Gdp And National Income Accounting

The Gross Domestic Product (GDP) is a calculation of the monetary value of all final goods produced within a country's domestic borders over a given time period, usually a year.

 

GDP is a flow metric. National Wealth is defined as the total goods or assets owned by the people of a country at any given time. Unlike the GDP, national wealth is a stock. Imported goods and services are not produced within the domestic boundaries, so GDP excludes them. GDP calculation is an estimate that is usually based on some survey or economic indicators. The money value of intermediate goods is not taken into account when calculating GDP because the value of final goods includes the value of intermediate goods. If the value of intermediate goods is also taken into account, a problem known as Double Counting arises.

 

Consider a simple economy where there is no government, no external trade, and no savings. There are only two types of entities: households and businesses. The firms pay the households for the productive activities that they perform for the latter. During the production of goods and services, there are four types of contributions that can be made: (a) contributions made by human labour, for which remuneration is called wage; (b) contributions made by capital, for which remuneration is called interest; (c) contributions made by entrepreneurship, for which remuneration is profit; and (d) contributions made by fixed natural resources (called "land"), for which remuneration is called rent. In this simplified economy, households have only one option for disposing of their earnings: they can spend their entire income on goods and services produced by domestic firms.

 

We assumed that households do not save, do not pay taxes to the government – because there is no government – and do not buy imported goods because there is no external trade in this simple economy.

 

In other words, factors of production spend their wages on the goods and services that they helped to create. The aggregate expenditure on goods and services produced by the economy's firms equals the aggregate consumption of the economy's households. As a result, the entire economy's income is returned to the producers in the form of sales revenue. There is no systemic leakage because there is no difference between the amount distributed in the form of factor payments (which is the total of remunerations earned by the four factors of production) and the aggregate consumption expenditure received as sales revenue.

 

Firms will produce goods and services and pay remuneration to the factors of production in the coming period. These funds will be used to purchase goods and services once more. As a result, we can imagine the economy's total income flowing in a circular pattern through the two sectors, firms and households, year after year.

 

When income is spent on the goods and services produced by the firms, it is referred to as aggregate expenditure. Because the value of expenditure must equal the value of goods and services, we can calculate the aggregate value of goods and services produced by the firms to calculate aggregate income. When a firm's total revenue is distributed to the factors of production, it is referred to as aggregate income.

 

Because the same amount of money represents the aggregate value of goods and services, we can estimate the aggregate value of goods and services produced during a year by measuring the annual value of the flows at any of the dotted lines in the diagram.

 

The uppermost flow (at point A) can be measured by calculating the total value of spending received by firms for the final goods and services they produce. The expenditure method will be the name of this method. The product method is used to measure the flow at B by calculating the total value of final goods and services produced by all firms. At C, the income method will be used to calculate the total of all factor payments.

 

Keep in mind that the economy's total spending must equal the total income earned by the factors of production (the flows are equal at A and C). Let's say that at a certain point in time, households decide to spend more on goods and services produced by businesses. Let us ignore the question of where they would get the money to finance the additional spending for the time being because they have already spent all of their income (they may have borrowed the money to finance the additional spending). 

 

If they spend more on goods and services, businesses will respond by producing more goods and services to meet the increased demand. Because they will produce more, the firms will have to pay higher wages to the production factors. How much more money will the businesses have to pay? The value of the additional goods and services produced must be equal to the additional factor payments. As a result, the households will eventually receive the additional earnings required to support the initial additional spending. In other words, households have the option of spending more – beyond their means. And, in the end, their income will rise exactly by the amount required to cover the additional spending. 

 

To put it another way, an economy may decide to spend more than its current income. However, as a result of this, its income will eventually rise to a level that corresponds to the higher spending level. This may appear to be a bit paradoxical at first. However, because income flows in a circular pattern, it is easy to see how a rise in the flow at one level must eventually lead to a rise in the flow at all levels. As a result, GDP calculated using any of the methods above will produce the same result.

 

To return to our discussion of the definition of final output, the portion of our final output that consists of capital goods is referred to as gross investment. Buildings, office spaces, warehouses, or infrastructure such as roads, bridges, airports, or jetties are examples of these. However, all of the capital goods produced in a given year do not add to the existing capital stock. A significant portion of current capital goods output is used to maintain or replace a portion of the existing capital goods stock. This is due to the fact that existing capital stock wears out and requires maintenance and replacement. A portion of the capital goods produced this year is used to replace existing capital goods and is not added to the existing stock of capital goods, so its value must be subtracted from gross investment to arrive at the net investment measure. Depreciation is a deduction made from the value of a gross investment to account for normal wear and tear. As a result, net investment or new capital formation, which is expressed as, is used to measure new additions to capital stock in an economy.

 

Net Investment = Gross investment – Depreciation

 

Consider the purchase of a new machine by a company. This machine could be in use for the next twenty years before it breaks down and needs to be replaced. We can now imagine that the machine is gradually being depreciated in each year's production process, with one twentieth of its original value depreciated each year. As a result, rather than making a large investment for replacement after twenty years, we calculate an annual depreciation cost. This is the most common meaning of the term depreciation, and it includes the expected life of a particular capital good, such as twenty years in our machine example. Depreciation is thus an annual allowance for a capital good's wear and tear. The Net Domestic Product (NDP) is calculated by subtracting depreciation costs from the Gross Domestic Product (GDP) (NDP). It is written as

 

NET DOMESTIC PRODUCT (NDP) = GROSS DOMESTIC PRODUCT (GDP) – DEPRICIATION

 

Factor cost is the cost of production, whereas market price is the price that is currently in effect in the market. Because of the extension of product subsidies or the imposition of product taxes, market prices may not reflect the actual cost of production. As a result, we must subtract taxes and add subsidies to market price to arrive at the actual cost of production (i.e. Factor cost). Factor cost is the resultant cost, which is expressed as

 

FACTOR COST= MARKET PRICE – INDIRECT TAXES + SUBSIDIES

 

MARKET PRICE = FACTOR COST + INDIRECT TAXES - SUBSIDIES FACTOR COST = MARKET PRICE- (INDIRECT TAXES – SUBSIDIES) FACTOR COST = MARKET PRICE-NET INDIRECT TAXES MARKET PRICE =FACTOR COST + NET INDIRECT TAXES

 

Hence,

GDP at Factor Cost = GDP at Market Price – Subsidies + Indirect Taxes

 

The difference between the income received and the income paid is referred to as net factor income from abroad. In other words, it is the difference between the income earned by Indians from factoring services performed abroad and the income paid to foreigners for factoring services performed in India. India's GDP exceeds its GNP, indicating that Indians pay more to foreigners than they receive from foreign countries. The Gross National Product (GNP) is also known as the Gross National Income (GNI) (GNI).

 

The monetary value of finished goods and services produced by a country's citizens, both domestically and internationally, in a given period (i.e., the gross national product (GNP) minus the amount of GNP required to purchase new goods to maintain existing stock) is known as net national product (NNP) (i.e., depreciation).

 

GROSS NATIONAL PRODUCT (GNP) GNP = GDP + NET FACTOR INCOME FROM ABROAD (NFIFA)

NNP is frequently assessed on an annual basis as a way to assess a country's ability to maintain minimum production standards. The NNP is denominated in the national currency of the country it represents. The NNP is measured in dollars in the United States and in euros in EU member countries.

 

NNP = GNP – DEPRECIATION

By subtracting the depreciation of any assets, also known as the capital consumption allowance, the NNP can be extrapolated from the GNP. The value of an asset's depreciation is calculated by assessing the loss of value of assets due to normal use and ageing. The relationship between a country's gross domestic product (GDP) and net domestic product (NNP) is similar to the relationship between its GDP and NNP (NDP). National Income is commonly referred to as NNP at Factor Cost.