NATIONAL INCOMEMEASURES AND METHODS OF CALCULATION

NATIONAL INCOME

National income is the total value a country’s final output of all

new goods and services produced in one year. Understanding

how national income is created is the starting point for

MACROECONOMICS. This also includes

• GDP

• PCI

• NNI

• NNP

• PPP

GROSS DOMESTIC PRODUCT

Gross domestic product (GDP) is defined by OECD as "an

aggregate measure of production equal to the sum of the

gross values added of all resident institutional units engaged

in production.

GDP estimates are commonly used to measure the

economic performance of a whole country or region, but can

also measure the relative contribution of an industry sector.

This is possible because GDP is a measure of 'value added'

rather than sales; it adds each firm's value

METHODS OF CALCULATING GDP

There are three methods to calculate GDP

1. Production approach

• Estimate the gross value of domestic output out of the many various economic

activities;

• Determine the intermediate consumption, i.e., the cost of material, supplies

and services used to produce final goods or services.

• Deduct intermediate consumption from gross value to obtain the gross value

added.

Gross domestic product = gross value of output – value of intermediate

consumption.

2. INCOME APPROACH

The second way of estimating GDP is to use "the sum of primary incomes

distributed by resident producer units".

If GDP is calculated this way it is sometimes called gross domestic income

(GDI), or GDP (I). GDI should provide the same amount as the expenditure method

described later.

This method measures GDP by adding incomes that firms pay households for

factors of production they hire - wages for labor, interest for capital, rent for land

and profits for entrepreneurship.

GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and imports

3. EXPENDITURE APPROACH

• The third way to estimate GDP is to calculate the sum of the final uses of

goods and services measured in purchasers' prices.

• In economics, most things produced are produced for sale and then sold.

Therefore, measuring the total expenditure of money used to buy things is a

way of measuring production. This is known as the expenditure method of

calculating GDP.

GDP (Y) is the sum of consumption (C), investment (I), government spending

(G) and net exports (X – M)

Y= C+I+G+(X-M)

PER CAPITA INCOME

Per capita income, also known as income per person, is

the mean income of the people in an economic unit such

as a country or city. It is calculated by taking a measure

of all sources of income in the aggregate and dividing it

by the total population.

= TOTAL INCOME

Total population

NET NATIONAL PRODUCTNet national product (NNP) refers to gross national product (GNP), i.e. the total market value

of all final goods and services produced by the factors of production of a country or other polity

during a given time period, minus depreciation. Similarly, net domestic product (NDP)

corresponds to gross domestic product (GDP) minus depreciation. Depreciation describes the

devaluation of fixed capital through wear and tear associated with its use in productive

activities.

In national accounting, net national product (NNP) and net domestic product (NDP) are given

by the two following formulas

NNP = GNP – DEPRECEIATION

NDP = GDP - DEPRECIATION

NET NATIONAL INCOME

Net national income (NNI) is an economics term used in national income accounting. It can be defined as

the net national product (NNP) minus indirect taxes. Net national income encompasses the income of

households, businesses, and the government.

It can be expressed as:

NNI = C + I + G + (NX) + net foreign factor income - indirect taxes - manufactured capital

depreciation

where:

C = Consumption

I = Investments

G = Government spending

NX = net exports (exports minus imports)[exports – imports]

PURCHASING POWER PARITYPurchasing power parity (PPP) is a component of some economic theories and is a technique

used to determine the relative value of different currencies.

The concept of purchasing power parity allows one to estimate what the

exchange rate between two currencies would have to be in order for the

exchange to be at par with the purchasing power of the two countries'

currencies. Using that PPP rate for hypothetical currency conversions, a given

amount of one currency thus has the same purchasing power whether used

directly to purchase a market basket of goods or used to convert at the PPP rate

to the other currency and then purchase the market basket using that currency.

Observed deviations of the exchange rate from purchasing power parity are

measured by deviations of the real exchange rate from its PPP value of 1

LIMITATIONS OF NATIONAL INCOME ESTIMATION IN INDIA

1 Output of non monetized sector

2. Non availability of data about income of small

producers or household enterprises

3 Absence of data on income distribution

4 Unreported legal incomes

TRENDS IN NATIONAL INCOME IN INDIA

NEED FOR CALCULATING NATIONAL INCOME

• National income is considered a major economic indicator that helps the study of overall

economic activity, production, consumption and trade in a country. Country income provides

useful information about.

• The overall size of the country’s economy.

• Economic growth trends in comparison to the previous year’s performance and the nation’s

economic health.

• The contribution of various production sectors to the national economy.

• Future growth prospects.

• Standard of living in the country.

• National income data also helps the government strategize future economic policies and

formulate developmental plans. It also helps business groups estimate future market trends

in terms of product demand

INDIA’S ANNUAL GDP

GDP per capita1,498.87

USD (2013)

GDP growth rate5.0% annual

change (2013)

Gross national

income

6.698 trillion PPP

dollars (2013)

Gross domestic product elsewhere(2013)

China 9.24 trillion USD (2013)

United States of

America16.8 trillion USD (2013)

Pakistan 236.6 billion USD (2013)

GROWTH IN GDP AND FUTURE PLANS

1. Improve its governance. This is probably the hardest and most important task -- the

precondition for the rest. Whoever leads the next government in 2014, India needs maximum

governance and minimum government. There is no point having the world’s largest democracy

unless it leads to effective government.

2. Fix primary and secondary education. There has been some progress here, but a huge

number of young people still get little or no schooling. I sit on the board of Teach for All, a

global umbrella organization for groups that encourage the brightest graduates to spend at

least two years teaching. Today India has about 350 teachers in these programs. It could do

with 350,000 or more.

3. Improve colleges and universities. India has too few excellent institutions. Its share of

places in the Shanghai ranking of the world’s top universities should be proportional to its

share of global gross domestic product -- meaning 10 universities in the top 500 (it currently

has just one). Make that an official goal.

4. Adopt an inflation target, and make it the center of a new macroeconomic

policy framework.

5. Introduce a medium to long-term fiscal-policy framework, perhaps with

ceilings as in the Maastricht Treaty -- a deficit of less than 3 percent of GDP

and debt of less than 60 percent of GDP.

6. Increase trade with its neighbors. Indian exports to China could be close to

$1 trillion by 2050, almost the size of its entire GDP in 2008. But India has

little trade with Bangladesh and Pakistan. There’s no better way to promote

peaceful relations than to expand trade -- and that means imports as well as

exports.

7. Liberalize financial markets. India needs huge amounts of domestic and

foreign capital to achieve its potential -- and a better-functioning capital

market to allocate it wisely.

• 8. Innovate in farming. Gujarat isn’t a traditional agricultural producer, but it

has improved productivity with initiatives like its “white revolution” in milk

production. The whole nation, still greatly dependent on farming, needs

enormous improvements.

• 9. Build more infrastructure. I flew in to Ahmedabad via Delhi, and out via

Mumbai, all in a day. I got where I needed to go -- but it’s obvious how much

more India needs to do. Adopt some of that Chinese drive to invest in

infrastructure.

• 10. Protect the environment. India can’t achieve 8.5 percent growth for the next

30 to 40 years unless it takes steps to safeguard environmental quality and use

energy and other resources more efficiently. Encouraging the private sector to

invest in sustainable technologies can boost growth in its own right.

THANK

YOU