1 Chapter 4 National Income and its Measurement

2 Chapter outline Meaning and definition. Significance of National Income Factors effecting the volume of National Income. Various concept of NI. Three approaches used to measure NI. 1.Product approach 2.Income approach 3.Expenditure approach Difficulties in measuring NI.

3 Definition to National Income  National Income is the monetary value of all goods and services produced in a country during one year, including income derived from abroad.

It mainly include the output of the following sectors: Agriculture Industry Natural Resources Trade Transport & communication Health & education Banking 4

5 Significance of NI It seeks to measure the level of production in the country in one year. We can know whether the economy is growing or declining by comparing it with the previous years.

6 CONT`D National income shows contributions by various sectors in the economic development of economy. Living standard and economic welfare of the people can be compared with other countries.

7 From National Income Data we can see the employment situation sector wise. By Looking the National Income Data we can see which sector of the economy is weak so we can focus on it to improve its performance. CONT`D

Factors influencing the volume of NI: Natural Resources:- A Country having large deposits of natural resources will have large production and hence large volume of national income. Human Resources:- If the human resources of a country are healthy and well-educated, the production of the country will be large and hence large volume of national income. 8

Man-made Resources:- If man-made sources are greater in number,it will increase the volume of business in the country and hence volume of national income. Credit Facilites:- Credit facilities in a country will increase the volume of business activities in a country and hence volume of national income. 9

10 Technology:- A country having advanced technology will have maximum production and hence will have large volume of national income. Political Stability:- If a country is politically stable, Local and foreign investment will be high which ultimately leads to high production and high national income.

11 GNP or ( Gross National Product) GNP or Gross national product is the money value of all final goods and services produced by the people within and outside the country for one year. GNP = GDP + (exports – imports) (Both goods and services)

12 MEASUREMENT OF NATIONAL INCOME There are three methods which are used to measure National Income: PRODUCTION OR OUTPUT METHOD Income Method Expenditure Method

13 PRODUCTION METHOD The national income is calculated by adding up the net values of all production that has taken place in different sectors of economy during a year. in this method the economy is divided into various sectors such as….  Agriculture  industry  Infrastructure  Banking  Health  Education  Transport and communication etc.

14 CONT`D The net market or money value of all these sectors is added and the result is coming as national income. Example….. production sectors Net value (billions) Agriculture 340 industry 210 Trade 290 Transport & communication 200 Health & education 250 Banking 160 NATIONAL INCOME 1450

15 INCOME METHOD In this method the income of all individuals in a country is calculated which they earn in return of services they provide for four factors of production such as, Land, Labor, Capital and organization. Thus national income is the sum total of Rent, Wages, Interest and profit which are received by people from four factors of production.

16 CONT`D FOPs = land + Labor + capital + Entrepreneur and N.I = Rent + Wage + Interest+ Profit

17 CONT`D Example: Source of income Amount (billions) Wages and salaries 400 Rent 300 Interest 320 Profit 450 National income 1470

18 EXPENDITURE METHOD National income can also be measured by adding the total expenditure made by the people and government on consumption of goods and services and investment in a country during a year.

19 Consumption (C): The spending by households on goods and services. Investment (I): The spending on capital equipment, inventories, and structures, including new housing etc

20 Government Purchases (G): The spending on goods and services by local, state, and federal governments. Net Exports (NX): Exports minus imports.

21 NI (Y ) is the sum of the following: – Consumption (C) – Investment (I) – Government Purchases or spending (G) – Exports NI = Y = C + I + G + (X-M)

22 CONT`D Example: Expenditure Amount (billions) Private consumption exp 400 Private domestic investment 200 Government consumption 350 Government investment 300 Export minus import 150 National Income 1400

23 Difficulties in measuring NI Inadequate statistical data: In under-developed countries since scientific methods of collecting data are not used, so accurate information is not obtained and NI is under estimated. Lack of trained staff: Most under developed countries do not have trained staff for data collection which leads to the problem of estimating exact NI.

24 CONT`D Illiteracy : Due to illiteracy, most of the producers do not maintain proper records of production, cost and income which leads to under estimated NI. Many sources of income: Some people get their incomes from many other sources It is very difficult to compute their income from different sources and in this way the exact figure of NI is mislead. No-cooperation of the people: In most of under-developed countries, people do not cooperate with data collecting staff.

25 CONT`D Non-marketed goods and services: In estimating the national income, only those goods and services are included for which the payment is made the unpaid or non-marketed goods and services are excluded such as production for self consumption, help or volunteer etc Under-ground economy: In under-developed countries, about 30% of the economy is under-ground the officially declared incomes are less than the actual incomes.

26 Some important steps to be remembered. National income is measured for one year. Only the current year production will be counted in the estimation of natioal income. National income does not include the income earned from illegal activities such as smuggling, kidnapping, theft etc.

THANKS 27