NI, BC, I&D, BOP-National Income/Business Cycle/Recovery/Balance of Trade

1. National Income

2. National Income • National Income refers to the total incomes of residents of an economy in a given period after providing for capital consumption. • National Income is the money value of all goods and services produced in a country during a year

3. Payment of Resources (National Income) Factor Services (Land, Labor, Capital and organization Household (Consumption Sector) Firms (Production Sector) Goods and Services (National Product) Money Payments of Firms for Consumption (National Expenditure) The Circular Flow of Income

4. Three Measures Of National Income • National Product • Sum of outputs in several sectors of a nation’s production • National Income • Sum of all incomes accruing to factors of production in a given time period • National Expenditure • Sum of consumption expenditure. National Product = National income = National Expenditure

5. Gross Domestic Product (GDP) Gross Domestic Product at Market Price (GDPMP) Gross Domestic Product at Factor Cost (GDPFC) Net Domestic Product (NDP) Gross National Product at Market Prices (GNPMP) Gross National Product at Factor Cost (GNPFC) Net National Product (NNP) National Income (NI) Important Concepts of National Income

6. National Income at Current Prices National Income at Constant Prices Nominal National Income (NNI) Real National Income Private Income Personal Income Disposable Income Per Capita Income Important Concepts of National Income

7. 1. Gross Domestic Product (GDP) • GDP is the aggregate money value of all final goods and services produced in an economy during a year before depreciation and indirect taxes. • (Only final goods are included, intermediate goods are excluded)

8. 2. Gross Domestic Product at Market Price (GDPMP) • GDP is expressed in the form of money value. • To find the money value of all final goods and services produced in an economy during a year, we multiply each of these goods and services by their respective market prices, i.e., the prices at which these are sold in the market. • The resultant aggregate is known as GDP MP (Market price of a product includes the different taxes levied on it by the government, for example excise duties etc.)

9. 3. Gross Domestic Product at Factor Cost (GDPFC) • GDPFC can be derived from GDPMP as follows • GDPFC = GDPMP – Indirect Taxes + Subsidies (OR) • GDPFC = GDPMP – Net Indirect Taxes • (Net Indirect Taxes = Indirect Taxes – Subsidies)

10. 4. Net Domestic Product (NDP) • NDP refers to the money value of all the final goods and services net of depreciation produced annually in the domestic territory valued at market price before net indirect taxes. Thus, • NDP = GDP – Depreciation

11. 5. Gross National Product at Market Prices (GNPMP) • GNPMP is estimated by adding net factor income from abroad to GDPMP. • (Net factor income form abroad = Income earned by Indian residents abroad in the form of wages, rent, interest and profits - Income earned by foreigners in India in the form wages, rent, interest and Profits)

12. 6. Gross National Product at Factor Cost (GNPFC) • GNP FC can be derived as follows, • GNPFC = GNPMP - Net Indirect Taxes

13. 7. Net National Product (NNP) • NNP equals GNP minus the cost of depreciation. • NNP = GNP – Cost of Depreciation • NNP can be estimated either as NNPMP or NNPFC and can be derived form respective gross estimates.

14. 8. National Income (NI) • NI is the same as NNPFC. Thus • NI = GDPMP + Net Factor Income from Abroad – Cost of Depreciation – Net Indirect Taxes.

15. 9. National Income at Current Prices • National Income at Current Prices is estimated when the output of different products is multiplied by the respective prices obtaining in the year for which the estimates are prepared. • Thus, if we estimated the money value of all goods and services produced in the year 2007-08 by multiplying the products by the prices that obtained in the same year i.e., 2007-08, the resulting estimate is known as the national income at current prices.

16. 10. National Income at Constant Prices • Here, we can obtain national income estimates for a year by making use of prices prevalent in some other (i.e., the base year). • Thus if we estimate national for year 2007-2008 with the help of the prices that prevailed in the year 1999-2000, the estimates would be know as national income at constant prices (base year : 1999-2000)

17. 11. Nominal National Income (NNI) • National income estimated at current prices is referred to as nominal national income.

18. 12. Real National Income (RNI) • National income estimated at constant prices also knows as real national income. For purposes of comparison over a period of time (called inter-temporal comparison), we make use of real national income. • But for purposes of comparison between different regions for the same year (called inter-spatial comparison), we make use of national income. Symbolically,

19. 12. Real National Income (RNI) National Income for Current year × Base Year Index Real Income = ___________________________________________ Current Year Index

20. 13. Private Income (PI) • Private income refers to the income of the private sector generated within the domestic territory and abroad by private enterprises and transfer of payments. Thus,

21. 13. Private Income (PI) • Private Income = • National Income + Transfer Payment + Interest on Public Debt – Social Security – Profit of Public Undertaking. • (Transfer Payment includes pensions, unemployment allowances, gifts and payments form abroad, lotteries, horse racing earning from illegal activities etc.)

22. 14. Personal Income • Personal Income is the total income received by all the individual of a country from all sources before direct taxes during a year. Thus, • Personal income = • National Income + Transfer Payment + Interest on Public Debt – Social Security – Profit of Public Undertaking – Profit of Private Enterprises – Profit Taxes. OR • Personal Income = Private Income – Profit of Firms – Profit Taxes.

23. 15. Disposable Income • Disposable income refers to actual income which can be spent on consumption by individuals. Thus • Disposable Income = Personal Income – Direct Taxes

24. 16. Per Capita Income • The average income of the people of a country in a particular year is called Per Capita Income for the year. Thus

25. 16. Per Capita Income National Income (Year 2008) Per Capita Income (year 2008) = _____________________________ Population during the year 2008

26. 16. Per Capita Income • Likewise, nominal per capitaincome is calculated from nominal national income while real per capita income is calculated form real national income.

27. Methods of Measuring National Income • There are three approaches are employed for calculating National Income. They are • Income Method • Expenditure Method • Value Added Method or Output Method

28. 1. Income Method • The income approach to GNP consists of remuneration paid in terms of money to the factors of production annually in a country. • According to this method, the factor earnings of the economy is equal to the sum total of the products produced by them.

29. (i) Wages and Salaries (ii) Rents (iii) Interest (iv) Dividends (v) Undistributed Corporate Profits (vi)Mixed incomes(profits of incorporated businesses, self employed persons and partnerships) (vii) Direct Taxes (viii) Indirect Taxes (ix) Depreciation (x) Net income earned from abroad. Income Method includes the following for its calculations

30. 2. Expenditure Method • From expenditure point of view, GNP is the sum total of expenditure incurred on final goods and services during one year in a country. • It includes the following items: • (i) Private consumption expenditure • (ii) Expenditure by consumers on goods and services • (iii) Expenditure by Government on consumption as well as capital goods • (iv) Money received from exports and incomes received on foreign investments.

31. 3. Value Added Method • Here the money value of final goods and services produced at current prices during a year is taken into account. • Since it is difficult to distinguish properly between a final product and an intermediate product of an industry, the value of intermediate products used in manufacturing final products must be subtracted form the value of total output of each industry in the economy.

32. 3. Value Added Method • Thus, the difference between the value of material outputs and inputs at each stage of production is called the value added. • If all such differences are added up for all industries in the economy, we arrive at the GDP by value added. • The value added method for measuring national income is more realistic that the product and income method because it avoids the problem of double counting by excluding the value of intermediate product. • Further, through this method, we can also know the contribution of each production sector to the value of GNP.

33. Factors Determining National Income • Quality and quantity of factors of production • The state of technical know how • Political stability

34. Uses of National Income Data • It helps to study the rate of growth of an economy • It helps to estimate inter sectoral growth • It helps to study inter-class income distribution • It helps to make international comparisons about standards of living • It helps govt in planning, policy making, preparation of budgets and forecasting the level of economic activity.

35. Business Cycle

36. Business Cycle • Business cycle or economic cycle refers to the fluctuations of economic activity (business fluctuations) around its long-term growth trend. • It is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables. • A wave-like fluctuation in the general level of economic activity in national income, employment and output

37. Business Cycle • The cycle of economic growth and decline. There are four stages in the business cycle: expansion, growth, contraction and recession. • The rhythm / periodicity between the cycles need not be similar pattern. • It is mostly present in a captalistic economy.

38. History of Economic Fluctuations • The history shows that most economies have experienced economic fluctuations • Great Depression of 1930s(the longest period considered in the trade cycle) • Hyper inflation in Germany 1980 • These are saying the dangers of economic fluctuations.

39. Economic Fluctuations • Boom in one period and Sump in another in economic activities in the business cycle. • Prosperity opens up new opportunities to the business • Depression reduces the opportunities • An entrepreneur must analyze the economic environment for his business decisions, profit maximization and forward planning

40. Phases of Business Cycles

41. Line of Cycle E B D F Prosperity Depressions C A Steady Growth Line C-D = Recovery D-E = Expansion E = Peak (Boom) E-F = Recession F = Trough (Panic) A-B = Expansion B = Peak (Boom) B-C = Recession C = Trough (Panic)

42. Business Cycle • Steady growth line shows the growth of the economy • Line of cycle moves up and down the steady growth line shows the economic fluctuations.

43. Boom or Prosperity

44. Boom or Prosperity • There is all-round prosperity • The business outlook is extremely optimistic • High level of output, trade, employment and income • High level of effective demand and high marginal efficiency of capital • Large expansion of credit • Rising trend in prices, profits and interest rates

45. Recession

46. It is only a turning point(turning point from optimism to pessimism)and thebeginning of recession It is the end of prosperity Supply exceeds demand Failure of the company or a bank Consumer spending falls and sales declines Firms sells their goods at low price Panic in the stock market and business activities Wave of pessimism sweeps the economy Recession

47. Depression and Trough(The worst Phase of Business cycle)

48. When recession deepens, Depression occurs. It is opposite to boom Economic activities are slow than their normal level Growth rate becomes negative Weaker firms eliminated from the industry National income and expenditure declines negatively Wages and profits fall The level of unemployment rises Prices of goods decline steadily. Workers lose their job Demand for bank credit becomes zero Depression and Trough(The worst Phase of Business cycle)

49. Recovery (A lower Turing point from Depression to Prosperity)

50. Investments picks up and employment gradually increases Production and income, demand start increasing Economic activities get accelerated Multiplier effect will be generated Firms plan for additional investment Wage, income and consumption rises Business realizes quick turn over and profit All factor of production are fully employed Recovery (A lower Turing point from Depression to Prosperity)