Economy Basic Concepts Part 3 – National Income and related aggregates

The concept of National Income and related aggregates

Gross vs. Net

  1. Net Value = Gross – Depreciation (consumption of fixed capital)
  2. Depreciation – Reduction in the value of capital goods due to wear and tear lapse of time
  3. Net National Product (NNP) = Gross National Product (GNP) – Depreciation

 National vs. Domestic

  1. National = Domestic + NFIA (Net factor income from abroad)
  2. Net National Product (NNP) = NDP + NFIA
  3. GDP is used when we have to compare the economies of different countries

 Factor Cost (FC) vs. Market Price 

  1. FC = Total cost of all factors of production consumed or used in producing a good or service.
  2. MP = FC + Net Indirect taxes (Indirect taxes – subsidies)
  3. GDPMP = GDPFC + Indirect taxes – Subsidies

Direct Taxes vs. Indirect Taxes

  1. Direct taxes – These are imposed on income and wealth of individual and firms. Example – Income tax, house tax, corporate income tax.
  2. Indirect Taxes – These are also called commodities taxes, these taxes are imposed on production distribution of goods and services. Example – Excise Duty, Sales Tax and Vat

 Current Prices vs. Constant Prices

Current Prices – Goods and services are valued at current year prices of production,

Constant Prices – Goods and services are valued at base year prices of production for example (2004 – 05)

Year Production

(A)

Current prices

(B)

Base year price

(C)

GDP at current prices (Nominal GDP)

(A*B)

GDP at constant prices

(Real GDP)

(A*C)

GDP Deflation

(B*C)

Real GDP

(Nominal GDP/GDP Deflator )* 100

2004 – 05 100 10 10 1000 1000 100 1000
2005 – 06 100 15 10 1500 1000 150 1000
2006 – 07 150 15 10 2250 1500 150 1500

 

GDP Deflator

  1. It is an index number which measures inflation
  2. Index Number – They are used and constructed to measure the change in any variable, like prices, production, population etc.
  3. For estimating change we must have two value, reference time (base year) & reference value

HUMAN DEVELOPMENT INDEX

  • It was developed by a team of economist of UNDP led by professor Mehbub Ul – Haq
  • Since 1990 it is being published in the annual Human Development Report of UNDP
  • HDR (Human development report) 2010 is significant because of its
  • HDI is based on the following three dimensions (Asked in mains)
Dimensions

 

Indications

 

Values Dimension Indices

 

Minimum Maximum
Long and Healthy life(Health)

 

Life expectancy at birth

 

20years

 

83.6 years

Japan has the highest

Life expectancy index

(LEI)

Knowledge

 

Mean Year of Schooling Earlier it was Adult literacy  

0 years

 

13.3 years

 

Education Index (EI)

Expected year of schooling Earlier combined enrolment ratio 0 years 18.0 years
 

Standard of living

GNI Per capita ($PPP)

Earlier it was GDP per capita

 

$100

 

$87, 478

 

 

GNI Index (GI)

 

Let us discuss some concept associated with it

Mean Years of Schooling

Average number of years of education received by people aged 25 years and above their lifetime

Calculation:

No. of person Age Year of education  

Average = Year of education/no of people*

28/4 = 7 years

 

*We can’t include age below 25 years, so we are not taking option D while calculating.

A 37 years 5 years
B 73 years 0 years
C 41 years 15 years
D 24 years
E 26 years 8 years
Total 28 years

 

Expected year of schooling

It is the average number of years of education received by people or children under the age of 25 years. The range is (3 – 25) years.

GNI per Capita

GNI/Population – GNP/Population

Dimension Index

Actual value – Minimum Value/ Maximum Value – Minimum Value

In the case of India life expectancy is 65.8 years

LEI    =    65.8 – 20         =    0.72

83.6 – 20

LEI (Life expectancy index) is between 0 to 1

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