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2. National Income2 3. Group MembersSaima PervaizMehak TanveerRida AslamShabnoor JavedMishal MaryFaryal Iqbal3 4. Content:National incomeMethods to measure National IncomeConcept of GDP and GNP as National IncomeFlow DiagramImportance of National IncomeAdvantages and Disadvantaged of GDP4 5. National IncomeThe sum total of the values of all goods and servicesproduced in a yearIt is the money value of the flow of goods and servicesavailable in an economy in a year5 6. National IncomeNational Income refers to-The income of a countryto a specified period of time, say a yearincludes all types of goods and serviceswhich have an exchange valuecounting each one of them only once6 7. NI Methods of computationThree methods to measure the national incomeThey are-Production method or Census methodIncome methodExpenditure method7 8. Production methodIn this methodThe total products produced in the economy arecalculated for the year and the value is added withoutdouble countingThe economy is classified into sectors likeAgricultural, industrial, fisheries, forest, directservices and foreign transactions etcIn each sector, we can find the value of final goodsand services8 9. Production methodIn the international transactions, net foreign incomeis calculated by subtracting the total imports fromthe total exports and added to the national incomeThe results of these sectors, when combined, givesthe national income or national productThe census or product method can be expressedthrough the formula9 10. Production method O = C + IWhere O stands for output,C stands for consumption of goodsI stands for investment goods10 11. Income MethodAccording to this methodNet incomes of individuals and business housesduring a year are added to know the national incomeOnly those incomes earned and received forproducing goods and for rendering services are to becountedTransfer payments such as old age pensions , widowpensions and unemployment benefits etc should notbe counted as these are the incomes received withoutcontributing to the production11 12. Income MethodPeople get incomes in the form ofRents, wages or salaries, interest and profitThe formula is Y = C + SHere Y stands for Total IncomeC stands for consumption and S stands for Savings12 13. Expenditure methodOne mans income is another mans expenditureTherefore national income can be arrived at byadding the total expenditure of individual andbusiness firms during a yearExpenditure or outlay on final products takes place inthree ways13 14. Expenditure methodExpenditure or outlay on final products takes place inthree waysExpenditure by consumers on goods and servicesExpenditure by entrepreneurs on capital orinvestment goodsExpenditure by government on consumption andcapital goods14 15. Expenditure methodThe formula for this method is Y = C + IHere Y stands for total expenditureC stands for consumption expenditure I stands for investment expenditure15 16. National Income conceptsThe following are the concepts of national incomeGross National Product GNPNet National Product NNPPersonal Income PIPer capita Income PCI16 17. National Income conceptsGross National ProductNational Income is the sum total of values of allgoods and services produced during a yearThe money value of this total output is known asGross National Product GNP17 18. GDP(Gross Domestic Product)Market value of finally prepared goods and servicesWithin a countryRestricted to a specific time period (usually of oneyear)Indicator of the progress of a countryCommonly used to calculate national income19 19. The Components of GDPYYYY ==== CCCC ++++ IIII ++++ GGGG ++++ NNNNXXXXGovernmentGovernmentpurchases of goodspurchases of goodsand servicesand servicesTotal demandfor domesticoutput (GDP)Total demandfor domesticoutput (GDP)is composedis composedofofConsumptionspending byhouseholdsConsumptionspending byhouseholdsInvestmentspending bybusinesses andhouseholdsInvestmentspending bybusinesses andhouseholds Net exportsNet exportsor net foreigndemandor net foreigndemand 20. Components of GDP(1)Consumption (c)- Durable goods- Non-durable goods- Services(2) Investment (I)(3)Government spending (G)(4)Net exports (X-M) 21. (1)Consumption (c) C is private consumption the economy. Consumption is spending by households ongoods & services excluding purchase ofnew housing. Include - food- rent- medical expenses-clothing 22. (1) Durable goodsThis items have largerlife span.Consider similar to aconsumer investment8% GDPIts components- autos(3.6%)- furniture(3%)Ovens 23. Examples ofdurable goods- Refrigerators- Washingmachine-Toster- Ovens & etc. 24. (2) Non durablegoodsNon durable itemshave shorter life span. 20% GDPIts components-food(10%)-clothing(2.7%)-fuel(2.4%) 25. Examples ofNon-durable goods-Groceries-News paper-Foods-Cloths 26. (3)Services:Fastest growing componentof consumer purchases hasbeen the area of services40% GDP components-real estate(10%)-healthcare(12%) 27. Examples of services-Medical treatment-insurance-banking 28. (2) Investment (I)I is defined as businessinvestment capital includingthe purchase of newhousing.Ex. Investment in newmine company.. 29. (3) Government spending (G)G is the sum of expenditureon final goods and services. in concerned-salaries-weapons for military-etc. 30. Examples of governmentspendingWeaponsSalariesDeffence& Etc. 31. (4) Net exports (X-M=XM)(x-m) is gross exports.Incleding goods andservices. 32. GGDDPP mmeeaassuurreess aallll ffiinnaall ggooooddss//sseerrvviicceesspprroodduucceedd bbyy wwoorrkkeerrss aanndd ccaappiittaall ooff aallooccaall ssttaattee ,, rreeggaarrddlleessss ooff oowwnneerrsshhiipp..[[DDoommeessttiiccaallllyy llooccaatteedd rreessoouurrcceess]]FFiinnaall ggooooddss aarree ggooooddss rreeaaddyy ffoorr ccoonnssuummppttiioonn.. 33. 11.. IInntteerrmmeeddiiaattee GGooooddss ccoommppoonneennttss ooff tthhee ffiinnaall ggoooodd..AA.. AA ccoommppaannyy bbuuyyss bbaatttteerriieess oorr ttiirreess ffoorr iittss ccaarrss..BB.. KKFFCC bbuuyyss cchhiicckkeennss ttoo eevveennttuuaallllyy sseellll ttoo ccuussttoommeerrss.. 34. 2. 2nd Hand Sales no current production.A. 1957 Chevy bought in 2007SSaalleessmmaann[It has not been produced again in 1963 & would not count.]The salesman is doing productive work. His commission would count.B. Boots produced in 1980 are bought in a Thrift Store in 07.They also have not been produced again.Salesmans commission would count.You are buying his services.SShhooee ssaalleessmmaann5577 CChheevvyy 35. 3. Purely Financial TTrraannssaaccttiioonnss stocks, bonds, CDs.There is nnoo ccuurrrreenntt pprroodduuccttiioonn.Ex: If 110000 sshhaarreess ooff DDeellll ssttoocckk is boughtBBuuyyiinngg ssttoocckk iiss nnoott bbuuyyiinngg aa pprroodduucctt bbuutt bbuuyyiinnggoowwnneerrsshhiipp ooff tthhee ffiirrmm.. BBuuyyiinngg bboonnddss iiss making a loan..IImm nnoott bbuuyyiinngg aa DDeellll ccoommppuutteerrbbuutt ppaarrtt oowwnneerrsshhiipp ooff DDeellll..EExxcchhaannggiinngg oonnee ffiinnaanncciiaall aasssseett ffoorr aannootthheerr[[sswwaappppiinngg bbiittss ooff ppaappeerr]] 36. 44.. PPuubblliicc TTrraannssffeerr PPaayymmeennttss wweellffaarree,, uunneemmppllooyymmeenntt,, ssoocciiaallsseeccuurriittyy. [There is nnoo ccoonnttrriibbuuttiioonn ttoo ffiinnaall pprroodduuccttiioonn]Now that Ive gotten mywelfare check, I can get aniPhoneAlso, Private Transfer Payments, like yourparents giving you $250 cash for Christmas,or - $100 for making an A in economics.[Just transferring funds from one privateindividual to another private individual] 37. Illegal business activity, because it goes unreported, also doesnot count. Making up 11//33 of the uunnddeerrggrroouunndd eeccoonnoommyy,, itincludes murder for hire, gambling, drugs, prostitution, andmoney laundering.Making money illegally (drug money)and making it look like it was legallyearned (like buying a laundry mator car wash that deal in cash) andreport it as legally earned.Im getting $1,000 to killyou, but at least itwill not count in GDP.Money Laundering 38. DefinitionGross National Product (GNP):It is the combined value of all thefinal goods and services produced in a country duringan accounting year, including net factor income fromforeign countries42 39. How To CalculateGNP = GDP + Net factor income from abroadNet factor income: it difference between incomeearned in foreign countries by residents of a countryand income earned by foreign nationals domestically.43 40. What does GNP indicate?GNP helps to measure the contribution of residentsof a country to the flow of goods and services withinand outside the national territory.44 41. Double AccountingA term used to describe the problematic situation thatoccurs when the costs of intermediate goods used toproduce a final good are included in the calculation ofGNP. But the price of the final good already includes theprice of intermediate this way we are countingprice of intermediate goods twice, this situation is calleddouble accounting.45 42. GNP as a inductorGNP is not a good inductor due to its limitation.52 43. The Circular-Flow of national IncomeMarkets for Goods and Services Firms sell Households buyMarkets for Factors of Production Households sell Firms buy 44. 6060Hosehold FirmsFactors of ProductionFactoral Income (Y)= 7000Savings (S)= 2000Consumption (C)= 5000Goods and ServiesInvestment (I)= 2000 45. The Circular-Flow DiagramFactors of Production Inputs used to produce goods and services Land, labor, and capital 46. Importance of national incomeIt indicates the prosperity of a nation. Growth innational income indicates economic prosperityIt indicates the standard of living of people of acountryIt indicates the per capita income with which we cancompare the levels of development of all the countriesCountries can be classified as developed anddeveloping and under developed based on their percapita income only62 47. Importance of national incomeNI estimates