the OECD the U.S. economy is the one with the lowest national sav- ing ratio. It is also true--though probably less well publicized-- that any’ definition of saving is to some extent arbitrary, and that given a specific definition, institutional differences between countries may result in differ- ences in saving ratios between economies which otherwise display identical characteristics and behavior. The present paper analyzes the question of how important institutional differences are in explaining observed differ- ences in official saving ratios between the United States and other industri- alized countries, and how sensitive this difference is to alternative defini- tions of saving and income. This analysis will be carried out for both the aggregate national saving ratio and the household saving ratio. A separate treatment of the household sector seems justified, given the dominating share this sector contributes to total national savings in most countries, and the focus on household behavior in theoretical discussions of savings determinants. 2. The various possible modifications of the official definition of sav- ings discussed here result in a large number of alternative savings concepts. Which of these alternatives is the "correct" one will of course depend on the question analyzed. Special attention will be given in this paper to the savings concept most relevant for the analysis of economic growth.
    [Show full text]