CA. NARENDRA BHAMBWANI CA-INTER ECONOMICS ICAI –REVISION LECTURE 1- NATIONAL INCOME Q1. Explain the following 1. Gross Domestic Product (GDP) 2. Gross National Product (GNP) 3. Net National Product (NNP) (1) Gross domestic Product:- • refers to money value of all types of goods and services produced with the country. • Gross domestic product refers to the total domestic output. • It excludes goods produced in foreign country, • While calculating Gross domestic Product, only the money value of final goods and services. For example the value of cloth will be taken in GDP but the value of raw cotton which was used for making cloth will not be taken so as to avoid double counting. In other words what ever is produced in the country is only included in Gross Domestic Product. Gross domestic product is calculated as under Total value of final goods available in the country xxxx Add:- Goods exported xxxx xxxxx Less:- value of goods imported xxxxx Gross domestic product xxxxx There are two methods of valuing gross domestic product Gross Domestic Product at Market Price : In this method The goods and services Produced in a country are valued at Market Price. For example if 100 Bags of cement is produced the market Price of 100 cement of bags will be included in Gross domestic product. The Market price of a commodity includes the following Market Price = Income to factors of Production (Wages + Interest + Rent + Profits) + Taxes - Subsidies Gross Domestic Product at Factor Cost : In this method the goods and services Produced in a country are valued at factor cost. For example if 100 bags of cement are produced we will not value 100 bags at the market price but we will include only income received by factors of production Thus Gross domestic product at factor cost = GDP at Market Price - taxes + subsidies. In other words while calculating the value of goods and services produced we only include cost paid to factors of Production. Thus GROSS DOMESTIC PRODUCT INCLUDES THE FOLLOWING CA. NARENDRA BHAMBWANI CA-INTER ECONOMICS ICAI –REVISION LECTURE 1. Consumption goods : It includes market value of all the consumer goods and services Produced in the country . It covers Perishable goods such as milk , vegetables electricity etc. It also covers market value of durable goods such as television set, VCR, Car furniture etc and market value of consumer services such as services of a doctor , advocate teacher etc. 2. Investment : GDP also includes Capital goods Produced in the country and used as Private sector. It includes new factory Building constructed New Machines made during the current period. 3. Government Expenditure : It also includes amount spent by the Government on consumer as well as capital goods and services. Thus GDP = C + I + G + EXPORTS – IMPORTS (2) Gross National Product (GNP):- Gross National means Market values of goods and services produced in the country and Net income from abroad ( foreign country). While calculating Gross National Product only value of final goods and services is included to avoid double counting. • GNP = GDP + Net factor Income from abroad. GNP = C + I +G + EXPORTS - IMPORTS + Income earned by Indian national working in foreign countries - income earned by foreign nationals in India. While calculating GDP we include only value of goods and services produced in the country but for calculating GNP we include Net income from abroad. Net Income from abroad means Income earned by Indian national working in foreign countries - income earned by foreign nationals in India. In other word GROSS NATIONAL PRODUCT refers Income received by People of the country. Thus Gross national product includes value of goods and services produced by the Indian Nationals and excludes the contribution of Foreign nationals in the Production of goods and services. Gross National Product may be valued at Market Price or at factor cost Gross National product at market price : In this method the goods and services produced in a country are valued at market price. For example if 100 bags of cement is produced the market price of 100 cement of bags will be included in gross National product. The market price of a commodity includes the following CA. NARENDRA BHAMBWANI CA-INTER ECONOMICS ICAI –REVISION LECTURE Market price = income to factors of production ( wages + interest + rent + profits) + taxes - subsidies Gross National product at factor cost : In this method the goods and services produced in a country are valued at factor cost. For example if 100 bags of cement are produced we will not value 100 bags at the market price but we will include only income received by factors of production Thus gross domestic product at factor cost = market price - taxes + subsidies. In other words while calculating the value of goods and services produced we only include cost paid to factors of production. (3) Net National Product :- Before discussing the meaning of Net national Product let us first under stand the meaning of depreciation. Production of goods and services involve use of capital assets such as machines, factory building etc. Production process involves wear and tear of fixed assets. Wear and tear or exhaustion of fixed asset during Production process is called depreciation IN other words Production leads to creation of new goods but some part of the capital goods such as machinery etc is consumed during the production process. Net National Product refers to Gross National Product - Depreciation. THUS NNP = GNP - D Q2 Distinguish between a) Gross National Product and Net National Product b) Gross domestic Product and Gross National Product c) Gross domestic Product at Market Price and Gross Domestic Product at d) Gross National Product at Market Price and Gross National Product at Factor cost. a) Gross National Product Net National Product 1. by the people of country Produced by the people of a It includes net income from abroad. The country less depreciation 2. GNP = GDP + Net Income from abroad NNP = GNP - Depreciation 3. GNP is always higher than NNP NNP is lower than GNP b) Gross domestic Product Gross National Product 1. Gross domestic product Gross National Product refers refers to Money value of money value of goods and services goods and services Produced Produced by the people of the with in country. It does not of the country . It includes Net include net income from abroad Income from abroad. CA. NARENDRA BHAMBWANI CA-INTER ECONOMICS ICAI –REVISION LECTURE 2. GDP = Market value of final GNP = GDP + Income of Indian of goods and services available citizens from abroad - Income of in the country + Exports - Imports foreign nationals working in India 3. GDP = GNP - net income from GNP = GDP + Net income from abroad abroad c) Gross domestic Product Gross Domestic Product at Market Price at Factor Cost 1. It refers to market It refers to value of goods and value of goods and services services at Cost paid to factors Produced in a country of Production 2. GDP at Market Price GDP at Factor cost = GDP at market = GDP at Factor cost Price - Taxes + subsidies + Taxes - Subsidies. d) Gross National Product Gross National Product at Market Price at Factor Cost 1. It refers to market It refers to valuing goods and value of goods and services services produced by thecitizens Produced by the citizens of a country at cost paid to factors of Production 2. GNP at Market Price GNP at Factor cost = GNP at market = GNP at Factor cost Price - Taxes + subsidies + Taxes - Subsidies. Q3. What do you understand by the term " National Income " ? What are the various methods of estimating national Income. MEANING OF NATIONAL INCOME : National Income refers to the money value of final goods and services produced in a country during a year. National income also refers t to aggregate factor income or aggregate expenditure. According to the National committee of India " A National Income estimated measured the volume of commodities and services turned out during a given period, counted without duplication. The various methods of counting national Income are CA. NARENDRA BHAMBWANI CA-INTER ECONOMICS ICAI –REVISION LECTURE 1) Income Method 2) Product Method 3) Final expenditure method 1. Out Put Method:- Under This method, National Income is calculated by adding the value of final goods and services in a country during a year. The quantity of output Provided by different sectors is determined and their market value is worked out. While calculating National income by this method only value of final goods and services is included So as to avoid double counting. There are two ways in which value of output is computed (a) The final goods method. In this method only value of final goods and services is taken in to account to estimate GNP. The value of intermediate goods and services and raw materials is not considered as it would result in double counting. For eg.the4 value of cloth includes the value of raw cotton. (b) Value added method. Under this method the value added by each and every producing unit is added to arrive at the value of goods and serviced produced in the country. Value added by each production unit is calculated as under Value added = Value of out put produced - Value of input .In this method value added by all the producing units is added whether such units are producing intermediate goods or final goods. National Income is calculated as under: Value of final goods and services available in the country xxx Add : Value of exports xxxx Less : value of Imports xxx Gross Domestic Product at Market Price xxx Add Income of Indian citizens working abroad xxx Less Income of foreign Nationals working In India xxxx GROSS NATIONAL PRODUCT AT MARKET PRICE XXXX Less Depreciation xxxxx NET NATIONAL PRODUCT AT MARKET PRICE xxxx Less Taxes xxxx Add Subsidies xxxx NET NATIONAL PRODUCT AT FACTOR COST = NATIONAL INCOME XXX Income Method.