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National Income

Chapter 2. National Income. 1. Central endogenous macroeconomic variables. * Real income / growth rate. * Unemployment / employment rate. * Inflation rate. They must be uniquely defined before their behaviour could be explained / predicted. Group Low income countries

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National Income

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  1. Chapter 2 National Income

  2. 1. Central endogenous macroeconomic variables * Real income / growth rate * Unemployment / employment rate * Inflation rate They must be uniquely defined before their behaviour could be explained / predicted

  3. Group Low income countries Lower middle income countries Upper middle income countries High income countries Per capita GNP (1999) $755 and less $756 – 2,995 2,996 – 9,265 9,266 and above 2. Countries:World Bank atlas classification

  4. 3. Income concepts • Gross National Product (GNP) • Net National Product (NNP) • Gross Domestic Product (GDP) • Net Domestic Product (NDP) -at Market prices / factor cost • Private income • Personal income • Personal disposable Income - at current prices

  5. 4.GNPM stands for the monetary value of • all goods and services that are • (a) currently produced (flows only) • (b) sold through the official market (2 exceptions) (c) not resold or used in further production (final goods only) (d) produced anywhere but by the nationally owned resources (e) valued at the market prices

  6. 5. Under estimation of income • Do it yourself activities • Parallel /black economy • Illegal production • Legal but un / under reported production

  7. 6. Fundamental income identities • GNPF = GNPM ‑ Ti + S (2.1) • GDPF = GNPF ‑ NIA (2.2) • (domestic territory) • NNPF = GNPF ‑ D (2.3) • NDPF = GDPF ‑ D (2.4) • Pvt. I = NNPF ‑ IAD ‑ END + NDI + TAD + OTA • (2.5) • PI = Pvt. I ‑ RE – CT (2.6)

  8. PDI = PI ‑ HDT – MAD (2.7) • S + T + M = I + G + X (2.8) • - Three gaps • - Measurement alternatives: • Production = Income = Expenditure (2.9) • GDPF = P1Q1 + P2Q2 + ........+ PnQn • (2.10) • NDPF = W + R + I + P (2.11) • GDPM = C + I + G + X – M (2.12)

  9. Table 2.1: National Income and Related Aggregates (at current prices) (Rs crores) Variable 1980-81 1990-91 2000-01 1. GNP at market prices 136358 527989 2070574 1.1 Indirect taxes 16746 76329 247528 1.2 Subsidies 3160 18609 55383 2. GNP at factor cost (1-1.1+1.2) 122772 470269 1878429 2.1 Net factor income earned abroad 345 –7545 –17414 3. GDP at factor cost (2-2.1) 122427 477814 1895843 3.1 Capital consumption 12087 52195 198447 4. NNP at factor cost (NI) (2-3.1) 110685 418074 1679982 5. NDP at factor cost (3-3.1) 110340 425619 1697396 5.1 Income of govt. admn. depts. from entrep. and property 554 4584 19887 5.2 Saving of govt. non-dept. enterprises –820 2555 21591 5.3 National debt interest 1524 20233 109222 5.4 Current transfers from govt. admn. dept. 2835 15641 61300 5.5 Other net current transfers from abroad 2257 3711 58412 6. Private income (4-5.1-5.2+5.3+5.4+5.5) 117567 450520 1867438 6.1 Retained earnings of nation's private sector 584 6198 30531 6.2 Corporate tax 1378 5335 28487 7. Personal income (6-6.1-6.2) 115605 438987 1808420 7.1 Household direct tax 2197 7593 50996 7.2 Miscellaneous receipt of govt. admn. dept. 303 2097 7317 8. Personal disposable income (7-7.1-7.2) 113105 429297 1750107 Source: CSO: National Accounts Statistics , Various Issues.

  10. 7. Circular flow of income G + TP = T + GBD (2.13) (2.14) (2.15)

  11. Figure 1: Circular Flow of Income 14 Investments Financial PersSav. 11 Institutions Govt. Savings 13 (-ve) 5 1 RE D Government NDI+TP • Per.TP 4 2 CT T 12 8 i HDT 3 S Govt. C 9 7 [Rents+Wages 6 Interest+Profit] Households Firms FOP GNP 10 Pvt. Consumption Exports Imports 15 16 Rest of the World

  12. 8. PPP income • PPP of Indian rupee = Number of rupees • required to purchase a representative basket • of goods and services in India that one US • dollar will buy in USA • PPP income of India = • * Paradox : Official forex rate = Rs 46/US $ • PPP ( India ) = 12 • * Is rupee over/under valued ?

  13. 9. Human development index / QLI index * Extreme values : Max. = 1, min. = 0 * Three ingredients • - Per capita GDP (PPP) • - Life expectancy at birth(Min. : 25 years, • Max. : 85 years) • - Adult literacy (W=2/3) and primary, secondary • and tertiary enrolment rate(W=1/3) (min. 5%, • max. 100%) • * India’s HDI = 0.590, Rank = 127/175 (2001) • USA = 0.937 • Canada = 0.937 • Norway = 0.944 (Max.)

  14. 10. Income and economic welfare • National Income suffers from twin issues: • * Measurement errors • a) ignores the non‑market and black (parallel) economy • b) measures services sector output erroneously • c) ignores the quality of products, which may not be • accurately measured by their prices • d) measures output at the official exchange rate • *Imperfectmeasure of economic welfare • e)ignores the benefits due to leisure • f) equates goods (education) and bads (weapons)/ • public/ merit/ other goods • g) ignores income distribution • h) counts both addictions (drinking) and cures • (medicines for drunks)

  15. Ignores costs of growth, associated with traffic congestion, pollution, accidents, use of natural resources, environment degradation etc • Ignores weather conditions • Includes income generated through non‑productive activities such as defense, police and courts, which are considered ‘regrettable’ goods. They may be necessary but do not contribute to the standard of living or quality of life • Ignores the quality of life, which is influenced by education, health, living together, love to own land, human freedom etc. • Ignores ethics, values, traditions, culture, customs, habits, religious, emotions etc. • Bottom-line: per capita income, non-market and black economy, • saving and investment rates

  16. 11. International scenario • Size • Per capita income • Growth rate • HDI • Life expectancy • Literacy

  17. Table 2.5: International Data on Income and Related Variables Country GNP at current GNP per capita at Real GDP per Life expectancy Adult illiteracy HDI prices current prices capita growth at birth 2001 2001 rate 1990-2001 2002 2002 ( %) 2001 (Billion US $) (US $) (Years) ( Years) Measurd PPP Measurd PPP (%) Males Females Males Females (Max 1) India 502 2691 480 2570 4 64 63 31 54 0.59 USA 10110 10110 35060 35060 2.1 80 74 0 0 0.937 Canada 701 882 22300 28070 2.1 82 76 0 0 0.937 UK 1486 1523 25250 25870 2.5 80 75 0 0 0.93 Japan 4266 3315 33550 26070 1 85 78 0 0 0.932 Switzerland 274 226 37930 31250 0.3 82 76 0 0 0.932 Singapore 86 96 20690 23090 4.4 80 76 4 11 0.884 Indonesia 150 632 710 2990 2.3 68 64 8 17 0.682 Malaysia 86 201 3540 8280 3.9 75 70 8 16 0.79 Republic of 473 785 9930 16480 4.7 79 71 1 3 0.879 Korea China 1210 5625 940 4390 8.8 73 69 8 21 0.721 Pakistan 59 281 410 1940 1.2 60 61 42 71 0.499 Sri Lanka 19 64 840 3390 3.6 76 70 5 11 0.73 Australia 387 528 19740 26960 2.7 82 76 0 0 0.939 Nigeria 39 103 290 780 -0.3 52 51 27 42 0.463 Russian 308 1127 2140 7820 -3.5 73 61 0 1 0.779 Federation World 31484 46952 5080 7570 1.2 - - - - 0.772 Sources: World Development Report 2003, UNDP: Human Development Report 2003, and World Bank: World

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