Economic Environment of Business_4

National Income Analysis

•National Income concepts
•Methods for estimation of National Income
•Trends in India’s National income
•Inter-sectoral Distribution of National Income
•Trends in inter-sectoral distribution over the last 55 years


National Income concepts

•Gross Domestic Product (GDP)
GDP is the sum of the market values, or prices, of all final goods and services produced in an economy during a period of time.
1.GDP is a number that expresses the worth of the output of a country in local currency.
2.GDP tries to capture all final goods and services as long as they are produced within the country.
3.GDP is calculated for a specific period of time, usually a year or a quarter of a year.


GDP

•GDP refers to the total value of a nation's output, income, or expenditure produced within a nation's physical borders.
•Gross domestic product (GDP) measures the total output of goods and services for final use occurring within the domestic territory of a given country, regardless of the allocation to domestic and foreign claims.


Y = C + I + G + (X - M)
•Consumer Expenditure, C, is the sum of expenditures by households on durable goods, nondurable goods, and services. Examples include clothing, food, and health care.
•Investment, I, is the sum of expenditures on capital equipment, inventories, and structures. Examples include machinery, unsold products, and housing.

•Government spending, G, is the sum of expenditures by all government bodies on goods and services. Examples include naval ships and salaries to government employees.
•Net exports, X - M, equals the difference between spending on domestic goods by foreigners and spending on foreign goods by domestic residents. In other words, net exports describes the difference between exports and imports.


Gross National Product

•A country's total output of goods and services from all forms of economic activity measured at market prices for a calendar year.
•GNP is the sum of the market values of all goods and services produced by the citizens of a country regardless of their physical location.


GDP vs. GNP

•GDP is the sum value of all goods and services produced within a country. GNP is the sum value of all goods and services produced by permanent residents of a country regardless of their location.
•Thus, while GDP is the value of goods and services produced within a country, GNP is the value of goods and services produced by citizens of a country.


Real GDP vs. Nominal GDP

•Nominal GDP is the sum value of all produced goods and services at current prices.
•Real GDP is the sum value of all produced goods and services at constant prices.
•By keeping the prices constant in the computation of real GDP,and thereby adjusting for inflation, it is possible to compare the economic growth from one year to the next in terms of production of goods and services rather than the market value of these goods and services.


Inflation

•A continuous increase in the general price level
•The rate of change in the general price per year, expressed in percentage.


GDP Deflator

•The ratio of nominal (current price) GDP to real (constant price) GDP for a given year minus 1. The GDP deflator shows how much of the change in the GDP from a base year is reliant on changes in the price level.
•The GDP deflator is based on the Paasche’s method of computation of indices, i.e. it uses current output levels as weights.


Price Indices in India

•GDP Deflator
•Wholesale Price Index
•Consumer Price Index for industrial workers
•Consumer Price Index for urban
non-manual employees
•Consumer Price Index for agricultural labourers


Wholesale Price Index

•Published on a weekly basis by the office of the Economic Advisor, Ministry of Industries, Government of India
•Ideal measure of inflation rate
•WPI series is available for all commodities as well as for major groups, sub-groups and individual commodities
•It’s use is questioned as it ignores services
•Similar to Producers’ price Index (PPI) of many countries


Consumer Price Index (CPI)

•CPI-IW, CPI-AL : Published by the Labour Bureau of the Ministry of Labour
•CPI- UNME : Published by Central Statistical Organisation
•Prepared at state level or selected centres’ levels and then aggregated to all India level.
•Laspeyre’s formula is used.


Components of National Product

1.Consumption Expenditure
•Private Consumption
-Non-durable goods
-Durable goods
-Services
•Public consumption
2.Investment
•Domestic Fixed Capital Formation
- Business investments
- Residential investments
•Changes in stocks


Types of Investment Expenditure

•Business Investment and Non-business Investments
•Private Investment and Public Investments (Strategic investments)
•Autonomous Investments and Induced Investments
•Gross Investment and net Investment


Investments and Capital

•Investment is a flow, capital is a stock
•Capital is cumulative net investments
t
Kt = S Ii
i=1


Determinants of Investment Expenditure

•Output – changes in output
•Interest rate
•Wage rate
•Government policies –fiscal and monetary
•Technology
•Financial constraints


Gross Domestic Product at Factor Cost

•GDP at market prices includes indirect taxes and does not take into account the subsidies given by the Government. GDP at Factor cost = GDP at market prices – indirect taxes + subsidies
GDPFC = GDPMP + NIT
Where, NIT = Net I direct Taxes = IT - S





Personal Income (PI)

•Personal Income is the sum of all incomes received by all individuals or households during a given year.
•Personal Income = National Income - (Corporate Income Tax + Undistributed profits / Retained Earnings ) + Transfer Payments


Methods of Estimation of National Income

•The Product Method / The Output Method / The Value Added Method
•The Income Method
•The Expenditure Method


Measurement of National Income in India

•National Income Committee was constitutes in 1949.
•Chairman – Dr. P. C. Mahalnobis
•Members – Dr. D. R. Gadgil, Dr. VKRV Rao
•Published NI estimates from 1949 to 1952
•Developed methodology, which was followed till 1967
•Central Statistical Organisation (CSO) publishes the ‘Estimates of National Income’


Business Cycles

•Business Cycles are ups and downs in economic variables over time.
•Real National Income, Unemployment and Price Level are the core macro variables
•The level and growth rate of Real GDP at factor cost is used to denote economic standing or performance


Theories of Business Cycles

•Monetary Theories
–Over-investment theory – Prof. Hayek
–Pure Monetary theory – Prof. Haw trey
•Non-monetary Theories
–Sun-spot or climatic theory – W S Jevons, H C Moore
–Psychological Theory – Prof. Pigou
–Under-consumption Theory – Malthus, Marx & Hobson
–Keynes’ Theory
–Innovation Theory – Joseph Schumpeter


Keynes’ Theory of Business cycles

•Level of ‘effective demand’ in an economy determines the level of
–Employment
–Income and
–Output
•Effective Demand = Consumption Expenditure + Investment Expenditure
•In the short run, consumption is relatively stable, but investment is volatile


•Rate of investment depends on
–Rate of interest
–Marginal efficiency of capital (MEC)
•Interest rate is stable in the short run, therefore, MEC determines the rate of investment in the short run
•An increase in MEC leads to expansion in investment, thereby leading to higher output, employment and income.


Schumpeter’s Theory of Innovation

•Innovation brings about changes in economic activity
•Innovation refers to discovery of
–A new product
–A new market
–A new source of supply of raw materials or semi-finished goods
–A new method of production
•The process of economic growth is discontinuous
•Clustering of innovations creates a favourable disturbance and leads to boom/prosperity


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