National Income 2024 MBA SEM II PDF

Macroeconomics & Business Environment MBA Sem II Dr. Subhendu Dutta, Dept. of Economics, IBS Hyderabad  National Income & related Aggregates 2 After  economic attending growth andthis session, you will learn: distinguish it from economic developm...

Macroeconomics & Business Environment MBA Sem II Dr. Subhendu Dutta, Dept. of Economics, IBS Hyderabad  National Income & related Aggregates 2 After  economic attending growth andthis session, you will learn: distinguish it from economic development Key Terms  how economic indicators like Final goods and Intermediate goods GDP are used to assess the Consumer and Capital goods state of an economy. Stocks and Flows Gross investment & Net investment how does the flow of Depreciation, Inventories production arise in an Wage, Interest, Profit & Rent economy using the Circular Circular flow of income flow of money or income National Income, GDP, GNP, NDP, NNP  Key Value added national income market price and factor cost aggregates Transfer payments  Difference between nominal Personal Disposable Income and real GDP Nominal GDP vs. Real GDP GDP deflator Green Economy  What generates the economic wealth of a nation? Or What makes countries rich or poor? How does the flow of production arise? The economic wealth, or well-being, of a country does not necessarily depend on the mere possession of resources; but on: How these resources are used in generating a flow of production and How, as a result, income and wealth are generated from We need to know a few important terms to get into the crux that process. of these questions Important terms 5. Gross investment and net 1. Final and intermediate goods investment: an item that is meant for final use and will gross investment is the not pass through any more stages of addition to the capital stock of production is a final good. an economy. These may be Intermediate goods are goods that are used machines, tools, and by producers as material inputs for producing implements, buildings, office a final good. spaces, storehouses, or 2. Consumption goods and capital goods infrastructure like roads, consumer goods are mainly used for final bridges, and airports consumption such as food and clothing, and (Inventories, fixed business services like recreation. These are not used investment, and residential for further production. investment). Capital goods are of durable in character Net Investment = Gross which are used in the production process investment – Depreciation such as tools, implements and machines. 3. Stocks and flows: 6. Inventory is the stock of stocks are defined at a particular point of unsold finished goods, or semi- time. Eg. wealth finished goods, or raw materials  Important terms Domestic Product : Domestic product by Household Expenditure(C): Consumption The definition is a measure in monetary terms of household consumption the volume of all goods and services produced expenditure referred to as by an economy during a given period of time, private final consumption accounted without duplication. The measure expenditure (PFCE), consists of obviously has to be in value terms as the household expenditure physical units of production and different (including non-profit measures of services are not capable of institutions) on non-durable simple addition. In the case of a closed consumer goods and services economy, this measure amounts to domestic and all durable goods except product. land and buildings. Categories Of Expenditure: The income Government Final available to the individuals in the form of Consumption Expenditure labour income or capital income or to the (G): Government final productive units in the form of retained consumption expenditure income is spent. The utilization or expenditure comprises the compensation to of the income can take various forms, namely, the Government Employees and (a) household consumption expenditure(C); purchases of goods and (b) government consumption expenditure(G); services by the Government, Important terms Gross Capital Formation(I): Gross Capital Formation includes only produced capital goods (machinery, buildings, roads, softwares, hardwares etc.) and improvements to non-produced assets. Gross Capital Formation measures the additions to the capital stock of buildings, equipment and inventories, i.e. additions to the capacity to produce more goods and income in the future. The components of gross capital formation are Gross fixed capital formation Changes in inventories Residential investment Gross Fixed Capital Formation includes purchases of new assets within the domestic market like buildings, transport equipment, machinery, breeding stock etc.; import of new assets; own account production of new assets such as production of rail engines, wagons, trucks, aero-planes, farm machinery, breeding stock of fish, sheep, cows etc. by the enterprise; and net purchase of second hand physical assets from abroad. Change in stocks (inventories) consists of the difference between the opening Important terms Saving: Saving represents the excess of current income over current expenditure of various sectors of the economy. It is the balancing item on the income and expenditure accounts of the producing enterprises, households, government administration and other final consumers. For a closed economy, savings(S) equals capital formation(I) during the year, whereas for an open economy, savings equals capital formation plus net capital inflow from abroad during the year. Current Versus Constant Prices: National income, when calculated over a number of years, include implicitly not only the effect of the changes in production but also the changes in prices. This estimate compared over the period would not, therefore, give a proper measure of the overall real increase in production of the country or the economic welfare of the people or growth of the economy. Therefore, it would be necessary to eliminate the effect of Production/Income/Expenditure: The national income of a country can be measured in three different ways: from the angle of production, from income generation, and from final spending. These three forms are circular in nature. Undistributed Profits is a part of profit that is not distributed among the factors of production. Sources Of Data for measuring NI in India: National Accounts Statistics in India are compiled by National Accounts Division in the Central Statistics Office, Ministry of Statistics & PI. The data are available on the website of the Ministry (www.mospi.nic.in ). The four macroeconomic sectors All the individuals and non-profit institutions. The primary function The Household Sector is to provide the factors of production & consume G+S. business entities, corporations and partnerships. The primary The Firms Sector function is to produce goods and services for sale in the market The Four Macroeconomic Sectors center, state, and local The Government governments. The prime Sector function is to regulate the functioning of the economy. This sector includes The Foreign Sector transactions with the rest of the world. The Three markets goods and services are The Goods market exchanged among the four macroeconomic sectors factors of production are The Three Markets The Factor market traded through this market Includes financial institutions The financial who engage in borrowing market/Money market (savings from households) and lending of money. 11 Circular flow of INCOME The circular flow is the basis for all the macroeconomic models of the economy. It describes the movement of goods or services and income among the different sectors of the economy. It illustrates the interdependence of the sectors and the markets to facilitate both real and monetary flow. A continuous flow of production, income, and expenditure is known as the circular flow of income. Circular flow of INCOME 12 Circular flow of INCOME-Two sector model the economy is assumed to be a closed economy and consists of only two sectors, i.e., the household and the firms. In this model, Y=C Circular flow of INCOME-Three sector model In this model, the equilibrium condition is as follows: Y=C+I+G Circular flow of INCOME-Four sector model This is an ‘open economy’ model. In this model, the equilibrium condition is as follows: Y = C + I + G + NX What are the leakages and injections here? A leakage is referred to as an outflow of income from the circular flow model. An injection is an inflow of income to the circular flow. injections include investment, government purchases, Questions 1. What is the difference between intermediate goods and capital goods? 2. List three items included in the gross investment. 3. What do you mean by change in stocks? 4. How is the household sector different from the producers’ sector? 5. What is a factor market? 6. In a two-sector circular flow of income model, Y=C. Explain. 7. Is the three-sector model of circular flow- a closed or open economy model? 8. What constitutes National income? 9. What reduces the flow of income? 10.What increases the flow of income? 11.Write examples of leakages in 2 (closed economy), 3, and 4 sectors’ circular flow of income. 12.Write examples of injections in 2 (closed economy), 3, and 4 sectors circular flow of income.  National Income-selected Identities Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time. Gross National Product (GNP) is the total income earned by a nation’s residents (called nationals). Net Factor Income from Abroad(NFIA) = Factor income earned by the domestic factors employed in the rest of the world – Factor income earned by the factors of production of the rest of the world employed in the domestic economy Net National Product (NNP) is the total income of a nation’s residents (GNP) minus depreciation. Market price and factor cost: Market price includes net indirect taxes. Transfer payments result from transactions that do not give rise to the exchange of commodities or factor services. A payment of The measurement of GDP money is made without a corresponding flow of goods and services  National Income-selected Identities Domestic Income (NDPFC) is divided into two parts: 1. Income from domestic product accruing to the Private Sector 2. Income from Domestic Product accruing to the Public/Govt. Sector. It has two components: Income from property and entrepreneurship that accrues to government administrative departments: i.e, income earned by government departmental enterprises (such as railways, postal, and telegraphs, etc.) from property (rent and interest) and business (profit). Savings of non-departmental enterprises: This includes undistributed profits by non-departmental government-owned The measurement of GDP enterprises (such as ONGC, MTNL, LIC, etc.).  National Income-Selected Identities Private income is the income accruing to the private sector both from domestic and international sources. It includes income from domestic products accruing to the private sector, NFIA, and transfer incomes such as interest on the national debt, current transfers from the government, and net current transfers from the rest of the world. Therefore, private income consists of two different types of income: (1) factor income-from within the country and NFIA; (2) Transfer income-interest on national debt and net current transfers from the ROW. Interest on National Debt: The government borrows funds from the people (by issuing bonds such as National Saving Certificates, Saving Bonds, and so on). Interest on these debts is considered transfer income for private enterprises. Current transfers from the Government: transfer payments received from the government, such as subsidies, unemployment benefits, and scholarships. Net Current transfers from the rest of the world: It includes net gifts and remittances received from abroad. Private Income= Income from Domestic Product Accruing to the Private Sector + Net Factor Income from Abroad + National Debt Interest + The measurement of GDP  National Income-Selected Identities Personal Income is the total of all the incomes that are received by households from all sources. It also includes factor and transfer incomes. Personal income exclusively refers to that part of private income that is received by households only. Personal Income does not include Corporate Tax and Retained Earnings Personal Income = Private Income – Corporate Tax – Retained Earnings Personal Disposable Income (PDI ) = Personal income – Personal tax payments – Non-tax payments. The measurement of GDP  National Income-selected Identities Net Indirect taxes = Indirect taxes – Subsidies NNP at factor cost or National Income = NNP at market prices – Net Indirect taxes GNP= GDP + Net factor income from abroad NNP = GNP – Depreciation NDP= GDP – Depreciation NDP = NNP – NFIA GDPfc =GDPmp − NIT NDPmp =GDPmp −Dep GNPmp = GDPmp + NFIA NNPmp= GNPmp - Depreciation The measurement of GDP  National Income-selected Identities Gross value added = Output – Intermediate consumption GDP at Market Prices = Gross value added + Indirect taxes – Subsidies GDP = final consumption expenditures/actual final consumption + changes in inventories + gross fixed capital formation + acquisition less disposals of valuables + exports of goods and services – imports of goods and services GDP at Market Prices = compensation of employees + operating surplus / mixed income + CFC+ Indirect taxes – Subsidies GDP at factor cost = GDP at market prices – indirect The measurement of GDP  National Income-selected Identities Gross National Income (GNI) = GDP at market prices + taxes less subsidies on production and imports at market prices (Net receivable from abroad) + Compensation of Employees(Net receivable from abroad) + property income (Net receivable from abroad) Net National Income (NNI) = GNI at market prices - consumption of fixed capital at market prices Net National Disposable Income = NNI + net taxes on income and wealth receivable (NNDI) from abroad + net social contributions and benefits receivable from abroad. Net saving = NNDI-final consumption expenditure + net equity of households on pension funds receivable from abroad + net capital transfers receivable Net saving + net capital transfers = changes in net worth due to The measurement savings and capital transfers of GDP  Questions What is the difference between Personal Income = and Personal Disposable Income? What is Private Income? What is the difference between GNP and GDP? How is Net factor income from abroad different from net exports? How do you find out the ‘net’ from gross? What is the difference between Market price and factor cost? What is net indirect tax? What is double counting? The measurement of GDP National Income-calculations 1. Calculate NDP at FC 2. Calculate GDP at MP Items Amount Items Amount 1. GNP at MP 8000 1. NNP at Fc 2000 2.Dep 600 2.Dep 200 3. NFIA 300 3. FIA 110 4. Net Indirect 700 4. FI to Abroad 50 Taxes 5. subsidies 70 6. Indirect taxes 180 Solution: 1. 6400; 2. 2250 The measurement of GDP National Income-calculations 1. Calculate NDP at FC 2. Calculate NNP at FC Items Amount Items Amount 1. GNP at MP 6000 1. GDP at MP 5500 2.Dep 100 2.Consumpti 300 3. NFIA 400 on of fixed capital 4. Indirect 300 Taxes 3. FIA 150 5. subsidies 200 4. FI to 250 Solution: 1. 5400; 2. 5050 Abroad 5. subsidies 70 6. GST 120 The measurement of GDP National Income-calculations 1. Calculate Dep 2. Calculate Net Indirect tax Items Amount Items Amount 1. NNP at FC 4000 1. GNP at MP 7000 2.GDP at MP 5000 2.NDP at FC 6200 3. NFIA 200 3. Dep 600 4. Net Indirect 300 4. NFIA -400 Taxes Solution: 1. 900; 2. 600 The measurement of GDP  Nominal and Real GDP Real GDP is calculated by taking the prices of a base year. Real GDP is calculated at constant prices. Nominal GDP is simply the value of GDP at the current prevailing prices. The GDP Deflator: The GDP deflator measures the current level of prices relative to the level of prices in the base year. It can be calculated as below: GDP deflator= (Nominal GDP/Real GDP) x 100 Using the GDP deflator, the inflation rate between two consecutive years can be computed. Inflation rate in year 2 =(GDP deflator in year 2 - GDP deflator in year 1/GDP deflator in year 1) x 100. The measurement of GDP Nominal, Real GDP & GDP deflator computation Let us calculate real GDP, nominal GDP, and the GDP deflator for a hypothetical economy: year Price Price Qnty Qnty Nom Real GDP of x of y of x of y inal GDP deflator GDP Base year=20 19 2019 1 2 100 50 200 200 100 2020 2 3 150 100 600 350 171 2021 3 4 200 150 1200 500 240 Inflation rate (2019 to 2020) = (171-100)/100 =71%  Measurement of National Income Performance of an economy depends on the amount of goods and services produced in that economy. In monetary terms its measure is the Gross Domestic Product (GDP), Gross National Income (GNI), and Net National Income (NNI). The national income of a country is measured in three different ways-from the angle of production, from income generation and from final spending. GDP and GVA are the two main ways to ascertain the country’s economic performance. The GDP measures the monetary measure of all “final” goods and services produced in a country in a given period, i.e, C+G+I+NX. The GVA calculates the national income from the supply The measurement of GDP side by adding up all the value added across different sectors. The measurement of national income Three methods to measure national income are: 1. Product method: NI is measured in terms of the aggregate value of final goods and services produced by all the firms. 2. Income method: measuring national income by the sum total of all factor payments. 3. Expenditure method: NI is measured by the aggregate value of spending by all for the final goods and services. The measurement of GDP  1. The Product or Value-Added Method steps:  This method measures national income as the sum 1. IDENTIFICATION OF PRODUCTION UNITS AND CLASSIFYING THEM INTO of net final output produced INDUSTRIAL SECTORS: or net value added by all the o The first step is to identify all the firms in a year. production units and classify these  In this method, we calculate into three industrial sectors (i) the value added by each firm primary sector, (ii) secondary sector, and (ii) tertiary sector. and then sum it up to get national income. 2. ESTIMATION OF GROSS VALUE  Value added means the net ADDED and NET VALUE ADDED: contribution made by a firm, o Net value added is estimated by estimating gross output produced by The measurement of GDP each enterprise, intermediate  The Product or Value-Added Method (a)Gross value of 3. ESTIMATION OF NET FACTOR added/output INCOME FROM ABROAD: =Sales + Change in stocks of The final step is to estimate net all firms- Intermediate factor income from abroad and consumption add it to the net domestic (b) Net value added at product to get national income market price or NNPfc. Net factor income Net value added (NVA) at from abroad is the factor income market price = GVA - of the residents of a country Depreciation earned abroad less the factor (c) Net Value Added/NDP at income of foreign nationals earned in the domestic territory factor cost of the country. Therefore, NVA/NDP at Factor Cost = Net The measurement of GDP 33 value added at Market price -  Points to remember 1.Imports are not included if intermediate consumption is only given. 2.If the domestic purchase of raw materials is given separately, then import value is to be included. 3.When the entire output is not sold, then change in stocks has to be added to sales to get the value of output. 4.If sales are given and domestic sales are not specifically mentioned, do not include export value. The measurement of GDP  The Product Method- an example Gross Value Added/GDP= (sales or output + Change in stocks) – Value of intermediate goods Producti Total Intermed Gross Gross on units productio iate Value Domestic n/Output/ costs Added Product (GDP) = sales (or GDP) sum of Farmer 100 0 100 the gross value Baker 200 50 150 added of Total 300 50 250 all firms Therefore, the aggregate value of goods in a year. produced by an economy is Rs. 250. The measurement of GDP 35  Calculations on the Product Method 1. Calculate value added 2. Calculate Net Value by firm A and firm B Added at MP Items Amount Items Amount 1. Sales 90 1. Sales by A 4000 2.Closing stock 25 2.Exports by A 1000 3. Opening 15 3. Purchase by 200 stock A 4. Indirect 10 4. Sales by B 2940 taxes 5. Purchase by 1300 5. Depreciation 20 B 6. Intermediate 40 consumption Solution: (1). 3800; 1640; (2) 60 7. Purchase of 15 3. Calculate: (a). Value added by 4. Calculate Gross Value A and B; (b). GDP at MP and (c). Added at FC Net value added at FC Items Amoun Items Amount t 1. Sales by firm B to govt. 100 1. Units of output 1000 2.Sales by A 500 sold 2.Price per unit of 30 3. Sales by B to 350 output households 3. Depreciation 1000 4. Change in stocks of 20 firm A 4. Intermediate 12000 cost 5. Closing stock of B 40 5. Closing stock 3000 6. Opening stock of B 30 6. Opening stock 2000 7. Purchase by A 320 7. GST Solution: 6000 (3). 200; 260; 8.Indirect taxes paid by 75 both the firms 460; 265 (4). 13000 The Product Method-Problems and Precautions 2. GDP does not include the 1. Some goods and services are value of secondhand goods. not sold in markets. However, brokerages generated For example, Homemaking and in these transactions are child-rearing services performed included. within the family. These are not 3. Only final goods and included in GDP. services are counted in GDP to Activities hidden from government avoid double counting. records, such as drug dealing, 4. Capital goods are treated as gambling, etc., are not included in final goods and are included in NI. GDP because this adds to the the value of the services provided productive capacity of an by the government (defense, public economy. education, maintenance of roads 5. Inventory investment is and bridges). In this case, the value treated as a final good and thus of government services is included part of GDP because increased by estimating The measurement of GDP their cost of Income Method The income method calculates GDP by adding the factor incomes. In other words, GDP= Wages/Salaries+Rent+Interest+Profit National income is the sum of eight types of income: 1.Compensation of employees. It includes wages, salaries, employee benefits (including contributions by employers to pension plans), and employer contributions to Social Security. It excludes the income of the self-employed. 2.Proprietors’ income. The income of the nonincorporated self- employed such as small shopkeepers, retail traders, etc., and own- account workers like farmers, barbers, etc.. Proprietors’ income includes labor and capital income (mixed income). 3.Rent & Royalty. The income earned by individuals who own land or The measurement of GDP Income Method 4. Corporate profits. profits earned by corporations and represent the remainder of corporate revenue after wages, interest, rents, and other costs have been paid. 5. Net interest. interest earned by individuals from businesses and foreign sources minus interest paid by individuals. 6. Taxes on production and imports. include indirect taxes, such as sales and excise duties as well as customs duties and taxes on residential real estate and motor vehicle licenses paid by households. 7. Business current transfer payments (net). payments made by businesses to individuals or governments or foreigners such transactions as charitable donations, insurance payments, insurance premiums paid by banks, and legal settlements are covered by this category of income. 8. Current surplus of government enterprises. the profit of businesses that are owned by governments, such as water, electric, The measurement of GDP Income Method- Steps Step 1 Identify and classify the factors of production of all the producing firms into primary, secondary and tertiary sectors. Step 2 The estimation of the factor income paid by each sector. The factor income paid by various sectors is classified as: Compensation of Employees, Rent and Royalty, Profit, Interest, and Mixed Income. Step 3 Calculate domestic income NDPFC. The total of all the factor incomes is Domestic Income(NDPFC ). NDPFC = Compensation of Employees + Profit + Rent & Royalty + Interest + Mixed income. Step 4 The estimation of Net Factor Income from Abroad(NFIA). NFIA is added to domestic income (NDPFC) to get the National Income(NNPFC). NNPFC = The measurement of GDP NDP + NFIA.  Components Amount in Rs. cr Incom 1. Compensation of employees 9228 e 2. Proprietors’ income 3. Rent and Royalty 1380 640 Metho 4. Corporate profits 2090 d- 5. Net interest 6. Taxes on production and imports 486 1146 Examp 7. Business current transfer payments 141 le 8. Current surplus of government enterprises -34 Total (1 to 8)= NDP fc 15077 - Factor income received from rest of world 828 + Payments of factor income to rest of 616 world = NNP fc 15289 The measurement of GDP  Precautions of Income Method 1. Transfer Income will not be included: Transfer incomes such as donations, charity, scholarships, old age pensions, etc., are not counted in the National Income, as these activities are not connected to any production activity. 2. Income from the Sale of Second Hand Goods will not be included: Income received from the sale of second-hand goods, also known as capital gains, is not calculated in National Income, as their original sale has already been included at the time of purchase. If these goods are calculated again, then it will lead to the problem of double counting. However, commission or brokerage received by agents on the sale of these goods will be included, as it is an income received for rendering productive services. 3. Income from Sale of Securities will not be included: Income from the sale of bonds, shares, and debentures will not be calculated, as these transactions do not contribute to the current The measurement of GDP flow of goods & services. These financial assets are just paper claims  Precautions of Income Method 4. Windfall Gains will not be included: Income that arises from windfall gains like horse racing, lotteries, etc., are not calculated in the determination of National Income, as they are not connected with any kind of production activity. 5. Imputed Value of Services by Owners of Production Units will be included: The imputed value of self-occupied houses, production for self-consumption, interest on own capital, etc., are included under National Income, as these are productive activities and add to the current flow of goods & services of the economy. 6. Payment out of Past Savings will not be included: Payment out of past savings such as interest tax, gift tax, death duties, etc., is not calculated in National Income, as they are paid out of past savings or wealth and do not contribute to the current flow of goods & services of the The measurement of GDP Expenditure Method In this method, the income is 1. CONSUMPTION (C) is calculated as the sum of all household spending on expenditures incurred by goods and services. households, firms, government, and Consumption expenditures foreigners. are grouped into three The expenditure method measures categories: GDP as total spending on final consumer durables- goods and services produced within long-lived consumer items, a nation during a specified period such as cars, televisions, of time. furniture, and major GDP is the sum of four appliances components: consumption nondurable goods- are expenditure (C), investment shorter-lived items, such expenditure (I), government as food, clothing, and fuel; expenditure (G),and net exports and 45 The measurement of GDP (NX): Expenditure Method 2. INVESTMENT (I) is the sum of purchases of business capital (fixed investment), residential investment, and inventories. Business fixed investment- spending by businesses on structures (factories, warehouses, and office buildings, for example), equipment (such as machines, vehicles, computers, and furniture), and intellectual property products (such as software, investment in research and development, etc) Residential investment-spending on the construction of new houses and apartment buildings. Houses and apartment buildings are treated as capital goods because they provide a service (shelter) over a long46 The measurement of GDP  Expenditure Method 3. GOVERNMENT PURCHASES (G) 4. NET EXPORTS Government purchases of goods and (NX) equal the services include any expenditure by the foreign purchases government for a currently produced good or service, foreign or domestic. of domestically Note: produced goods Transfer payments such as Social (exports) minus Security and Medicare benefits, the domestic unemployment insurance, welfare purchases of payments, and so on, are not made in foreign goods exchange for current goods or services. As a result, they are excluded from the (imports). (G) and are not counted in GDP as calculated by the expenditure approach. Interest payments on the national debt The are notof GDP measurement counted as part of government  Expenditure Method-steps Step 1 The identification of economic units Step 4 operating within the country, namely Calculate Net Factor households, business firms, government, Income from Abroad and foreign trade. (NFIA) to get National Step 2 Income. Classify economic units under final expenditure: Private Final Consumption NNPFC = NDPFC + NFIA Expenditure (C), Government Final Consumption Expenditure (G), Gross Domestic Capital Formation (I), and Net Exports (NX) GDPMP = C + I + G + NX Step 3 Calculate The measurement ofDomestic GDP Income (NDPFC).  Calculations on Expenditure Method Components Amount in Rs. cr 1. Consumption expenditures (C) 11,930 Consumer durables 1303 Nondurable goods 2666 Services 7962 2. Gross private domestic investment (I) 2852 Business fixed investment 2211 Residential investment 559 Inventory investment 82 3. Government purchases of goods and services (G) 3175 4. Net exports (NX) -538 Total (equals GDP) (Y) 17,419 The measurement of GDP Calculations on Expenditure Method 1. Calculate GDP at MP 2. Calculate GNP at FC Items Amou Items Amou nt nt 1. Private final 1200 1. Net domestic fixed capital 350 formation consumption expenditure 2.Closing stock 100 2.govt. final 200 3. govt. final consumption 200 consumption expenditure expenditure 4. Net indirect taxes 40 3. Gross fixed capital 300 5. Opening stock 60 formation 6. Consumption of fixed capital 50 4. Change in stocks 400 7. Net exports -10 5. Imports 500 8. Private final consumption 1500 Solution: (1).2200; (2). 2060 expenditure 6. Exports 600 The measurement of GDP 9. imports 20 Questions 1. How are real and nominal GDP different? 2. What is a GDP deflator? Why do you calculate GDP deflator? 3. What do you understand by value-added? How useful is measuring national income by value-added method? 4. How do you calculate Net value added? 5. Why do we not include homemaking and child-rearing services performed within the family in GDP? 6. How do we treat the value of the services provided by the government in national income? 7. Why are we including capital goods as final goods, while calculating national income? 8. List out the limitations/problems of measuring national income by the product method. 9. What are the major types of income that are included in calculating national income by income method? 10.What is a statistical discrepancy? 11.What are the major components of expenditure that are included while calculating national income by expenditure method? Summary Consumption includes spending on goods Because every transaction has a buyer and services by households, with the and a seller, the total expenditure in the exception of purchases of new housing. economy must equal the total income in Investment includes spending on business the economy. capital, residential capital, and inventories. Gross domestic product (GDP) measures Government purchases include spending an economy’s total expenditure on newly on goods and services by local, state, and produced goods and services and the total federal governments. income earned from the production of Net exports equal the value of goods and these goods and services. More precisely, services produced domestically and sold GDP is the market value of all final goods abroad (exports) minus the value of goods and services produced within a country in and services produced abroad and sold a given period of time. domestically (imports). GDP consists of four components of Nominal GDP uses current prices to value expenditure: consumption, investment, the economy’s production of goods and government purchases, and net exports. services. GDP is a good measure of economic well- Real GDP uses constant base-year prices being because people prefer higher to to value the economy’s production of lower incomes. But it is not a perfect goods and services. The GDP deflator— measure of well-being. For example, GDP calculated from the ratio of nominal GDP excludes the value of leisure and the value to real GDP—measures the level of prices Summary The circular flow of income forms the basis for all the macroeconomic models of the economy and it is imperative to understand the circular flow model for understanding essential concepts like national income, aggregate demand and aggregate supply.  Analyse the news ( https://www.businesstoday.in/latest/economy/story/india-to-surpass-japan-to-beco me-second-largest-economy-in-asia-by-2030-sp-global-403103-2023-10-24 ) India to surpass Japan to become second largest economy in Asia by 2030: S&P Global India, the world's fifth largest economy in the world, is likely to overtake Japan to become the world's third-largest economy with a GDP of $7.3 trillion by 2030 (S&P Global Market Intelligence). The acceleration of foreign direct investment inflows into India over the past decade reflects the favourable long-term growth outlook for the Indian economy, helped by a youthful demographic profile and rapidly rising urban household incomes. India's nominal GDP measured in dollar terms is forecast to rise from $3.5 trillion in 2022 to $7.3 trillion by 2030, making India the second largest economy in the Asia-Pacific region. The US at present is the world's largest economy with a GDP of $25.5 trillion. It makes up for a quarter of the world's GDP. China is the second largest economy with a GDP size of about $18 trillion, which is almost 17.9 per cent of the world GDP. Japan is a distant third with $4.2 trillion GDP, followed by Germany with $4 trillion GDP. An important positive factor for India is its large and fast-growing middle class, which is The measurement of GDP helping to drive consumer spending.