National Income Accounting

The production of goods and services requires the contribution of four main factors. Their respective remunerations are:

In a simplified economy, the aggregate final expenditure must equal aggregate factor payments due to the Circular Flow of Income:

• Production generates Income: Firms produce goods and services by hiring factors of production. The value of this production is distributed as factor payments (Rent, Wages, Interest, Profit) to households. Thus, Total Value Added = Total Factor Income.
• Income generates Expenditure: Households spend their entire factor income to purchase the final goods and services produced by firms. Thus, Total Factor Income = Aggregate Final Expenditure.

Therefore, logically: Value of Output = Factor Income = Final Expenditure.

• Planned Inventory Accumulation: Occurs when a firm deliberately produces more than it sells to build up stock for future demand. It is a voluntary decision.
• Unplanned Inventory Accumulation: Occurs when sales are unexpectedly low, leaving the firm with unsold stock that it did not intend to keep. It is involuntary.

The three methods correspond to the three phases of the circular flow:

1. Product Method: GDP = Sum of Gross Value Added by all firms.
2. Income Method: GDP = Sum of Factor Incomes (Wages + Rent + Interest + Profit).
3. Expenditure Method: GDP = Sum of Final Expenditures (C + I + G + X – M).

Why they are equal: Because the same amount is simply circulating. The value produced by firms (Product side) becomes income for factors (Income side), which is then spent to buy the output (Expenditure side). Hence, Output = Income = Expenditure.

Given:
1. Excess of Private Investment over Saving $(I – S) = 2,000$
2. Budget Deficit = $(-) 1,500$ (Negative deficit implies a Surplus. So, $T – G = 1,500$ or $G – T = -1,500$)

Identity used: Saving-Investment Identity for Open Economy

Calculation:
Trade Deficit = $(2,000) + (-1,500)$
Trade Deficit = $500$

Answer: The volume of Trade Deficit is Rs 2,000 – 1,500 = Rs 500 Crores.

Given:
$GDP_{MP} = 1,100$
$NFIA = 100$
Net Indirect Tax $(NIT) = 150$
National Income $(NNP_{FC}) = 850$

Calculation:
$850 = 1,100 + 100 – 150 – Depreciation$
$850 = 1,050 – Depreciation$
$Depreciation = 1,050 – 850$

Depreciation = Rs 200 Crores

Given: $NNP_{FC} = 1,900$, $PDI = 1,200$, Personal Tax = $600$, Retained Earnings = $200$. No interest payments.

Step 1: Calculate Personal Income (PI)
$PI = PDI + \text{Personal Tax} = 1,200 + 600 = 1,800$

Step 2: Use PI Formula to find Transfers

*(Assuming Corp Tax is 0 or included in Retained Earnings as data is not explicitly separated)*

$1,800 = 1,900 – 200 + \text{Transfers}$
$1,800 = 1,700 + \text{Transfers}$
$\text{Transfers} = 1,800 – 1,700$

Transfer Payments = Rs 100 Crores

Data (Rs Crore): (a) $NDP_{FC}$ 8,000, (b) NFIA 200, (c) Undisbursed Profit 1,000, (d) Corp Tax 500, (e) Interest Received by HH 1,500, (f) Interest Paid by HH 1,200, (g) Transfer Income 300, (h) Personal Tax 500.

Step 1: Calculate National Income ($NI$)
$NI (NNP_{FC}) = NDP_{FC} + NFIA = 8,000 + 200 = \mathbf{8,200}$

Step 2: Calculate Personal Income ($PI$)

Net Interest paid by Households = Interest Paid (1,200) – Interest Received (1,500) = (-) 300

$PI = 8,200 – 1,000 – 500 – (-300) + 300$
$PI = 8,200 – 1,500 + 300 + 300$
$\mathbf{PI = 7,300}$

Step 3: Calculate PDI
$PDI = PI – \text{Personal Tax} = 7,300 – 500 = \mathbf{6,800}$

Personal Income = 7,300 | PDI = 6,800

Given:
Nominal GNP = 2,500
Real GNP (at base year prices) = 3,000

Calculation:
Deflator = $(2,500 / 3,000) \times 100 = 83.33\%$

Conclusion: Since the deflator (83.33) is less than 100, the price level has fallen between the base year and the current year.

While GDP indicates economic activity, it is not a perfect measure of welfare due to:

1. Distribution of Income: If GDP rises but inequality increases (rich get richer), the welfare of the majority may not improve.
2. Non-Monetary Exchanges: Many activities like household work by homemakers or barter exchanges in rural areas are not recorded in GDP, leading to underestimation of welfare.
3. Externalities: GDP does not account for positive externalities (like public parks) or negative externalities (like pollution) caused by production.