Chapter: Government Plans Programme & Policies

Topic: National Income & Related Aggregates (Part -1)

Introduction

Performance of an economy depends on the amount of goods and services produced in that economy. In monetary terms its measure is the Gross Domestic Product (GDP), Gross National Income (GNI), and Net National Income (NNI). Apart from these macro-economic aggregates, the other important indicators to measure health of economy are capital formation and savings. Thus, measurement of these macro-economic indicators is an extremely important exercise, which requires collection and analysis of large volume of data. In India the Central Statistics Office of the Ministry of Statistics and Programme Implementation have been measuring National Income and other related macroeconomic aggregates.

The major concepts related with this topic

The major concepts used in National Accounts Statistics and the inter relationship, particularly of those relating to macro-economic aggregates of domestic product, consumption, saving and capital formation are given in the following paragraphs.

Domestic Product

Domestic product by definition is a measure in monetary terms of the volume of all goods and services produced by an economy during a given period of time, accounted without duplication. The measure obviously has to be in value terms as the physical units of production and different measures of services are not capable of simple addition. In the case of a closed economy, this measure amounts to domestic product.

Domestic Product and National Income

The domestic product measures all goods and services arising out of economic activity, while national income is the sum of all incomes as a result of the economic activity. Since the production of goods and services is the result of the use of primary factors of inputs, namely, capital and labour, along with the raw materials, the process automatically generates income. This income is in the form of return to capital and labour used in the production process. National income includes only those incomes which are derived directly from the current production of goods and services, which are called factor incomes.

National Income and Expenditure

The production within the economy over a given period of time is spent either for consumption of its members or for addition of fixed assets or for addition to the stock of existing productive assets within the country. Hence, production can also be measured by considering the expenditure of those who purchase the finished or final goods and services. The national expenditure is the sum of expenditure of all spending of institutional sectors viz., government, households and enterprises. The expenditure on final goods and services may be purely for consumption purposes like consumption of food, clothing, shelter; services etc., or for capital formation such as addition to buildings, plant, machinery, transport equipment, and the like. Some goods may not be immediately sold and may be kept aside as stocks. These goods which are added to stocks are also accounted for as final expenditure.

Production / Income / Expenditure

The national income of a country can be measured in three different ways, from the angle of production, from income generation and from final utilization. These three forms are circular in nature.

Gross National Income (GNI)

The economy of India is not closed as there are transactions with rest of the world in the form of exports, imports, loans and the like. This gives rise to the concept of national or domestic income. Gross Domestic Product refers to the production of all resident units within the borders of a country, which is not exactly same as the production of all productive activities of residents. Some of the productive activities of residents may take place abroad. Conversely, some production taking place within a country may be attributed to temporary and seasonal foreign labour. The Gross National Income is calculated by the following formula:

GNI = GDP + compensation of employees and property income receivable from the rest of the world – compensation of employees and property income payable to the rest of the world.

Categories of Expenditure

The income available to the individuals in the form of labour income or capital income or to the productive units in the form of retained income is then spent. The utilization or expenditure of the income can take various forms, namely, (a) household consumption expenditure; (b) government consumption expenditure; and (c) capital formation comprising fixed capital formation and stock accumulation.

Household Consumption Expenditure

The household consumption expenditure referred to as private final consumption expenditure (PFCE) in the National Accounts Statistics (NAS), consists of expenditure by households (including non-profit institutions) on non-durable consumer goods and services and all durable goods except land and buildings.

Government Final Consumption Expenditure

Government final consumption expenditure comprises of the compensation to the Government Employees and purchases of goods and services by the Government including purchases abroad. Compensation of Employees of general Government consists of wages and salaries and social security contribution.

Gross Capital Formation

Gross Capital Formation includes only produced capital goods (machinery, buildings, roads, artistic originals etc.) and improvements to non produced assets. Gross Capital Formation measures the additions to the capital stock of buildings, equipment and inventories, i.e. additions to the capacity to produce more goods and income in the future. The components of gross capital formation are
gross fixed capital formation
changes in inventories
acquisition less disposal of valuables ( such as jewelry and works of art).

Gross Fixed Capital Formation includes purchases of new assets within the domestic market like buildings, transport equipment, machinery, breeding stock etc.; import of new assets; own account production of new assets such as production of rail engines, wagons, trucks, aero-planes, farm machinery, breeding stock of fish, sheep, cows etc. by the enterprise; purchase of new houses by consumer households and net purchase of second hand physical assets from abroad.

Change in stocks (inventories) consists of the difference between the opening stock and the closing stock.

Saving

Saving represents the excess of current income over current expenditure of various sectors of the economy. It is the balancing item on the income and outlay accounts of the producing enterprises, households, government administration and other final consumers. For a closed economy, savings equals capital formation during the year, whereas for the open economy savings equals capital formation plus net capital inflow from abroad during the year.

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