Define the following: Value Addition
Value Addition: Value addition on a good refers to the increase in the value of good at each successive stage of production. Algebraically, Value Addition is the difference between the total value of the output and the total value of the intermediate consumption.
Value Addition = Total Value of Output – Total Value of Intermediate Consumption.
Definition: Private Income (According to C.S.O.)
"Private income is the total of factor incomes from all sources and current transfers from the Government and rest of the world accruing to private sector." – C.S.O.
Formula: Net Investment
Net Investment = Gross Investment – Depreciation
Formula: GDP by Value Added Method
\[\mathrm{GDP}\equiv\sum_{i=1}^N\mathrm{GVA}_i\]
Formula: National Income by Expenditure Method
National Income (NI) or Gross National Product at market prices can be written as:
NI = C + I + G + (X − M) + (R − P)
Where:
- C: Private Final Consumption Expenditure
- I: Private Domestic Investment Expenditure
- G: Government Final Consumption and Investment Expenditure
- (X−M): Net Exports (Exports minus Imports)
- (R−P): Net Receipts from abroad on account of goods and services
Formula: National Income by Income Method
National Income (NI) using this income method is expressed as:
NI = R + W + I + P + MI + (X − M) + (R − P)
Where:
- R: Rent (including imputed rent of owner-occupied houses and income from government property)
- W: Wages and salaries (compensation of employees)
- I: Interest
- P: Profits (including distributed, undistributed, and corporate tax)
- MI: Mixed income of self-employed (where labour and capital income cannot be separated)
- X−M: Net exports (exports minus imports of goods and services)
- R−P: Net receipts from abroad (net income from abroad, such as factor income received from the rest of the world minus factor income paid abroad)
In words, national income is the sum of all domestic factor incomes plus net exports and net factor receipts from abroad.
National Income (NI) from NNP at market prices
NI ≡ NNP at factor cost = NNP at market prices − (Indirect taxes − Subsidies)
or
NNP at factor cost = NNP at market prices − Net indirect taxes
GNP from GDP
GNP = GDP + Net factor income from abroad
where
Net factor income from abroad = Factor income earned by domestic factors abroad
NNP from GNP
NNP = GNP − Depreciation
Personal Income (PI)
PI = NI − Undistributed profits − Net interest payments made by households − Corporate tax + Transfer payments to households
Personal Disposable Income
PDI = PI − Personal tax payments − Non-tax payments
Formula: National Disposable Income
National Disposable Income = Net National Product at market prices + Other current transfers from the rest of the world
Private Income – Formula
Private Income can be expressed as under:
| Private income = Income from net domestic product accruing to the private sector + Net factor income from abroad + Net transfer payment from the government + Transfer payments from the rest of the world + Interest on national debt |
Or
| Private income = Domestic income + Net factor income from abroad + Net current transfer payments from the government + Net current transfer payments from the rest of the world + Interest on national debt – Property and entrepreneurial income of the government – Saving of the non-departmental undertakings – Social security contributions |
Formula: Wholesale Price Index (WPI)
\[\mathrm{WPI}=\frac{\text{Cost of wholesale basket in current year}}{\text{Cost of same wholesale basket in base year}}\times100\]
Formula: Real GDP
Value of current year output at base year prices.
Real GDP = ∑ (Current year quantity × Base year price)
Formula: GDP Deflator
Using nominal GDP = GDP and real GDP = gdp:
\[\text{GDP Deflator}=\frac{\text{Nominal GDP}}{\mathrm{Real~GDP}}\]
In percentage form:
\[\text{GDP Deflator }(\%)=\frac{\text{Nominal GDP}}{\mathrm{Real~GDP}}\times100\]
Formula: Nominal GDP
Value of current year output at current year prices.
Nominal GDP = ∑ (Current year quantity × Current year price)
Formula: Consumer Price Index (CPI)
\[\mathrm{CPI}=\frac{\text{Cost of fixed basket in current year}}{\text{Cost of same basket in base year}}\times100\]
Key Points: Meaning of Economic Wealth and Final Goods
- A country’s wealth depends on how well it uses resources to produce goods and services.
- Final goods are goods for final use (like a shirt); they are not used for further production.
- Whether a good is final depends on use: at home (final good), in a shop or factory (intermediate input).
- Final goods are of two types: consumption goods (for direct use) and capital goods (machines, etc., used to produce other goods).
- Intermediate goods (like steel for cars) are used only as inputs in production and are not final goods.
Key Points: Stocks, Flows and Depreciation
- Money is used as a common measure to calculate the total value of final goods and services.
- Intermediate goods are not counted separately to avoid double-counting.
- Flows are measured over a period of time (e.g., income, output, profit).
- Stocks are measured at a particular point in time (e.g., capital, machinery).
- Changes in stocks over time are called flows.
- In a water tank, the water entering per minute is a flow, while the water stored is a stock.
- Gross Investment is the total value of capital goods produced.
- Depreciation is the loss in value of capital due to wear and tear.
- Net Investment = Gross Investment − Depreciation.
- Net Investment represents the actual addition to the economy's capital stock.
Key Points: Capital Formation, Trade-off & Circular Flow of Income
- Depreciation is the annual allowance for wear and tear of a capital good, equal to its cost divided by its useful life in years.
- In any year, total final output is split between consumption goods and capital goods; more capital goods now usually mean more capacity to produce consumer goods in the future.
- There is a circular flow: firms pay incomes (wages, rent, interest, profit) to households for factor services; households use these incomes to buy goods and services from firms, enabling firms to sell their output.
Key Points: Circular Flow of Income and Methods of Calculating National Income
- In a simple economy (no government, no trade, no saving), households earn wages, rent, interest and profit, and spend all their income on firms’ goods and services.
- The same income circulates: firms’ factor payments = households’ spending = firms’ sales, so aggregate income = aggregate expenditure = total value of final output.
- Hence national income can be calculated in three equal ways: by total spending, by total output, or by total factor incomes.
Key Point: Factor Cost, Basic Prices and Market Prices
- Factor cost: Value of output including only factor payments (wages, rent, interest, profit), excluding all indirect taxes and subsidies.
- Basic prices: Factor cost plus net production taxes, but excluding net product taxes.
- Market prices (GDP): Basic prices plus net product taxes; this is the value buyers pay in the market.
Key Points: National Income Aggregates
- National income aggregates are classified as Domestic/National, Gross/Net, and Market Price/Factor Cost, giving 8 aggregates.
- GDP relates to production within domestic territory, while GNP includes net factor income from abroad.
- Gross includes depreciation; Net is obtained after deducting depreciation.
- Market Price includes indirect taxes; Factor Cost is obtained by subtracting net indirect taxes.
- National Income = NNP at Factor Cost (NNPFC) and is the best measure for comparing income levels.
Key Points: GDP and Welfare
- GDP does not show equal distribution of income.
- Non-monetary activities are not included in GDP.
- Negative externalities (pollution) reduce welfare but are ignored in GDP.
- Positive externalities increase welfare but are not counted.
