# Chapter 3 Trends in National Income - PowerPoint PPT Presentation

Chapter 3 Trends in National Income

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Chapter 3 Trends in National Income

## Chapter 3 Trends in National Income

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1. Chapter 3Trends in National Income To understand the structure and level of any economy and the change in it over time, it is essential to know about its net domestic product. Net domestic product shows the flow of goods and services in the economy. Data on net domestic product presents a complete picture of different sector of the economy.

2. With its help we can know the growth rate of economy, relative importance of difference sectors (agricultural, industrial and service sectors) of the economy, saving and investment and other important aspects of the economy. In India the estimates of national income are prepared by central statistical organization. Every years it issue a white paper on national income estimates (the name white paper has now been discontinued). Estimates presents by CSO are now called National accounts statistics.

3. Meaning of National Income: National income refers to the market value of the goods and services produced by an economy during the period of one year, counted without duplication. National income committee defines national income as,” national income estimate measures the value of commodities and services produced in the economy during a given period, counted without duplication.

4. Meaning of per Capita Income: Per capita income of a country refers to income per head of the population of that country, counted at current prices or at constant prices. It is simply a ratio between national income of the country and population of that country. Per capita income of a country, say for the year 2011 will be estimated as:

5. Per Capita Income = National income of 2011 Population of 2011 Per Capita income of a country depends upon the national income and total population. Check on population is the immediate answer to the problem of low capita income in countries like India.

6. Estimates of National Income in India: Various methods have been used for the estimation of national income in India. Estimates are studied in two parts: 1. Pre-Independence Estimates and 2. Post-Independence estimates.

7. Pre-independence Estimates of National Income: There was no central authority or government In India before independence to prepare National Income Estimates. Certain important citizens and economics made some estimates of national income of their personal level. In 1876, DadabhaiNaoroji was the first person to prepare estimates of national income and per capita income for year 1867-68. After this, many other important persons prepared their own estimates. Table 1 shoes estimates of national income and per capita income of India prepared by different persons before independence.

8. Estimates of National income and per capita income of India

9. Methods of measuring national Income before Independence Different methods were adopted foe estimating national income before independence. For Example: DadabhaiNaoroji, Shah and Khambata, Wadia and Joshi and certain others first estimated the value of agricultural production. A certain percentage of it was added as the value of non-agricultural production. Thus, national income was estimated thought production in agricultural sector. This was a non-scientific method of estimating national income.

10. Dr. V.K.R.V. Raowas the first person to adopt a scientific procedure for the estimation of national income in 1931. He divided Indian economy into two parts: 1. Agricultural sector included agriculture, forests, finishing and hunting. 2. Corporate sector included industries, construction, business, transport and public services. Dr. Rao used mixed method for the estimation of national income. He used a) product method for estimating income in the agricultural sector and b) income method for estimating income in the corporate sector. Net factor income earned from abroad was added to the income of both these sectors to obtain national income. This was certainly a more scientific method of estimating national income. This method is still being used in India.

11. Difficulties and limitation:Some of the major difficulties and limitation of income estimates in India before independence were as under: 1. There was no government agency for the estimation of national income. Therefore, no estimates were prepared at the official level. All estimates of national income were prepared at the personal level. Accordingly, these estimates suffered form personal bias of the individuals. Estimates of National income prepared by the Indians tried to show that India was a poor country. On the other hand, estimates by the goring tried to show that India was not a poor country.

12. 2. These estimates were based on incomplete and unreliable data. 3. Different estimates were based on different methods. Choice of methods depended upon the preference of the person concerned. These estimates were not prepared according to the accepted definitions and concepts of national income.

13. The estimates covered different graphical areas, i.e in these estimates income of the country was estimated on the basis of data collected form different geographical areas. • These estimates were based on the current prices and were prepared only for the particulars years or so. Hence, comparison of these was not possible. Despite these limitations of income estimates before independence, estimates prepared by different individuals gave some insight about economic situation of the country. These estimates suggested that the economic situation of the country before independence was far from satisfactory.

14. Estimates of national income after independence:After independence, the government of India in 1949, appointed National Income committee under the chairmanship of prof. P.C. Mahalanobis, Prof. Gadgil and Dr. VKRV Rao were two other members of this committee. The committee presented its first report in 1951 and last in 1954. According to the first report of the committee, national income of India was 8710 crore and per capita income was Rs. 225 in 1948-49.

15. This report discussed details of methods for the estimations of data on national income. It also discussed the various sources and limitation of data on national income. Since 1955, the national income estimates are being prepared by central statistical organization. The organization publishes annually estimates of national income called National Accounts statistics.

16. Estimates of national Income by Central Statistical Organisation Central statistical organization has so far prepared six series of national income estimates relation different base years. These are discussed as under: 1. Conventional Series: Between 1952 to 1967, the same technique of national income estimates as recommended by National Income committee was adopted. The year 1948-49 was taken as base year. In this series, national income estimates were prepared both at current and constant prices.The economy was divided into 13 sectors. Central statistical organization discounted the publication of conventional series after 1966.

17. 2. First Revised Series:Central statistical organization introduced certain major changes relating to estimation of national income in 1967 in this series 1960-61 was taken as base year instead of 1948-49. National income estimates were prepared both on current price as well as constant prices (1960-61). In this series economic activates were classified into 14 parts belonging to three different sectors of the economy, viz. Primary sector, secondary sector and territory sector.

18. Second Revised series:Central statistical organization introduced a second revised series of national income estimates in 1978. In this series 1970-71 was taken as base year instead of 1960-61. • Third Revised Series:Central statistical organization adopted third revised series in the year 1988. In this series 1980-81 was selected as base year, instead of earlier 1970-71.

19. 5. Fourteen Revised Series: The central statistical Organization published fourth revised series in 1999. In this series, base year was taken to be 1933.94. Several important methodological changed were introduced in this year. 6. Fifth Revised Series: Central statistical organization adopted fifth revised series in 2004-25. In this series base year 1999-2000 was selected for measuring national income and per capita income at constant prices.

20. 7. New Series: Central statistical organization adopted a new series in 2009-10. In this new series, base year 2004-05 was taken for measuring national income and per capita at constant price. • Method of measuring national Income after independence: In India, various methods are adopted for the estimation of nation income. A brief description of different methods used for different activities is as follows:

21. 1.Produced value added method or net output Method:In product method, national income is estimated by taking the total of value of production various sectors like consumer goods and services, capita goods and services\, production by government etc. While using this method double counting of the same production must be avoided. This method is used for: 1) agriculture and animal husbandry 2. Forestry and logging, 3. Fishing 4. Mining and quarrying and 5. Registered manufacturing, Accounting to this method, value of output relating to each activity is estimated. Value of intermediate goods (input) is deducted form the value of output to obtain gross value added. Net value is finally obtained by deducting depreciation from the gross value.

22. 2.Income method: In income method, national income is estimated by taking the total of various factor incomes like wages, rent, interest and profit. In this method, national income is estimated for different activates in different ways. For instance: 1. With regard to cottage and small-scale industries, unregistered manufacturing, roads and water transport trade, hotels and restaurants, national income estimates are prepared by finding out average productivity of the workers. Average productivity is multiplied by total number of workers to obtain valued added.

23. 2. Regarding other activities such as electricity, rail transport, air transport, real estate, public services and profit. Income generated in banks and by adding up factor payments inn terms of wages, rent, interest and profit. Income generated in banks and insurance companies is estimated from their profit and Loss Accounts. 3. Income generated in administration and defence activities of the government is estimated from the budget of state and central government. Data provided by reserve bank of India gives the estimates of income generated through activates abroad.

24. 3.Expenditure method and Commodity Flow method: Expenditure method and commodity flow method are used for the estimation of income relating to construction activity. Expenditure method is used for the rural construction activity. In this method, total expenditure on construction activity is activity. According to commodity flow method, national income is estimated on the basis of total valued of domestic production of bricks, cements, steel and other items used in construction. These estimates are then adjusted change in stock, exports and imports.

25. Importance of Measuring National Income: National Income estimates are useful in following ways: 1. It helps us to estimate the level economic development of nation. 2. National income is used in computing per capita income. This per capita Income is indicator of real economic growth and standard of living of population.

26. 3. National income data is used for analyzing various phases of business cycles. 4. National Income data is used for framing various policies by the government. 5. It helps in comparing economic growth of our country with other nations. 6. Net Domestic Product of various states is used in analyzing regional imbalances. i.e comparing economics development of different states.

27. Difficulties in Measuring National income In India: Following are some of the notable difficulties in measuring national income in India: 1. Non-Monetized Sector:In the estimation of national income, it is assumed that the economy of the country is a monetised economy in which goods and services are exchanged for money. But in India, the bulk of goods and services produced do not come to market for sale; these are either consumed by the producers themselves or exchanged through barter system of exchange. This practice is particularly significant in the agricultural sector. So it becomes very difficult to find out market value of production.

28. 2. lack of Distinct Differentiation in Economy Activity: In India a large number of workers are engaged in many activities simultaneously, therefore, difficult to make an estimation of national income and small industries. These people sometimes even go to the urban areas for jobs. As such, it is difficult to distinguish their income from different economic activities.

29. 3. Conceptual problem: There are many conceptual problems in the estimation of national income of India. Even to define national income different basis are used in terns of production, income and expenditure. Accordingly, it is difficult to obtain precise estimates of national income. Many new commodities are now produced in the country which did not exist in the base year. A variety of electronic production of these goods at the constant prices. Thus, while it is easy to prepare estimates at current prices,. It is very difficult to prepare similar estimates at constant price.

30. Black Money: A significant part of economy operates through black money. Economy activity is these sectors are not reported or under-reported. To evade excise duties, production of manufacturing units is under reported. To evade income tax, income of different sources is under-reported. So the estimates of national income become wrong. The size of black money has been growing over time, so correct estimation of national income has become very wrong.

31. 5. Inter-regional Differences: Circumstances differ in different regions of the country, conditions; differ not only in different states but also within each state. Under such circumstances, it becomes very difficult to obtain required information through sample survey or to use data of one region for other region in extended form.

32. Non-availability of data about certain incomes: Data about income of small producers and household enterprises is not available. Such producers carry on production at family level or at a very small scale. Most of these people are not educated and hence do not maintain proper accounts. Similarly, there is no correct estimation of value added from agriculture, horticulture, floriculture, pisciculture, etc. Estimates of production of these sectors are made only on the basis of guesswork. So, it is quite possible that these estimates are wrong.

33. 7. Mass Illiteracy: Prevalence of mass illiteracy keeps the people ignorant of usefulness of national income statistic. The informants are not fully responsive to the queries made by investigators. 8. Difficulty in Obtaining Data about income: Generally people hesitate to give correct data about their income. Whenever any investigator asks any persons about his income, then that persons under-report his income. So in the absence of correct and reliable statistics, it is difficult to correctly measure the national income.

34. Difficulties of sampling techniques: While measuring national income, central statistical organization, national survey organization use sampling techniques. The sample size is used by these organizations is of very small size keeping in view the large population base of the country. So, generalizations made on the basis of small sample render national income statistics as inaccurate and less reliable.

35. What National Income does not measures? National income data does not include income from following activities: Income from illegal activities lie smuggling, gambling, etc. Income from non-economic activities like domestic work by housewives, work done without remuneration. Black money i.e. income which is not reported to income tax authorities, and on which income tax is paid.

36. Trends in National Income:in order understand the level of economic development of the nation., trends of national income are studied. By analyzing these trends one can come to know the level of national income, per capita income, their growth rates over different periods of time. In India, every years central statistical organization publishers data regarding national income at current prices, national income at constant prices by taking 2004-05 ads the base years., per capita income at current prices and per capita income at constant prices. This data helps in understanding the level of economic growth and rate of economic growth on the economy.

37. National income at current prices is obtaining by multiplying current years’ production with the current year’s prices. Currently our base year is 2004-05. Per capita income at current prices is obtained by dividing national income at current prices with the total population of the country. Per capita income at constant prices is obtained by dividing national income at constant prices with the total population of the country. By measuring national income at constant price, the effect of price rise from national income is eliminated. By computing per capita income the effect of population rise from the national income is eliminated.

38. Per capita income at constant prices is the real indicator of increase in standard of living of the economy. If per capita at constant prices of an economy is increasing then nit indicates real economic development of that nation. The trends in national income are clear from table2.

39. From the table 2, it is clear that national income at current prices, national income at 2004-05 prices, per capita income at current prices and per capita income at 2004-05 prices, all are increasing national income at current prices was Rs. 9152 crore in 1950-51, it increased to Rs. 5439557 crore in 2009-10. It indicators of growth of over 594 times. But this is not real indicators of growth in standard of living of the economy. The real indicator of growth is increase in per capita income measured at constant prices. Per capita income at constant price was Rs. 5708 in 1950-51, it increased to Rs. 3731 in the year 209-10. It indicates a real growth of 5.91 times in this period of time.

40. Annual Growth Rate of National Income and Per capita Income: National income and per capita income have not been rising consistently over the plan periods. The rise has been more in one year and less in the other. Table 3 shows growth rates of national income and per capita income during different plan periods. Growth Rates of national Income and per capita income at constant prices:

41. Trends in National Income and per capita income

42. The table 3 shows that from fifth plan onwards, the growth rate in our national income is consistent and we are achieving more than 5 percent per annum growth in our national income. The growth rate in per capita income from 6th plan to 10th plan is ranging between 3.2 percent to 6.1 percent per annum. In the tenth plan (2002-07) our national income increased at the rate of 7.8 per cent p.a. and our per capita income recorded an increase of 6.1 per cent p.a. In 2007-08, growth rate of national income was 6.7 per cent and growth rate per capita income was 5.2 per cent. In year 2008-09, the growth momentum in Indian economy is adversely affected by the global slowdown. In 2010-11, growth rate of national income was 8.6 per cent and growth rate of per capita income was 7.3 per cent. In 201-12 expected growth rate in national income is 9 percent.

43. Comparison of per capita income and growth rate of GDP of India with other countries Per capita income of India compares unfavourably with most nations of the world, some comparative estimates are presented in the following table: Comparison of per capita income of India with other countries

44. From the above table it is clear that per capita income of India is very less in comparison to other nations. India’s ranking in terms of per capita income is 87th in all nations of the world. For international comparison, per capita income all countries is computed in U.S. dollars. World Bank measures per capita income of different countries on the basis of market exchange rate. While in human development Report, per capita income is computed on the basis of purchasing power parity (PPP). In market exchange rate basis, per capita of income of different countries in converted on the basis of the prevailing market exchange rates of different currencies in U.S. dollars.

45. But these estimates do not reflect the power of different currencies due to the fact that relative prices of goods and services vary substantially from one country to another. The use of purchasing power parity conversion factors corrects for these differences and provides a better comparison of income of different nations. In PPP approaches exchanges rate is computed on the basis of purchasing power of currency . The PPP is defined as the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as one dollar would buy in the united states.

46. For example, if we have to spend Rs. 30 for purchasing the same amount of goods and services as are purchased in spending one dollar developed and under developed countries are lower as compared to estimates, income inequalities between basis, i.e. comparison under PPP estimates reflects less income inequalities between developed and underdeveloped countries; nbut comparison under exchange rate basis reflects more inequalities between developed and developing nations. According tp IMF data, measured in PPP terms on the basis of nations income, India was the world’s fourth largest economy after the US, China and Japan in the year 2009.

47. Growth Rate of GDP of Different Nations Growth rate of GDP of some developed and some developing economies is shown along with India’s growth rate in the table 5. Growth rate of GDP of different Nations (annual average in %)