Economics ppt

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NATIONAL INCOME 1

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economics

Transcript of Economics ppt

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NATIONAL INCOME

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National Income

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Group MembersSaima Pervaiz Mehak TanveerRida AslamShabnoor JavedMishal MaryFaryal Iqbal

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Content:National incomeMethods to measure National IncomeConcept of GDP and GNP as National IncomeFlow DiagramImportance of National IncomeAdvantages and Disadvantaged of GDP

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National IncomeThe sum total of the values of all goods and services

produced in a year

It is the money value of the flow of goods and services available in an economy in a year

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National IncomeNational Income refers to-The income of a country

to a specified period of time, say a yearincludes all types of goods and serviceswhich have an exchange valuecounting each one of them only once

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NI – Methods of computationThree methods to measure the national incomeThey are-

Production method or Census methodIncome methodExpenditure method

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Production methodIn this methodThe total products produced in the economy are

calculated for the year and the value is added without double counting

The economy is classified into sectors likeAgricultural, industrial, fisheries, forest, direct

services and foreign transactions etcIn each sector, we can find the value of final goods

and services

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Production methodIn the international transactions, net foreign income

is calculated by subtracting the total imports from the total exports and added to the national income

The results of these sectors, when combined, gives the national income or national product

The census or product method can be expressed through the formula

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Production method O = C + I

Where O stands for output,C stands for consumption of goodsI stands for investment goods

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Income MethodAccording to this methodNet incomes of individuals and business houses

during a year are added to know the national incomeOnly those incomes earned and received for

producing goods and for rendering services are to be counted

Transfer payments such as old age pensions , widow pensions and unemployment benefits etc should not be counted as these are the incomes received without contributing to the production

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Income MethodPeople get incomes in the form of Rents, wages or salaries, interest and profitThe formula is

Y = C + S

Here Y stands for Total IncomeC stands for consumption and S stands for Savings

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Expenditure method

One man’s income is another man’s expenditureTherefore national income can be arrived at by

adding the total expenditure of individual and business firms during a year

Expenditure or outlay on final products takes place in three ways

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Expenditure method

Expenditure or outlay on final products takes place in three ways

Expenditure by consumers on goods and servicesExpenditure by entrepreneurs on capital or

investment goodsExpenditure by government on consumption and

capital goods

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Expenditure methodThe formula for this method is

Y = C + I

Here Y stands for total expenditureC stands for consumption expenditure I stands for investment expenditure

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National Income conceptsThe following are the concepts of national incomeGross National Product – GNPNet National Product – NNPPersonal Income – PIPer capita Income – PCI

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National Income conceptsGross National ProductNational Income is the sum total of values of all

goods and services produced during a yearThe money value of this total output is known as

Gross National Product – GNP

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GDP(Gross Domestic Product)Market value of finally prepared goods and servicesWithin a countryRestricted to a specific time period (usually of one

year)Indicator of the progress of a countryCommonly used to calculate national income

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Governmentpurchases of goods

and services

Governmentpurchases of goods

and services

Y = C + I + G + NXY = C + I + G + NXY = C + I + G + NXY = C + I + G + NX

Total demandfor domestic output (GDP)

Total demandfor domestic output (GDP)

is composed of

is composed of

Consumptionspending byhouseholds

Consumptionspending byhouseholds

Investmentspending by

businesses andhouseholds

Investmentspending by

businesses andhouseholds Net exports

or net foreigndemand

Net exportsor net foreign

demand

The Components of GDP

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Components of GDP(1)Consumption (c) - Durable goods - Non-durable goods - Services (2) Investment (I) (3)Government spending (G) (4)Net exports (X-M)

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(1)Consumption (c)

“C” is private consumption the economy. Consumption is spending by households on goods & services excluding purchase of new housing.

Include - food - rent - medical expenses -clothing

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(1) Durable goods

This items have larger life span. Consider similar to a consumer investment8% GDPIts components - autos(3.6%) - furniture(3%)

Ovens

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Examples of durable goods

- Refrigerators- Washing machine-Toster- Ovens & etc.

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(2) Non –durable goods

Non durable items have shorter life span. 20% GDPIts components -food(10%) -clothing(2.7%) -fuel(2.4%)

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Examples of Non-durable goods

-Groceries-News paper-Foods-Cloths

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(3)Services:

Fastest growing component of consumer purchases has been the area of services40% GDP components -real estate(10%) -healthcare(12%)

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Examples of services

-Medical treatment-insurance -banking

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(2) Investment (I)

“I” is defined as business investment capital including the purchase of new housing.Ex. Investment in new mine company……..

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(3) Government spending (G)

“G” is the sum of expenditure on final goods and services. in concerned -salaries -weapons for military -etc.

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Examples of government spending

WeaponsSalariesDeffence & Etc.

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(4) Net exports (X-M=XM)

(x-m) is gross exports.Incleding goods and services.

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GDP measures allGDP measures all final goods/services final goods/services produced produced by by workers workers and and capital of a capital of a local state local state , regardless of ownership., regardless of ownership. [[Domestically located resourcesDomestically located resources] ] Final goodsFinal goods are goods are goods ready for consumptionready for consumption..

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1. 1. Intermediate GoodsIntermediate Goods – components of the final good. – components of the final good. A. A company buys A. A company buys batteries or tiresbatteries or tires for its cars. for its cars.

B. KFC buys B. KFC buys chickenschickens to eventually sell to customers. to eventually sell to customers.

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[It has not been produced again[It has not been produced again in in 19631963 & & would not count.]would not count.]

2. 2. 2nd Hand Sales2nd Hand Sales – – no no current production.current production. A. 1957 Chevy boughtA. 1957 Chevy bought in in 20072007

The salesman is doing productive work. His commission would count.The salesman is doing productive work. His commission would count.B. Boots producedB. Boots produced in in 1980 are bought 1980 are bought in ain a Thrift Store in 07. Thrift Store in 07.

They also have not been produced again.They also have not been produced again.Salesman’s commission would count.Salesman’s commission would count.You are buying his services.You are buying his services.

SalesmanSalesman

Shoe salesmanShoe salesman

57 Chevy57 Chevy

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3. Purely Financial TransactionsPurely Financial Transactions – stocks, bonds, CDs. There is no current productionno current production. Ex: If 100 shares of Dell stock100 shares of Dell stock is bought

I’m not buying a Dell computerI’m not buying a Dell computerbut part ownership of Dell.but part ownership of Dell.

Exchanging one financial asset for anotherExchanging one financial asset for another[swapping bits of paper][swapping bits of paper]

Buying stock is not buying a product but Buying stock is not buying a product but buying buying ownership of the firmownership of the firm. Buying bonds is . Buying bonds is making a loan..

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4. 4. Public Transfer PaymentPublic Transfer Paymentss –welfare, unemployment, social –welfare, unemployment, social securitysecurity. [There is nono contribution to final productioncontribution to final production]

“Now that I’ve gotten my welfare check, I can get an iPhone”

Also, Private Transfer Payments, like your parents giving you $250 cash for Christmas, or - $100 for making an “A” in economics. [Just transferring funds from one private individual to another private individual]

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Making money illegally (drug money)and making it look like it was legallyearned (like buying a laundry mator car wash that deal in cash) and report it as legally earned.

Illegal business activity, because it goes unreported, also does

not count. Making up 1/31/3 of the “underground economy,”“underground economy,” it includes murder for hire, gambling, drugs, prostitution, and money laundering.

“I’m getting $1,000 to killyou, but at least itwill not count in GDP.”

Money Laundering

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DefinitionGross National Product (GNP): It is the combined value of all the final goods and services produced in a country during an accounting year, including net factor income from foreign countries

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How To CalculateGNP = GDP + Net factor income from abroad

Net factor income: it difference between income earned in foreign countries by residents of a country and income earned by foreign nationals domestically.

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What does GNP indicate?GNP helps to measure the contribution of residents

of a country to the flow of goods and services within and outside the national territory.

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Double AccountingA term used to describe the problematic situation that

occurs when the costs of intermediate goods used to produce a final good are included in the calculation of GNP. But the price of the final good already includes the price of intermediate goods.so this way we are counting price of intermediate goods twice, this situation is called double accounting.

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GNP as a inductorGNP is not a good inductor due to its limitation.

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The Circular-Flow of national Income Markets for Goods and Services

Firms sell Households buy

Markets for Factors of Production Households sell Firms buy

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Hosehold Firms

Factoral Income (Y)= 7000

Factors of Production

Savings (S)= 2000

Consumption (C)= 5000

Goods and ServiesInvestment (I)

= 2000

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The Circular-Flow DiagramFactors of Production

Inputs used to produce goods and services Land, labor, and capital

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Importance of national incomeIt indicates the prosperity of a nation. Growth in

national income indicates economic prosperityIt indicates the standard of living of people of a

countryIt indicates the per capita income with which we can

compare the levels of development of all the countriesCountries can be classified as ‘developed’ and

‘developing’ and ‘under developed’ based on their per capita income only

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Importance of national incomeNI estimates are very helpful to the Finance Minister.

It guides him to make proper and right decisions in regard to taxation and budgets

It is useful to compare the prosperity of a country at different times

It provides an instrument of economic planningIt indicates the trends of inflation and deflation.

Proper corrective action can be taken against them

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Importance of national incomeIt helps to know the progress of various sectors in the

economy. Imbalanced growth, if any, can be solvedIt helps in forecasting the economic future and

preplanning is possibleIt indicates the economic status of a country among

the nations of the world

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Advantages of national incomeGross Domestic Product (GDP) is an economic

measure of a nation's total income and output for a given time period (usually a year). Economists use GDP to measure the relative wealth and prosperity of different nations, as well as to measure the overall growth or decline of a nation's economy

The most common way to measure GDP is the expenditure approach

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Benefits of GdpTotal domestic consumption:

This is the total amount spent on domestically produced final goods and services. Final goods are items that will not be resold or used in production within the next year — milk, cars, bow ties, and so on.

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Benefits of gdp2 Total domestic investment expenditures: This measurement includes not only investments in

stocks and bonds, but also investments in equipment — such as bulldozers, computer servers, and commercial buildings — that will be useful over a long period of time. It also includes inventory goods — final goods waiting to be sold that a company still has on hand.

Government expenditures: This includes everything from paying military salaries to building roads and maintaining monuments, but does not include welfare and social security payments

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Benefits of gdp.3 Net exports: Net exports are the total of goods and services

produced domestically and sold to foreigners minus goods and services produced by foreigners but sold domestically (imports).

Using GDP as a measure of a nation's economy makes sense because it's essentially a measure of how much buying power a nation has over a given time period. GDP is also used as an indicator of a nation's overall standard of living because, generally, a nation's standard of living increases as GDP increases.

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Disadvantages of gdp4 GDP doesn't count unpaid volunteer work: GDP doesn't take into account work that people do

for free, from an afternoon spent picking up litter on the roadside to the millions of man-hours spent on free and open source software (such as Linux). In fact, volunteer work can actually lower GDP when volunteers do work that might otherwise have gone to a paid employee or contractor

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Disadvantages of gdpDisasters can raise GDP: Wars require soldiers, oil spills require cleanup, and

natural disasters require health workers, builders, and all manner of helping hands. Rebuilding after a disaster or war can greatly increase economic activity and boost GDP.

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Disadvantages of gdpGDP doesn't account for quality of goods: Consumers may buy cheap, low-quality, short-lived

products repeatedly instead of buying more expensive, longer-lasting goods. Over time, consumers could spend more replacing cheap goods than they would have if they had bought higher-quality goods in the first place, and GDP would grow as a result of waste and inefficiency.

Although economists are constantly working on other ways to measure an economy, GDP is still the best indicator of a nation's overall economic health, in spite of its shortcomings

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