National Income - Lecture notes 1 PDF

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National Income...

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Concepts of National Income Topics to be discussed: Measurement Approaches to National Income: There are 3 approaches to the measurement of National Income: 1. Output/Production Approach: The production of all the goods and services is multiplied by the market value to get the national income. 2. Expenditure Approach: Money spend = Money income Consumption Expenditure (C) Government Expenditure (G) Investment Expenditure (I) Net export 3. Income Approach: Land, Labor, Capital and Enterprise Rent + Wages + Interest + Profit = National Income

1. GNP (Gross National Product) 2. GDP (Gross Domestic Product) 3. NNP (Net National Product) or National Income at Market Price 4. National Income (NI) or National Income at Factor Costs 5. Personal Income 6. Disposable Income 7. Personal Saving

1. National Income/GNP: In an open economy, GNP = C+I+G+Xn+Z Here, C= Consumption Expenditure I = Investment Expenditures G= Govt. Expenditure Xn = net exports = Export – Import (X-M), X = Total Export M= Total Import Z= Net Factor Income from Abroad

Gross National Product (GNP)  This is the basic national accounting measure of the total output or aggregate supply of goods & services.  GNP is defined as the total market value of all final goods and services produced in a year. Mobile: Processor + Battery + Memory Card +RAM +etc.  Two things must be noted in regard to GNP: i)

It measures the market value of annual output. In other words, GNP is a monetary measure.

ii)

For calculating gross national product accurately, all goods and services produced in any given year must be counted once, and not more than once.

3. Gross Domestic Product (GDP)  GDP is the money value of all final goods and services produced by normal residents as well as non residents in the domestic territory of a country.

 Difference between GDP and GNP: The difference between GDP and GNP at market prices arises due to the existence of ‘net factor income from abroad’. GDP does not include net factor income from abroad, whereas GNP includes it. Therefore, GDP (at market price), *GDP MP = GNPMP - Net factor income from abroad. = GNP - Z ** GNPMP = GDP MP + Net factor income from abroad.  Net Factor Income (Rent, Wages, Interest and Profit) from Abroad: The net factor income from abroad is the difference between factor income received from abroad by normal residents of Bangladesh for rendering services in other countries and the factor incomes paid to the foreign residents for factor services rendered by them in the domestic territory of Bangladesh. Components of Net Factor Income:  Net factor income earned from abroad have the following three categories: 1. Net compensation (wages, salaries) of employees. 2. Net income from property i.e., rent, interest and income from entrepreneurship (that is profits and dividends) 3. Net retained earnings of the resident companies working in foreign countries. How to calculate Net Factor Income from Abroad: Source/Components of Net Factor Income

Salary & Wages Rent Interest Profit Total

Income to Bangladesh from abroad

Income from Bangladesh to abroad

$200000 $150000 $50,000 $100000 $500,000 Net Factor Income from Abroad

$250,000 $100000 $20,000 $50000 $420,000

Net income

($50,000) 50,000 30,000 50,000 $80,000

Furniture = Value 10,000 Suppose, Depreciation= 1000. Net value of furniture/product/national product= 10000 -1000 = 9,000 4. Net National Product (NNP) or National Income at Market Prices

 In the production of gross national product of a year, we consume or use up some fixed capital i.e., equipment, machinery etc. The capital goods, like machinery, wear out or fall in value as a result of its consumption or use in the production process. This consumption of fixed capital or fall in the value of fixed capital due to wear and tear is called DEPRECIATION.  When charges for depreciation are deducted from the gross national product we get Net National Product (NNP). * NNP or NIMP = GNPMP - Depreciation Expenses 5. National Income (NI) or National Income at Factor Cost (NIFC)  National income at factor cost which is simply called national income means the sum of all incomes earned by resource suppliers for their contribution of land, labor, capital and entrepreneurial ability which go into the year’s net production. In other words, national income or national income at factor cost shows how much it costs society in terms of economic resources to produce net output. It is really the national income at factor cost for which we use term National Income. •

National Income (NI) or National Income at Factor Cost (NIFC)

 The difference between national income (or national income at factor cost) and NNP (or national income at market price) arises from the fact that indirect taxes and subsidies cause market prices of output to be different from the factor incomes resulting from it. So, *National Income or (National Income at Factor Cost) = NNP (or National Income at Market Price) – Indirect Tax + Subsidies ** Net Indirect Tax (NIT) = Indirect Tax – Subsidies So, National Income = NNP – NIT = NNP – (Indirect Tax – Subsidies) = NNP –Indirect Tax + Subsidies

Product = Land + Labor + Capital + Enterprise = Rent + Wages + Interest +Profit = 5+3+2+5 = 15 + Tax/VAT (Tk. 2) = 17 (Market value) [MP – Indirect Tax = Factor Cost] Product at Factor Cost = Market Value (17) – Indirect Tax (2) = 15 Product (Fertilizer) = Land + Labor + Capital + Enterprise = Rent + Wages + Interest +Profit = 5+3+2+5 = 15 – Subsidies (3) = 12 (Market value) [FC = MP +Subsidies]

Product at Factor Cost = Market Value (17) – Indirect Tax (2) = 15 Product at Factor Cost = Market Value (12) + Subsidies (3) = 15 6. Personal Income (PI) A works in a firm. The firm’s income is Tk. 100. Is this Tk. 100 is the income of A? 100 – Corporate Tax – Contribution – Undistributed Profit (R/E) = Personal Level/Household level + Transfer payments = Personal Income.  Personal Income is the sum of all incomes actually received by all individuals or households during a given year.  National income, that is, total incomes earned and personal income , that is, total income received must be different because some incomes which are earned such as social security contributions, corporate income taxes, undistributed profits (Retained earnings) are not actually received by households, and conversely, some incomes which are received like transfer payments are not currently earned.  Examples of Transfer Payments: i)

Old age pensions

ii)

Unemployment compensations

iii)

Relief payments.

iv)

Interest payments on the public debt etc.

* Personal Income (PI) = National Income – Social security contributions – Corporate Income Taxes – Undistributed Corporate Profit (R/E) + Transfer Payments. 7. Disposable Income (DI)  Even whole of the incomes which are received by the people are not available to them for consumption. This is because govt. levy some personal taxes such as income tax, personal property taxes.  After a part of personal income is paid to govt. in the form of personal taxes like income tax, personal property taxes, etc., what remains of personal income is called disposable income. * Disposable Income (DI) = Personal Income – Personal Taxes. e.g. Personal Income =1000

Personal tax (income tax, wealth tax) = 100 Disposable Income = 1000 -100 =900 = Consumption + Saving  Disposable Income can either be consumed or saved. Hence, * Disposable Income (DI) = Personal Consumption + Savings 8. Personal Saving = Disposable Income – Personal Consumption

Problem You are given the following information related to the National Income Account: (Taka in billion) Particulars

Tk.

Particulars

Undistributed Corporate Profit/ RE

100 Corporate Income Taxes

Personal Taxes

110 Old Age Pensions

Tk. 110 20

Depreciation Expenses

10 Indirect Business Taxes

70

Net Factor Payment from abroad

40 Exports (X)

90

Personal Consumption Expenditure (C )

990

Govt. Purchases of goods and Services (G)

310 260

Social Security Contributions

50

Gross Private domestic investment (I)

Unemployment Compensation

30

Relief Payments

Imports (M)

20 Subsidies

Required: Calculate i) GNP iii) GDP iii) NNP iv) NI v) Personal Income (PI)/ (Household Income) vi) Disposable Income (DI) vii) Personal Savings (S)

Solution:

i) GNP = C+I+G+Xn+Z

20 10

= 990 + 260 + 310 + (90 – 20) + 40 = Tk. 1,670 billion. ii) Gross Domestic Product (GDP) = GNP – Net Factor income from abroad = 1670 – 40 = Tk. 1,630 billion iii) Net National Product (NNP)/ National Income at Market Price = GNP – Depreciation Expense = 1,670 – 10 = 1,660 iv) National Income (NI)/ National Income at Factor Cost = NNP – Indirect Tax + Subsidies = 1,660 – 70 + 10 = 1,600 v) Personal Income (PI) = NI – Undistributed Corporate Profit – Social Security Contribution – Corporate Income Tax + unemployment compensation + Old Age Pension + Relief Payments = 1,600 – 100 – 50 – 110 + 30 + 20 + 20 = 1,410 vi) Disposable Income (DI) = Personal Income – Personal Taxes = 1,410 – 110 = 1, 300 vii) Personal Savings (S) = DI – Personal Consumption (C) = 1,300 – 990 = 310...