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Summary
Economics_RS Class 24

A BRIEF OVERVIEW OF THE PREVIOUS CLASS (05:03 PM)

NATIONAL INCOME (05:05 PM)

  • National income= Productive income of normal residents of a country in one financial year- Within domestic and + Rest Of the World.
  • Transfer payment is not a productive income thus it is not a part of National Income. Examples- Old age pension, Remittances, Unemployment allowance, Gifts, etc
  • However, pension to retired employees is not a transfer payment as the services were already rendered by them before retirement, thus it will be a part of National Income. 
  • National Income includes factor payment in the form of rent, wages, interest, and profits.

  • NI= Compensation to employees (CE) + Mixed income+ operating surplus
  • Compensation to employees= Salaries/ Wages in cash, Salaries/ Wages in kind, Employees' contribution to social security
  • Mixed income= Mixed income of self-employed refers to the surplus or deficit amount which is earned from the production process by the enterprises which are not corporate
  • Operating Surplus= Rent or Royalty or Profit or Interest. 
  • Depreciation/ Consumption of fixed capital 
  • It refers to the loss in value of fixed assets that are in use due to wear and tear. In simple words, it can also be termed as an annual amount spent on wear and tear or maintenance of assets. 
  • Gross V/s Net
  • Net= Gross- Depreciation 
  • Factor cost 
  • It refers to the cost of factors of production incurred by a firm while producing goods and services. 
  • Factor cost does not include indirect taxes like GST that are paid to the government since payment of taxes is not directly related to the production process but subsidies received are included in the factor cost as these are direct inputs into the production process. 
  • Note- Subsidies given to farmers for production or Subsidies given to manufacturing processes etc are not seen as Transfer payments. They are used in the production process.  
  • Market Price 
  • It is the price that the consumer pays for the product while purchasing from the seller i.e. it is the price at which units are sold in the economy taking into account the indirect taxes and subsidies. 
  • Market price= Factor cost+ Indirect taxes- Subsidies
  • Market proice= Factor cost + Net Indirect taxes
  • If the Net indirect taxes are Negative, then the Market cost will be less than the factor cost
  • Net indirect taxes= Indirect taxes- Subsidies 
  • GDP at Market Price= GDP at Factor cost + Indirect taxes- Subsidies

  • GDP at Market price= GDP at Factor cost + Net indirect taxes

TRANSFER PAYMENTS (05:45 PM)

  • Transfer payments are unilateral payments corresponding to which there is no exchange of goods and services in the economy. Examples- Gifts, Donations, Old age or disability pension, Unemployment compensation, etc 
  • However, pensions to retired employees are not a transfer payment as the services were already rendered by them before retirement. 
  • Note- Transfer payments are not included in the National Income calculation as they are not productive income. 

DOMESTIC V/S NATIONAL (05:49 PM)

  • Concept of Normal Resident
  • National income has also been defined as the sum total of factor incomes earned by the normal residents of a country during a year, thus like domestic territory, normal resident has special importance in national income accounting. 
  • A resident is said to be a person or institution who ordinarily resides in a country and whose center of economic interest lies in that country. He is called a normal resident since he normally lives in the country of his economic interest. 
  • The period of stay should be at least one year or more, thus staying for more than a year and having economic interest like earning, spending, and accumulation are the two conditions for becoming a normal resident. 
  • National income is the sum total of income of only normal residents of a country during a year. 
  • Who is a normal Resident?
  • Normal residents cover both Individuals and institutions
  • Normal residents include both citizens and non-citizens i.e. Foreigners who reside in a country for more than a year and have an economic interest in that country. 
  • International bodies like World Bank, WHO, or IMF are not considered residents of the country in which they operate but are treated as residents of International territory.
  • However, the staff of these bodies are treated as normal residents of the country in which the international body operates. For example- An international body like the WHO located in India is not a normal resident of India but Americans working in its office for more than a year will be treated as Normal Residents of India
  • Local employees working in foreign Embassies located in their country are treated as normal residents. For example- Indians working in USA Embassy located in India are residents of India. 
  • Workers moving across the border for work, For Example- Indians working in Nepal and returning back in the evening are not residents of the country where they work.  
  • GNP= Total final value of all goods and services produced by Normal Residents of the country in one financial year
  • GNP= GDP + NFIA
  • NFIA- Net Factor Income From Abroad. 
  • NDP at MP= GDP at MP- Depreciation
  • NDP at FC= NDP at MP- Net Indirect taxes
  • NNP at FC= NDP at FC + NFIA

  • NNP at FC= GDP at MP- Depreciation- Net Indirect taxes+ NFIA

CONCEPT OF  NFIA (06:36 PM)

  • It is the difference between Factor Income (WIPR) earned by normal residents of India who are temporarily residents upon and Factor income earned by Non-Residents temporarily residing in India. 
  • NFIA= Factor income from the rest of the world- factor income to the rest of the world
  • National income includes income of only normal residents of India i.e While computing national income what matters is the resident status and not citizenship status
  • Components of NFIA
  • 1) Net compensation to employees
  • 2) Net retained earnings
  • 3) Net earnings in the form of Net interest earnings etc
  • 4) Net income from property
  • NFIA is zero, in a closed economy as such an economy does not deal with the rest of the world. 
  • GNP= GDP + Net Factor Income from Abroad. 
  • It is the total final value of all Goods and services produced by Normal Residents of a country in one financial year. 

NOMINAL V/S REAL GDP (07:03 PM)

  • Nominal GDP= GDP calculated at Current Year prices 
  • Real GDP= GDP calculated at Base year prices 
  • GDP is calculated by NSO which is under MoSPI (Ministry of Statistics and program implementation)
  •   Quarter 1 (April, May, June) Quarter 2 (July, August, September) Quarter 3 (October, November, December)

    Quarter 4 (January, February, March)
    2019 100      
    2020 76      
    2021 90      
  • When we compare the GDP of 2021 Quarter 1 with the GDP of 2020 Quarter 1, the number looks bigger as we are comparing with a lower base. This is called the Base effect

METHODS OF CALCULATING NATIONAL INCOME/ GDP (07:17 PM)

  • Income method 
  • It is also called the distribution method. Under this method, the factor income of the following three categories is added to calculate NDP at Factor cost
  • a) Compensation to employees (CE)
  • b) Mixed Income
  • c) Operating Surplus
  • NDP at FC= CE+ MI+ OC
  • CE= Wages/ Salaries in cash + Wages/ salary in kind+ employers contribution to Social security
  • Mixed Income of self-employees- It refers to earnings from Farming, sole proprietorship, and other professions such as legal and Medical practices. In these professions owners themselves assume the role of entrepreneur, Financer, Landlord, and workers
  • Items not included in National income under the Income method
  • a) Windfall gains
  • b) Transfer receipts
  • c) Income from the sale of shares and bonds
  • d) Income from the sale of second-hand goods
  • Items included in National Income under the Income method
  • 1) Commission charged by Broker  on sale proceeds of second-hand goods
  • 2) The value of production for self-consumption is also included in national income.  
  • National Statistics Organization, NSO
  • It is under the Ministry of Statistics and program implementation (MoSPI). 
  • It is created through the merger of NSSO and CSO in 2019. 
  • GDP is calculated on a quarterly and yearly basis. 
  • Nominal GDP v/s Real GDP 
  • Nominal GDP- GDP calculated at the Current year prices 
  • Real GDP- GDP calculated at base year prices 
  • GDP deflator = Nominal GDP / Real GDP 
  • Domestic V/s National 
  • Domestic Income National Income
    It is a territory concept, as it includes the value of final goods and services produced within the domestic territory of a country. It is a national concept as it includes the value of final goods and services produced in the entire world.
    It considers all producers within the domestic territory of the country

    It considers all producers who are normal residents of the country.
    It does not include NFIA. It includes NFIA.

DIFFERENT AGGREGATES OF CALCULATING NATIONAL INCOME (07:34 PM)

  • 8 Aggregates= GDP at MP, NDP at MP, GDP at FC, NDP at FC, GNP at MP, GNP at FC, NNP at FC, NNP at MP
  • Gross domestic product at market price
  • It refers to the gross market value of all final goods and services produced within the domestic territory of the country during a period of one year.
  • Gross domestic product at factor cost 
  • It is the money value of all final goods and services produced within the domestic territory of a country during a period of one year.
  • GDP at factor cost=GDP at market prices - Net Indirect Taxes
  • Net domestic product at market price
  • It refers to the net market value of all final goods and services produced within the domestic territory of a country during a period of one year.
  • NDP at MP= GDP at MP - Depreciation 
  • NDP at FC= GDP at MP- Net Indirect taxes- Depreciation
  • Gross national product at market price
  • It is the gross market value of all final goods and services produced by the normal resident of a country during one year.
  • GNP at MP= GDP at MP + Net factor income from abroad (NFIA)
  • GNP at factor cost
  • It refers to the gross money value of all final goods and services produced by a normal resident of a country during one year.
  • GNP at FC= GNP at  MP- net indirect taxes 
  • Net National product at market price
  • It refers to the net market value of all final goods and services produced by the normal residents of a country during a period of one year. 
  • NNP at MP= GNP at MP - Depreciation
  • Net national product at factor cost
  • It is the net money value of all the final goods and services produced by normal residents of a country during a period of one year.
  • NNP at FC= GDP at MP -Depreciation-Net indirect taxes + NFIA
  • NNP at FC= GNP at MP -Depreciation-Net indirect taxes

OUTPUT METHOD (07:52 PM)

  •   Intermediate consumption Final output
    Farmer 0 500
    Baker 500 1000
    Miller 1000 2000
  • Final output= 2000
  • Gross value addition= (500-0)+ (1000-500)+ (2000-1000)= 2000

The topic for the next class:- Output method and GVA method, GVA at basic prices.