*DAY #13&14 08 &
09.04.2020*
*TOPIC – STEPS AND PRECAUTIONS (N.I. CALCULATION)*
1. VALUE ADDED / OUTPUT /
PRODUCTION METHOD:
STEPS OF VALUE ADDED METHOD:
The main steps for estimating
national income by Value Added Method are:
Step 1: Identify and classify the production units:
· Identify
and classify the production units.
Step 2: Estimate Gross Domestic
Product at Market Price:
· In
the second step, Estimate Gross Domestic product at Market Price ƩGVAMP =
GDPMP. (by adding Value Added at market price of all sectors)
Step 3: Calculate Domestic
Income (NDPFC):
· Calculate
Domestic Income ( NDPFC) = NDPFC = GDPMP –
Depreciation – Net Indirect Tax i.e. NDPFC = GDPMP – Depreciation – Net Indirect Taxes.
Step 4: Estimate net factor
income from abroad (NFIA) to arrive at National Income:
· In
the final step, Estimate net factor income from abroad (NFIY) to arrive at
National Income. (NNPFC) = NDPFC + NFIA
CALCULATION -
GVAMP of
Primary Sector
+ GVAMP of
Secondary Sector
+ GVAMP of
Tertiary Sector
= Gross Domestic Product
at Market Price (GDPMP)
(-) Depreciation
= Net Domestic Product at
Market Price (NDPMP)
(-) Net Indirect Tax
= Net Domestic Product at
Factor Price (NDPFC)
(+) Net factor Income from Abroad
= Net National Product at
Factor Price (NNPFC)
Value Added =
Value of Output – Intermediate Consumption
Value of Output =
Sales
Value of Output =
Sales + Change in Stock
Value of Output =
Domestic Sales + Export + Change in Stock (if Given)
(Machinery
are always final goods when calculated Value Added)
Precautions of Value Added
Method:
The various precautions to be
taken in Value Added Method are:
1. Intermediate Goods are
not to be included in the national income since such goods are already included
in the value of final goods. If they are included again, it will lead to double
counting.
2. Sale and Purchase of
second-hand goods is not included as they were included in the year in which
they were produced and do not add to current flow of goods and services.
However, any commission or
brokerage on sale or purchase of such goods will be included in the national
income as it is a productive service.
3. Production of Services
for self-consumption (Domestic Services) are not included. Domestic services
like services of a housewife, kitchen gardening, etc. are not included in the
national income since it is difficult to measure their market value. These
services are produced and consumed at home and never enter the market place and
are termed as non-market transactions.
It must be noted that paid
services, like services of maids, drivers, private tutors, etc. should be
included in the national income.
4. Production of Goods for
self-consumption will be included in the national income as they contribute to
the current output. Their value is to be estimated or imputed as they are not
sold in the market.
5. Imputed value of
owner-occupied houses should be included. People, who live in their own houses,
do not pay any rent. But, they enjoy housing services similar to those people
who stay in rented houses. Therefore, value of such housing services is
estimated according to market rent of similar accommodation. Such an estimated
rent is known as imputed rent.
6. Change in stock of Goods
(inventory) will be included. Net increase in the stock of inventories will be
included in the national income as it is a part of capital formation
PRECAUTIONS IN SHORT-
(1) Intermediate Goods are not to be included in N.I.
(2) Sale and Purchase of second hand goods is not included.
(3) Production of services for self consumption (Domestic
Services) is not included.
(4) Production of Goods for self consumption is not included.
(5) Imputed value of owner occupied houses should be included.
(6) Change in stock of Goods (inventory) will be included
*2. INOCME METHOD *
Compensation of Employees
+ Operating Surplus
+ Mixed Income
= Net Domestic Product at Factor Cost (NDPfc)
= Domestic Income
(+) Net factor Income from Abroad
= Net National Product at Factor Price (NNPFC)
= National Income
Compensation of Employees –
(1) Wages and Salaries in Cash;
(2) Wages and Salaries in Kind;
(3) Employer’s contribution in Social Security Schemes.
Operating Surplus –
(1) Factor Payment like Rent,
(2) Royalty,
(3) Interest and
(4) Profit (Profit Includes Dividend, Corporation Tax and Retained
Earning)
Mixed Income – Income from Self
employment
STEPS - Following
are the main steps involved in estimating national income by income method:
(i) Identify enterprises which employ factors of production (land,
labour, capital and enterprise).
(ii) Classify factor payments into various categories like rent,
wages, interest, profit and mixed income (or classify factor payments into
compensation of employees, mixed income and operating surplus).
(iii) Estimate amount of factor payments made by each enterprise.
(iv)Sum up all factor payments made within domestic territory to
get Domestic Income (NDP at FC).
(u) Estimate net factor income from abroad which is added to
Domestic Income to derive National Income.
STEPS IN SHORT-
(1) Identify and classify the production units.
(2) Estimate the factor income paid by each sector.
(3) Calculate Domestic Income (NDPFC) = NDPFC =
C.o.E. + Rent and Royalty + Interest + Profit + Mixed Income
(4) Estimate net factor income from abroad (NFIY) to arrive at
National Income. NNPFC = NDPFC + NFIA.
PRECAUTIONS - For correct
computation of national income by income method, following precautions need to
be taken:
(i) Only factor incomes which are earned by rendering productive
services are included. All types of transfer income like old-age pension,
unemployment allowance, etc. are excluded.
(ii) Sale and purchase of second-hand goods are excluded since
they are not part of production of current year but commission paid on sale of
second-hand goods is included as it is reward for rendering productive
services. Likewise, sale proceeds of shares and bonds are not included.
(iii) Imputed rent of owner occupied dwellings and value of
production for self-consumption is included but value of self-consumed services
like those of housewife is not included.
(iv) Incomes from illegal activities like smuggling,
black-marketing, etc. as well as windfall gains (e.g., from lotteries) are
excluded.
(v) Direct taxes such as income tax which are paid by the
employees from their salaries and corporate tax, which is paid by the joint
stock company from its profit, are included. But wealth tax and gift tax are
excluded since they are deemed to be paid from past savings and wealth.
Similarly, indirect taxes like sales tax, excise duties, which tend to increase
market prices, are not included
PRECAUTIONS IN SHORT-
(1) Transfer Incomes are not included in the N.I.
(2) Income from sale of second hand goods will not be included.
(3) Income from sale of shares, bonds and debentures will not be
included.
(4) Windfall gains.
(5) Imputed value of services provided by owners of production
units will be included.
(6) Payments out of past savings are not included in the N.I.
(7) Indirect Taxes are not included in N.I. at factor cost
*3. EXPENDITURE METHOD *
Private Final Consumption Expenditure
+ Government Final Consumption Expenditure
+ Gross Domestic Capital Formation
+ Net Export
= Gross Domestic Product at Market Price (GDPMP)
(-) Depreciation
= Net Domestic Product at Market Price (NDPMP)
(-) Net Indirect Tax
= Net Domestic Product at Factor Price (NDPFC)
(+) Net factor Income from Abroad
= Net National Product at Factor Price (NNPFC)
PFCE – Consumption
Expenditure by House Hold
GFCE – Consumption
Expenditure by Govt.
GDCF = Net Domestic Capital
Formation + Depreciation
GDCF = Net Domestic Fixed
Capital Formation + Change in Stock + Depreciation
GDCF = Gross Domestic Fixed
Capital Formation + Change in Stock
Net Export = Export – Imports
STEPS OF EXPENDITURE METHOD:
Step 1: Identify the Economic
Units incurring Final Expenditure - All the
economic units, which incur final expenditure within the domestic territory,
are classified under 4 groups: (i) Household sector; (ii) Government sector;
(iii) Firm (Producing) sector; (iv) Rest of the world sector (Abroad).
Step 2: Classification of Final
Expenditure - Final expenditures incurred by the above mentioned economic units
are estimated and classified as (1) Private
Final Consumption Expenditure (PFCE); (2) Government Final Consumption
Expenditure (GFCE); (3) Gross Domestic Capital Formation (GDCF); (4) Net
.Exports (X-M).
The sum total of four
components of final expenditure gives Gross Domestic Product at Market Price
(GDPmp), i.e. GDPmp = PFCE + GFCE + GDCF + (X-M)
Step 3: Calculate Net Domestic
Income at Market Price
(NDPmp) - By subtracting the amount of depreciation from GDPmp, we get Net
Domestic Income, i.e. NDPmp = GDPmp – Depreciation.
Step 4: Estimates Net
domestic Income at Factor Cost (NDPfc) - By subtracting the amount of net
indirect taxes from NDPfc, we get Net Domestic Income at factor cost, i.e.
NDPfc = NDPmp – Net Indirect Taxes.
Step 5: Estimate Net National
Product at Factor Cost / National Income - By adding the amount of Net Factor Income from Abroad / subtracting
the amount of Net Factor income Paid to abroad from NDPfc, we get Net National Product at Factor Cost / National Income i.e.
NNPfc = NDPfc + Net Factor Income from Abroad / NDPfc – Net factor income paid
to abraod
STEPS IN SHORT-
(1) Identify the Economic units incurring Final Expenditure
(2) Classification of Final Expenditure (PFCE + GFCE + GDCF + Net
Export = GDPMP)
(3) Calculate Domestic Income (NDPFC) = NDPFC =
GDPMP – Depreciation – Net Indirect Tax.
(4) Estimate net factor income from abroad (NFIY) to arrive at
National Income. NNPFC = NDPFC + NFIA.
PRECAUTIONS OF EXPENDITURE
METHOD:
The various precautions to be
taken while using the Expenditure Method are:
1. Expenditure on
Intermediate Goods will not be included in the national income as it is already
included in the value of final expenditure. If it is included again, it will
lead to double counting of expenditures.
2. Transfer Payments are not
included as such payments are not connected with any productive activity and
there is no value addition.
3. Purchase of second-hand
goods will not be included as such expenditure has already been included when
they were originally purchased. Such goods do not affect the current flow of
goods and services. However, any commission or brokerage on such goods is
included as it is a payment made for productive service.
4. Purchase of financial
assets (shares, debentures, bonds etc.) will not be included as such
transactions do not contribute to current flow of goods and services. These
financial assets are mere paper claims and involve a change of title only.
However, any commission or brokerage on such financial assets is included as it
is a productive service.
5. Expenditure on own
account production (like production for self-consumption, imputed value of
owner occupied houses, free services from general government and private
non-profit making institutions serving households) will be included in the
national income since these are productive services
PRECAUTIONS IN SHORT-
(1) Expenditure on Intermediate Goods will not be included in the
National Income.
(2)Transfer payments are not included.
(3) Purchase of second hand goods will not be included.
(4) Purchase of financial assets (shares, debentures, Bonds) will
not be included.
(5) Expenditure on own account production will be included in the
National Income.
Regards
Dr. Asad Ahmad
KV IIM, Lucknow
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