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Macro Economic Assignment 1

The document discusses various methods of calculating national income: 1. Value added method - National income is the sum of the value added by all producing units by taking the value of output and subtracting intermediate consumption. 2. Income method - National income is measured by adding up factor payments including compensation of employees, operating surplus, and mixed income. 3. Expenditure method - National income is calculated by adding various components of final expenditures, including private and government consumption, investment, and net exports. The sum of these expenditures equals gross domestic product at market prices.

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Harsha Ojha
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28 views

Macro Economic Assignment 1

The document discusses various methods of calculating national income: 1. Value added method - National income is the sum of the value added by all producing units by taking the value of output and subtracting intermediate consumption. 2. Income method - National income is measured by adding up factor payments including compensation of employees, operating surplus, and mixed income. 3. Expenditure method - National income is calculated by adding various components of final expenditures, including private and government consumption, investment, and net exports. The sum of these expenditures equals gross domestic product at market prices.

Uploaded by

Harsha Ojha
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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MACRO ECONOMICS

ASSIGNMENT 1

SUBMITED BY- BHUVNESHWAR RAM TRIPATHI

QUES, 1 -- WHAT ARE THE VARIOUS METHODS OF CALCULATING NATIONAL INCOME ?

ANS Methods of Calculating National Income

Value Added Method:- According to this method, National Income is calculated by


adding net value by
                                          all producing unit during the year within the domestic boundary.
GVPmp = GDPmp = Value of Output – Intermediate consumption 
                                          ↓
                             Sales+ Change in stock
                                                     ↓
                                        Closing stock – Opening stock
                            or
GDPMP= Gross value added by primary sector, tertiary sector, secondary sector
For calculating domestic & national income,
Domestic income (NDPFC) =GDPMP –Depreciation – NIT
National Income(NNPFC) = NDPFC+NFIA
Following items should not be included
(i) Sale and purchase of second hand goods.
(ii) Value of intermediate goods & services.
(iii) Goods & services produced for self-consumption.
Precautions:-
(i) Commission on sale and purchase of second goods is included.
(ii) Imputed value of production  for self-consumption is included.
(iii) Imputed rent on the owner occupied house is also included.
 
Problem of Double Counting:-  Double counting means when value of certain goods  is
counted more than once. E.g. suppose there are four producers.
                           Farmer, Miller, Baker, Shopkeeper

      Producer          Value of Input Value inâ?¹  Value added â?¹
         Output  inâ?¹

   Farmer          2000            0         2000

   Miller          3000          2000         1000

   Baker          4000          3000         1000

   Shopkeeper          5000          4000         1000

                               Total :               14000     


9000                                     5000
If we take  â?¹14000 as final output, this will arise the problem of Double Counting.
To avoid the problem of double counting, we have following measures:-
(i) Value Added Method:- By this method, we take value added only at each stage i.e.
5000
     Value Added= Value of output – intermediate consumption(inputs value)
                             = 14000-9000
                             =5000
(ii) Final Output method :- According to this method, we take value of final goods only.
Value of Intermediate goods are not taken into account. In the above case, â?¹5000 only
added to national income.
 
 
Income Method:- According to this method, national income is measured in terms factor
payments
                                                                                                                                                
       ↓
                                                                                                                                   (Land,
Labour, Capital, Owner)
Components of Income Method-
(i) Compensation of Employees: it includes
              (a) Wages and salaries in cash and kind
              (b) Employers’ contribution to Social Security
              (c) Pension on Retirement (It does not refer to old age pensions)
              Note:- Ignore employee contribution to social security
(ii) Operating  Surplus: It is the income from property and entrepreneurship. It includes
              (a) Rent, Interest, Royalty
                                    ↓
             (Ignore National Debt Interest)
              (b) Profit: Profit is further split into
                              → Dividends
                              → Corporate Profit Tax (tax on profit)
                              → undistributed profits (corporate saving)
(iii) Mixed Income: Income of the self-employed persons using their own labour, land,
capital, and  owner,  to produce goods & services. For e.g.  an owner uses himself in
place of manager or any other type of labour, or his car, or his building instead of other.
 When we add above values, we get NDPFC (domestic income)
Operating Surplus + Compensation of Employees+ Mixed Income = Domestic Income
(NDPFC)
Precautions:
(i) Transfer earnings like old age pensions, scholarships etc. should not be included in
National Income.
(ii) Income from illegal activities is not to be included.
(iii) Brokerage on sale and purchase of bonds should be included.
(iv) Commission on sale and purchase of second hand goods should be included.
(v) Income from lotteries or capital gain should not be included.
(vi) if any item is separately listed then it should not be included. For e.g. if  value of
operating surplus is given and we have separate value of wages & salaries, then wages &
salaries should not be included while calculating national income.
 
Expenditure Method:- As we know, “Production creates income, income creates
expenditure”. If we want to calculate National Income by this method, we have to add
different final expenditures from an economy. By adding all final expenditure we get
GDPMP.
 
Components of Expenditure Method:-
(i) Private Final Consumption Expenditure(C)
(ii) Government Final consumption Expenditure(G)
(iii) Investment Expenditure(I):
         It includes, = Business Fixed Investment (Purchase of fixed assets)
                           + Residential Construction
                           + Public Investment (Roads, dams, bridges)
                           + Inventory Investment (change in stock)
                           + Net Acquisition of Valuables(Gold, Diamonds)
(iv) Net Exports (X-M) = Exports – Imports
 
GDPMP = C+I+G+(X-M)
Domestic Income (NDPFC) = GDPMP –Depreciation-Net Indirect Taxes

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