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Chapter 2. National Income. 1. Central endogenous macroeconomic variables. * Real income / growth rate. * Unemployment / employment rate. * Inflation rate. They must be uniquely defined before their behaviour could be explained / predicted. Group Low income countries

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slide1

Chapter 2

National Income

slide2

1. Central endogenous macroeconomic variables

* Real income / growth rate

* Unemployment / employment rate

* Inflation rate

They must be uniquely defined before their

behaviour could be explained / predicted

2 countries world bank atlas classification
Group

Low income countries

Lower middle income countries

Upper middle income countries

High income countries

Per capita GNP (1999)

$755 and less

$756 – 2,995

2,996 – 9,265

9,266 and above

2. Countries:World Bank atlas classification
slide4

3. Income concepts

  • Gross National Product (GNP)
  • Net National Product (NNP)
  • Gross Domestic Product (GDP)
  • Net Domestic Product (NDP)

-at Market prices / factor cost

  • Private income
  • Personal income
  • Personal disposable Income

- at current prices

slide5

4.GNPM stands for the monetary value of

  • all goods and services that are
  • (a) currently produced (flows only)
  • (b) sold through the official market (2 exceptions)

(c) not resold or used in further production

(final goods only)

(d) produced anywhere but by the nationally

owned resources

(e) valued at the market prices

5 under estimation of income
5. Under estimation of income
  • Do it yourself activities
  • Parallel /black economy
        • Illegal production
        • Legal but un / under reported production
slide7

6. Fundamental income identities

  • GNPF = GNPM ‑ Ti + S (2.1)
  • GDPF = GNPF ‑ NIA (2.2)
      • (domestic territory)
  • NNPF = GNPF ‑ D (2.3)
  • NDPF = GDPF ‑ D (2.4)
  • Pvt. I = NNPF ‑ IAD ‑ END + NDI + TAD + OTA
  • (2.5)
  • PI = Pvt. I ‑ RE – CT (2.6)
slide8

PDI = PI ‑ HDT – MAD (2.7)

  • S + T + M = I + G + X (2.8)
  • - Three gaps
  • - Measurement alternatives:
  • Production = Income = Expenditure (2.9)
  • GDPF = P1Q1 + P2Q2 + ........+ PnQn
  • (2.10)
  • NDPF = W + R + I + P (2.11)
  • GDPM = C + I + G + X – M (2.12)
slide9

Table 2.1: National Income and Related Aggregates (at current prices)

(Rs crores)

Variable

1980-81

1990-91

2000-01

1. GNP at market prices

136358

527989

2070574

1.1 Indirect taxes

16746

76329

247528

1.2 Subsidies

3160

18609

55383

2. GNP at factor cost (1-1.1+1.2)

122772

470269

1878429

2.1 Net factor income earned abroad

345

–7545

–17414

3. GDP at factor cost (2-2.1)

122427

477814

1895843

3.1 Capital consumption

12087

52195

198447

4. NNP at factor cost (NI) (2-3.1)

110685

418074

1679982

5. NDP at factor cost (3-3.1)

110340

425619

1697396

5.1 Income of govt. admn. depts. from entrep. and property

554

4584

19887

5.2 Saving of govt. non-dept. enterprises

–820

2555

21591

5.3 National debt interest

1524

20233

109222

5.4 Current transfers from govt. admn. dept.

2835

15641

61300

5.5 Other net current transfers from abroad

2257

3711

58412

6. Private income (4-5.1-5.2+5.3+5.4+5.5)

117567

450520

1867438

6.1 Retained earnings of nation\'s private sector

584

6198

30531

6.2 Corporate tax

1378

5335

28487

7. Personal income (6-6.1-6.2)

115605

438987

1808420

7.1 Household direct tax

2197

7593

50996

7.2 Miscellaneous receipt of govt. admn. dept.

303

2097

7317

8. Personal disposable income (7-7.1-7.2)

113105

429297

1750107

Source:

CSO:

National Accounts Statistics

, Various Issues.

slide10

7. Circular flow of income

G + TP = T + GBD (2.13)

(2.14)

(2.15)

slide11

Figure 1: Circular Flow of Income

14

Investments

Financial

PersSav.

11

Institutions

Govt. Savings

13

(-ve)

5

1

RE

D

Government

NDI+TP

  • Per.TP

4

2

CT

T

12

8

i

HDT

3

S

Govt. C

9

7

[Rents+Wages

6

Interest+Profit]

Households

Firms

FOP

GNP

10

Pvt. Consumption

Exports

Imports

15

16

Rest of the

World

slide12

8. PPP income

    • PPP of Indian rupee = Number of rupees
    • required to purchase a representative basket
    • of goods and services in India that one US
    • dollar will buy in USA
  • PPP income of India =
  • * Paradox : Official forex rate = Rs 46/US $
  • PPP ( India ) = 12
    • * Is rupee over/under valued ?
slide13

9. Human development index / QLI index

* Extreme values : Max. = 1, min. = 0

* Three ingredients

    • - Per capita GDP (PPP)
    • - Life expectancy at birth(Min. : 25 years,
    • Max. : 85 years)
    • - Adult literacy (W=2/3) and primary, secondary
    • and tertiary enrolment rate(W=1/3) (min. 5%,
    • max. 100%)
    • * India’s HDI = 0.590, Rank = 127/175 (2001)
    • USA = 0.937
  • Canada = 0.937
  • Norway = 0.944 (Max.)
slide14

10. Income and economic welfare

  • National Income suffers from twin issues:
      • * Measurement errors
      • a) ignores the non‑market and black (parallel) economy
      • b) measures services sector output erroneously
      • c) ignores the quality of products, which may not be
      • accurately measured by their prices
      • d) measures output at the official exchange rate
      • *Imperfectmeasure of economic welfare
      • e)ignores the benefits due to leisure
      • f) equates goods (education) and bads (weapons)/
      • public/ merit/ other goods
      • g) ignores income distribution
        • h) counts both addictions (drinking) and cures
        • (medicines for drunks)
slide15
Ignores costs of growth, associated with traffic congestion, pollution, accidents, use of natural resources, environment degradation etc
  • Ignores weather conditions
  • Includes income generated through non‑productive activities such as defense, police and courts, which are considered ‘regrettable’ goods. They may be necessary but do not contribute to the standard of living or quality of life
  • Ignores the quality of life, which is influenced by education, health, living together, love to own land, human freedom etc.
  • Ignores ethics, values, traditions, culture, customs, habits, religious, emotions etc.
  • Bottom-line: per capita income, non-market and black economy,
  • saving and investment rates
11 international scenario
11. International scenario
  • Size
  • Per capita income
  • Growth rate
  • HDI
  • Life expectancy
  • Literacy
slide17

Table 2.5: International Data on Income and Related Variables

Country

GNP

at

current

GNP

per

capita

at

Real GDP per

Life expectancy

Adult illiteracy

HDI

prices

current prices

capita growth

at birth

2001

2001

rate 1990-2001

2002

2002

( %)

2001

(Billion US $)

(US $)

(Years)

( Years)

Measurd

PPP

Measurd

PPP

(%)

Males

Females

Males

Females

(Max 1)

India

502

2691

480

2570

4

64

63

31

54

0.59

USA

10110

10110

35060

35060

2.1

80

74

0

0

0.937

Canada

701

882

22300

28070

2.1

82

76

0

0

0.937

UK

1486

1523

25250

25870

2.5

80

75

0

0

0.93

Japan

4266

3315

33550

26070

1

85

78

0

0

0.932

Switzerland

274

226

37930

31250

0.3

82

76

0

0

0.932

Singapore

86

96

20690

23090

4.4

80

76

4

11

0.884

Indonesia

150

632

710

2990

2.3

68

64

8

17

0.682

Malaysia

86

201

3540

8280

3.9

75

70

8

16

0.79

Republic of

473

785

9930

16480

4.7

79

71

1

3

0.879

Korea

China

1210

5625

940

4390

8.8

73

69

8

21

0.721

Pakistan

59

281

410

1940

1.2

60

61

42

71

0.499

Sri Lanka

19

64

840

3390

3.6

76

70

5

11

0.73

Australia

387

528

19740

26960

2.7

82

76

0

0

0.939

Nigeria

39

103

290

780

-0.3

52

51

27

42

0.463

Russian

308

1127

2140

7820

-3.5

73

61

0

1

0.779

Federation

World

31484

46952

5080

7570

1.2

-

-

-

-

0.772

Sources:

World Development Report 2003, UNDP: Human Development Report 2003, and World Bank: World

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