Presentation is loading. Please wait.

Presentation is loading. Please wait.

Chapter 3 Basics of National Income Accounting. Gross Domestic Product  Money value of all final goods and services produced within the domestic territory.

Similar presentations


Presentation on theme: "Chapter 3 Basics of National Income Accounting. Gross Domestic Product  Money value of all final goods and services produced within the domestic territory."— Presentation transcript:

1 Chapter 3 Basics of National Income Accounting

2 Gross Domestic Product  Money value of all final goods and services produced within the domestic territory and valued at market prices in a given time period  Time period : typically one year : India – 1 April to 31 March  Product : output of goods and services  Money value : converting output into a common denominator of money

3 Need for ‘Money Value’ Common Unit Money (Rs) (Measured in Kgs) (Measured in litres) (Measured in metres) (Measured in tonnes)  Different commodities measured in different units  Addition becomes difficult

4 Nominal GDP  GDP (output) is valued at current prices  Current prices are the prices prevailing in the year in which production takes place  Reflects the change in output due to:  Price changing and / or  Quantity of commodities produced changing CommodityOutputPrice Value of OutputPriceValue of (Yr1) (Yr1) output(Yr2) (Yr2)output Wheat (kg) Cloth (mt) GDP Nominal GDP

5  Table shows GDP has increased  Output has remained constant in both years  Rise in GDP due to rise in price  Inflationary trend needs to be discounted to get actual change in availability of goods and services  Use of ‘Real GDP’

6 Real GDP  GDP measures at constant prices  Value current year’s output using base year prices  Rise in GDP reflects rise in output CommodityOutputPrice Value of OutputPriceValue of (Yr1) (Yr1) output(Yr2) (Yr1)output Wheat (kg) Cloth (mt) GDP Real GDP  Value of output has remained constant over the years

7 GDP Deflator  Measures the average price level of all goods and services that constitute GDP in the economy  Output is kept constant  GDP Deflator = X 100  For year 2 – GDP Deflator = X 100 =  On an average prices have risen by 41% Nominal GDP Real GDP

8 Terms to Understand  Domestic product vs National product  Gross product vs Net product  Final product vs Intermediate products  Market price vs Factor Cost

9 Domestic Product vs National Product  Domestic Product is the output produced within the economic or domestic territory of a country Domestic territory Includes : i.Political boundaries ii.High commissions, embassies military bases located overseas iii.Ships, fishing vessels, air crafts owned by residents Domestic territory excludes : i.Embassies, aid agencies of foreign governments situated in India ii.Offices of international organisations such as World Bank, IMF etc Indian High Commission Islamabad UK High Commission World Bank Office Indian Airline flying from Kathmandu to Colombo

10 Normal Resident of a country  Normal Resident is defined as a person who  Ordinarily resides in a country  Economic interest lies within the economic territory  Resident ≠ Citizen  Citizenship based on nationality  Resident based on economic interest HouseholdProduction unit Resident

11 Normal Residents of a country  All households in an economy ≠ resident households  Households = Resident + Non-resident households  Non-resident households in a domestic territory include :  Foreign visitors on conferences, vacations, tours  Seasonal workers within the domestic territory  Diplomats of other countries living within the domestic territory  Foreign employees in international organisations  Foreign consultants, technicians, engineers who come on projects  Resident households outside the domestic territory include :  Citizens of a country employed in their own embassies, consulates, military bases  Medical patients and students (as long as they continue to be a part of a household of their home country)  Citizens working in the local offices of international organisations

12 Domestic Product vs National product  National income is the income earned by residents of an economy  Domestic income=income of residents in the domestic territory + income of non-residents in the domestic territory  National income=income of residents in the domestic territory + income of residents from abroad  National income=Domestic income + net factor income from abroad

13 Net factor income from abroad (NFIFA)  NFIFA=Factor income earned by residents abroad - Factor income earned by non-residents in the domestic territory Factor income earned by non-residents within the domestic territory Factor income earned by residents abroad minus UK High Comm. Delhi (abroad) Indian Security Guard Factor Income Factor Services British Security Guard Factor Income Indian High Comm., London (domestic territory) Factor Services

14 Domestic Product vs National Product  Domestic Product = National Product – NFIFA  National Product = Domestic Product + NFIFA  When NFIFA National Product  When NFIFA > 0; Domestic Product < National Product

15 Gross Product vs Net Product  Gross product includes depreciation  Depreciation  Wear and tear of plant and machinery with use  Foreseen obsolescence  Also called  Replacement cost  Consumption of capital  Gross product = net product + depreciation  Net product = gross product - depreciation If Gross product is Rs 200 and Depreciation is Rs 50, then Net product is Rs 150 New clothes Faded clothes wear and tear

16 Final vs Intermediate Goods Intermediate Products  Goods and services used for furthering production Final Products  Goods and services used for directly satisfying the wants of consumers  No good is either intermediate or final  Distinction is based on the USE of the good Household VegetablesFood Tasty Food Restaurant VegetablesFood

17 Problem of Double Counting  Occurs when the value of a commodity is counted more than once in valuing the output of an economy  Output available is valued at Rs. 100 and not Rs. 150 ( )  Rs. 50 (value of inputs) is already included in Rs. 100 (value of output) MILK Cocoa Chocolate Yummy Chocolate Factory Input = Rs. 50 Sugar Rs Rs Rs. 10 Output = Rs. 100 Rs. 100

18 Problem of Double Counting  Leads to overestimation of output  Can be avoided by :  taking only final goods and services  taking value added at each production process Farmer Wheat Rs. 20 Miller Flour Rs. 30 Baker Bread Rs. 40 Customer Bread Rs. 40 Value Added 20 – 0 = 2030 – 20 = 1040 – 30 = 10  Total value added = = Rs. 40  Value of final product = Rs. 40

19 Indirect Tax Factor Cost: Rs. 100 Sales Tax: 10% Market Price: Rs Rs. 10 = Rs. 110 Product at Market Price vs Product at Factor Cost Factor Cost + Net Indirect Taxes = Market Prices Indirect Tax Subsidy ___ Rs. 100 Factory Rs. 10 Government Results in : price  Subsidy Factor Cost: Rs. 100 Subsidy: 10% Market Price: Rs Rs. 10 = Rs. 90 Government Rs. 10 Rs. 100 Results in : price  Factory Paid to factors of production Paid by households

20 Factor Income vs Transfer Receipts Factor Income  Arise due to the result of productive activity  Paid to factors of production  Included in national income estimates  e.g. : rent, wages, interest, profits Transfer Receipts  Do not arise due to any productive activity  Not paid to factors of production  Excluded from national income estimates  e.g. : scholarships to students, old age pension, lotteries, remittances received from abroad


Download ppt "Chapter 3 Basics of National Income Accounting. Gross Domestic Product  Money value of all final goods and services produced within the domestic territory."

Similar presentations


Ads by Google