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Marshall‟s definition of National Income. ◦ “The labor and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds…. This is true net annual income or revenue of the country or national dividend.” Defects of this definition: Multiple goods and services Fear of Double Counting Many of produced commodities are not marketed and are kept as self consumption 2
Pigou‟s definition of National Income. “National income is that part of objective income of community, including of course income derived from abroad which can be measured in money.” Defects of this definition: There is no difference in the fundamental forms of goods which can and can not be exchanged for money. This definition is applicable only to developed countries where every good and service is purchased for money from the market. So it is not applicable to backward and underdeveloped countries. 3
Fisher‟s Point of view: earlier two definitions are based on production concept. But this definition is based on „consumption concept. “The national income or dividend consists solely of services as received by ultimate consumers, whether from their martial or from their human environment.‟ this definition provides an adequate concept of economic welfare which is dependent on consumption and consumption represent our standard of living. Defects of this point of view. ◦ Difficult to calculate money value of net consumption. ◦ Difficult in case of durable good. ◦ In case of Exchange of second hand goods. 4
So National income Means the total value of goods and services produced annually in a country. Or total amount of income accruing to a country from economic activities in a year‟s time which includes payments made to all resources in the form of wages, interest, rent and profits. 5
Gross Domestic Product at market price Gross National Product at market price Net National Product at market price Net Domestic Product at Market Price Net Domestic income or product at Factor Cost Gross Domestic income or product at Factor Cost Net National product at Factor Cost or National income Gross National product at Factor Cost or Gross National income 6
Gross domestic product (GDP) is a measure of the income and expenditures of an economy. It is the total market value of all final goods and services produced within a country in a given period of time. GDP= Market Price X Final Goods and Services ◦ Its Gross before depreciation ◦ Domestic production only ◦ Value of Final goods and services 7
GDP at market price=C+I+G+(X-M) GDP at factor cost=sum of value added GDP at factor cost = wage+rent+interest+gross profits+depreciation GDP at factor cost + indirect business taxes –subsidies = GDP at market price 8
GNP is the total measure of flow of goods and services at market value resulting from current production during a year in a country including net income from abroad. So, it includes ◦ Consumers‟ goods and services to satisfy the immediate wants of the people. ◦ Gross private domestic investment in capital goods. ◦ Goods and Services Produced by government. ◦ Net exports of goods and services. ◦ So GNP = GDP at Market Price + Net Factor Income from Abroad 9
Index of current year to a base year Market Price of only final product should be taken into account to avoid double counting Goods and services rendered free of charges are not included Sale/Purchase of old goods, shares, bonds, existing assets should not be considered Profit/Loss on account of change in price of capital asset should not be considered Income from illegal activities should not be considered 10
Income Approach: Remuneration paid in terms of money to factors of production annually in a country. It is the sum total of following ◦ Wages and Salaries ◦ Rent ◦ Interest ◦ Dividends ◦ Undistributed corporate profits ◦ Mixed Income ◦ Direct Taxes ◦ Indirect Taxes ◦ Depreciation ◦ Net Income Earned from abroad 11
Expenditure Approach to GNP Sum total of expenditure incurred on goods and services during one year in a country. It includes ◦ Private consumption expenditure (C) ◦ Gross domestic private investments( I) ◦ Net foreign investment (X-M) ◦ Government Expenditure on goods and services (G) 12
It includes money value of final goods and services at current prices during a year. It excludes the value of intermediate products. If all such differences are added up for all industries in the economy we arrive at GDP by value added. 13
Income earned involved in economic activities (production) and Income earned by residents (individuals / organizations) and The economic activities are carried out within or outside the economic territory and In a current year 14
Under what situation when GDP is greater than GNP? Income earned by non-residents locally is greater than income earned by residents abroad Net Income from abroad is negative 15
GDP / population size If we compare HK’s GDP with China’s GDP, which one is larger? If we compare HK’s per capita GDP with China’s GDP, which one is larger? 16
The equality of income andexpenditure can be illustratedwith the circular-flowdiagram.
Revenue Spending Market for Goods Goods & Goods & Services sold and Services Services boughtFirms Households Inputs for Labor, land, production Market for and capital Factors Wages, rent, of Production Income and profit 18
Market Value of Final goods and services produced during a year + Net Factor income from Abroad – Depreciation/ capital consumption 19
Net Domestic Product at Market Price = Value of Currently produced Final Goods/ Services - Capital Consumption/ Depreciation Net Domestic Income or Product at factor cost = Wages/ Compensation for Employment + Rent, interest, Profit or operating Surplus + Mixed Income Gross Domestic Income or Product at factor cost = Wages + Rent +Interest + Profit + Consumption of Capital/ Depreciation 20
Net National Product at Factor Cost or National Income = Net Domestic Product at factor Cost (Rent + Wages + interest + Profit) Gross National Product at factor Cost or Gross National Income = Wages + Rent +Profit + Interest +Depreciation + Net Factor Income from Abroad 21