MEASURES OF NATIONAL INCOME


Wed,April 10, 2019 12:52 AM

CFO

INDIAN ECONOMY

Today lets discuss how exactly GDP, GNP are calculated, so that we can understand how economies perform and achieve prosperity. This is the second chapter in our preparation.
This is in continuation with the article published on 27th, March 2019, in these columns.

National Income and National Product?

National Income and National Product are one and the same. National Income is nothing but the total income accruing to a country from economic activities in a years time. It includes payments made to all the factors of production namely the land, labour, capital and enterprise in the form of rent, wages, interest, and profits respectively.

Why measure National Income?

Makes international comparisons possible - We can compare the economies of any two countries on the basis of their national income data. The National Income estimate is valuable in assessing the performance of different production sectors. The data on incomes generated by these sectors can be used to measure their relative contributions to national income.
National Income estimate is helpful In Economic Planning. Planning is not possible without statistical data of economy. The national income is also important for less developed or developing countries. National income estimates, throw light on the importance and backwardness of various sectors of the less developed or developing economics and help in formulating appropriate economic policies.

Who formulated measures of National Income?

Simon Kuznets is best known for his studies of national income and its components. Prior to World War I, measures of GNP were rough guesses. Kuznets changed all that. With work that began in the 1930s and stretched over decades, Kuznets computed national income back in 1969. He broke it down by industry, by final product, and by use.
The most common measures are Gross Domestic Product (GDP), Net Domestic Product (NDP), Gross National Product (GNP) and Net National Product (NNP).

What is GDP?

Gross Domestic Product (GDP) is the final value of the goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year. GDP growth rate is an important indicator of the economic performance of a country.Gross domestic product is the best way to measure a countrys economy. GDP is the total value of everything produced by all the people and companies in the country. It doesnt matter if they are citizens or foreign-owned companies. If they are located within the countrys boundaries, the government counts their production as GDP.

What is GNP?

Gross national product (GNP) is the market value of all the products and services produced in one year by labour and property supplied by the citizens of a country.Unlike GDP, which defines production based on the geographical location of production, GNP indicates production based on ownership.GNP includes income earned by citizens and companies of the particular country who are situated abroad, but does not include income earned by foreigners within the country.GNP is an economic statistic that is equal to GDP plus any income earned by residents from overseas investments minus income earned within the domestic economy by overseas residents.

Methods of calculation of GDP and GNP ?

There are basically three methods used for calculating the GDP and the GNP.
1. Product method
2. Income method
3. Expenditure method.
Product Method: In this method, GDP and GNP are measured as a flow of goods and services. We calculate money value of all final goods and services produced in an economy during a year. There are 4 important parameters which should be kept in mind while calculating the money value of a good or service.
a.Intermediate Vs final product
b.Factor cost Vs Market prices
c.Gross Vs Net
d.Constant prices Vs Current prices

a. Intermediate Vs Final product?

The distinction between intermediate goods and final goods is made on the basis of the use of product and not on the basis of product itself. A commodity can be an intermediate good as well as a final good, depending upon its nature of use. Final goods are those goods which are directly consumed and not used in further production process.Goods which are further used in production process are called intermediate goods.
In the value of final goods, value of intermediate goods is already included therefore we do not count value of intermediate goods in calculating GDP and GNP, otherwise there will be double counting of value of goods. Eg. Sugar is an intermediate good when it is used for making sweets. However, if it is used by the consumers for direct consumption, then it becomes a final good.

b. Factor cost Vs Market Price?

Factor cost is the actual cost incurred on goods and services that are produced by the firms and industries. Factor cost doesnt take into consideration any other cost other than those incurred in producing the good or service.
Factor cost =Manufacturing cost +Profit
Market prices are the prices at which the goods and services are sold in the market. In other words its the price which the final consumer pays to avail the service or buy the good.
Market prices = Manufacturing cost+ profit
+ Indirect tax - Subsidy
EXAMPLE: Manufacturing cost of a Solar panel includes:
Raw material Rs.10,000
Land(rent) where the factory is located- Rs. 1,000
Labour (wages) Rs. 2,000
Capital (interest) Rs.2,000
The profit is say, Rs.5000
Therefore the total manufacturing cost of the Solar panel is Rs.20,000.
20,000 is the factor cost of the Solar panel.
In the above example, let us say the GST applicable on the Solar panel is 18%.
Then, the market price of the Solar panel would be arrived at in the following way:
20,000*18%=3600
So 20000+3600=23600.
23600 would be the market price of the Solar panel.
Now assume the government has given a subsidy of 50 % . Then market price will be
23600-50%= 11800.
11,800 is the new market price of the Solar panel after including the subsidy.

c.Gross or Net?

Gross means before deductions and Net means after deductions
Gross refers to the whole of something, while net refers to a part of a whole following some sort of deduction. Gross income is calculated by subtracting the cost of goods sold from revenue. Net income is calculated by subtracting expenses such as SG&A (selling, general and administrative expenses), interest payments and taxes from gross income.

d.Constant prices Vs Current prices?

To understand this debate about whether the product/service pricing should be constant or based on current pricing, we need to look at the concept of Base year.
Base year is a particular year taken as reference year, against which the current years statistics are compared with, so as to arrive at the required information. Such a base year that is selected must be free from extreme fluctuations. Meaning it must have a normal average economic activity .
The base year is allocated a value of 100 in an index. Against this, the current years statistics are measured. The concept of base year is used in calculating a number of economic indicators like the National income, inflation, capital formation etc,.
The estimates at the prevailing prices of the current year are termed as at current prices, while those prepared at the base year are termed as at constant prices.
The Government of India calculates GDP and GNP using,
a. Final product and not Intermediate,
b. Market prices and not Factor cost,
c. Gross and not Net,
d. Constant prices and not Current prices.


Test

1. Which of the following statements is/are correct ?

A. National income and national product are one and the same
B. Calculating national income benefits the developed countries and not the developing .
A. 1 only
B. 2 only
C. Both
D. Neither

2. When final value of goods and services produced within the boundaries of a particular country are measured, it gives us the


A. GDP
B. GNP
C. NNP
D. NDP

3. Market value of goods and services is used in calculating


A. GDP
B. GNP
C. Both
D. Neither

4. Income earned by US citizens in India is included in the calculation of


A. GDP
B. GNP
C. Both
D. Neither

5.Profit is included in the calculations of


A. Factor cost
B. Market cost
C. Both
D. Neither
vijay

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