Coursework: MPP

IMT Ghaziabad
By
Dr. Manas Paul
Term I PGDM 2024-26
 National Income Accounting
• GDP
• Different measures of GDP
• Equivalence of different GDP measures
• GDP, GNP, NNP
• Some important identities
• Nominal and Real GDP
 • GDP
• Market value of final goods (both C & K) and services produced by
factors of production within the borders of the economy within a
specified time

Greece 238 GDP of select countries GDP of select regions

Australia 1,444
Russia 1,857 World 77,302
India 2,050
Advanced economies 47,044
Italy 2,148
Brazil 2,353 Emerging market and developing… 30,258
France 2,847 Emerging and developing Asia 14,922
United Kingdom 2,945
Euro area 13,391
Germany 3,860
Japan 4,616 Middle East and North Africa 3,182
China 10,380 ASEAN-5 2,060
United States 17,419
Emerging and developing Europe 1,901
0 5,000 10,000 15,000 20,000
0 50,000 100,000

USD BN USD BN

Source: IMT MPP, IMF WEO April 2015

http://data.worldbank.org/indicator/NY.GDP.MKTP.CD/countries/1W?display=map (Map GDP nominal USD)

http://data.worldbank.org/indicator/NY.GDP.PCAP.CD/countries?display=map (Map GDP per capita nominal USD)
 Measuring GDP: The Production
Approach
• GDP is the current market value of all final
goods and services newly produced in the
economy during a fixed period of time
• In the case of apples and oranges, we multiply
the their prices and quantities, and then add
them up:
GDP = (price of apples ✕ quantity of apples)
+ (price of oranges ✕ quantity of oranges)
 Market Value
• Not all goods and services are counted in
GDP because they are:
– Nonmarket goods and services, which do not
have a market price (e.g., household services
produced within a family), or
– Produced in the underground economy
• Many nonmarket goods and services are
counted in GDP by their imputed values
 Value Added Technique
• Value added is the value of a firm’s output
minus the cost of the intermediate goods
purchased by the firm
• By adding up the value added from each
firm, we get the final value of the goods and
services produced
GDP: Important factors to take note of

• Outcome of an economic process : Output is governed by inputs

• It’s a flow concept (Diff between income and wealth)
• Why only final goods and services? Are intermediate goods not produced
in an economy what happens to them?
• Market value… implies there has to be a price for the products… what if
some of the products does not have a market or left out market?
• Government services like administration valued at cost
• Non-market production – goods and services produced but not
exchanged for money (growing ones own food, services of household
work)
• It talks about the size of the economy but not about welfare
• Does not reflect standard of living, Education, Health, Environment, Security,
Freedom, discrimination
• It excludes parallel/under ground economy

• Does not account for the change in the composition of goods and services
over time
 Policy and Practice: Can GDP Buy
Happiness?
• Is GDP the best measurement of national well-being?
• In 1972, the king of Bhutan proposed the
replacement of GDP by “gross national happiness”
that incorporates factors such as spirituality and
culture
• In 1990, the United Nations began to rank countries
on a so-called human development index, which is a
combination of life expectancy, education, literacy,
educational participation, and GDP
• In 2008, a French economic commission led by Nobel
Prize winner Joseph Stiglitz called for modifications to
GDP with factors such as political freedom, physical
safety, and work-life balance
 GDP as an economic process

Inputs Final Product

Labour, capital, land, knowledge/

technology/entrepreneurship GDP

Owned by Consumed by
households households
GDP is a Flow Concept – i.e. incremental within a specified time period

GDP =

Wealth =
National
flow

stock
Numerical Example
The bread economy. Which has Farmer, Bread Economy transactions Rs
Miller, Baker, Consumers. One final
Farmer's input cost to produce
good is produced which is bread. Farmer wheat 0

The farmer grows wheat and sells it to the Farmers labor cost to produce
wheat 100
miller at Rs. 500. Assume that he incurs no
cost for intermediate goods. Though there Farmer's revenue from sale of
is a labour cost of Rs. 100. wheat 500

Miller Miller's input cost 500

The miller buys the wheat at Rs. 500 and
turns it into flour. He incurs a labour cost Miller's labour cost 50
of Rs. 50. He sells flour to the baker at Rs. Miller's revenue from sale of wheat 700
700.
Baker Baker's input cost 700
The baker buys the flour and employs Baker's labour cost 100
labour at a cost of Rs. 100 to make it into
a nice dough and bake it to a bread which Baker's Revenue 1000
he sells to the consumer at Rs. 1000. Consumer Buys bread 1000

What is the value of GDP in this economy?

• A: 2200 (500+700+1000)
• B: 1500 (500+1000)
• C: 1000
• D: 1700 (700+1000)
• E: 1200 (500+700)
 Intermediate goods excluded to prevent double counting
(Value Added Method)
Example of a bread economy

Assumption of

•Produces wheat
Miller •Purchases flour at Rs.
Consumers
•(assume at zero cost) 700
•Purchases wheat at •Sells bread Rs. 1000 •Purchases the bread
•Sells to miller at Rs. Rs. 500 at Rs. 1000 and
500 •VA: Rs (1000 -700) consumes as final
•Sells flour at 700
•VA*: Rs. (500-0) product
•VA: Rs. (700 – 500)

Farmer Baker

*VA = Value Added

• Wheat farmer’s final product; Flour Miller’s final product; Bread baker’s final product
• So what should be the value additions at each stage?
• Does the sum of value additions equal to GDP?
GDP : Intermediate goods, capital goods and inventories

• GDP includes final goods (consumption as well as capital goods ) & services…

• A lathe machine used by a toy maker … is it an intermediate good?

• It has been itself produced and is used to produced other goods (toys)…like
intermediate goods
• Not used up in the same period it is produced unlike an intermediate good
• Moreover, It adds to productive capacity…unlike an intermediate goods

A capital good is a good that is itself produced (which rules out natural resources such as
land) and is used to produce other goods; however, unlike an intermediate good, a capital
good is not used up in the same period that it is produced.

• Inventories are stocks of unsold finished goods, goods in process, and raw
materials held by firms.
• This forms a part of GDP
GDP: Change in Stocks (CIS) or inventories in Indian GDP
Exercise: What would be the impact on GDP other things remaining constant:

Buying a car on loan involves two important things:

1. Paying fees/incurring other expenditures to avail the loan facilities
2. Paying the dealer the loan money to buy the car
3. If it’s an old car, it could involve paying the broker for his services to bring the
buyer and seller together

A CIAZ ZDI+ manufactured and sold in 2015 has an on road price (excl registration)
of INR 11,76,391. Bimal a Ghaziabad resident has been looking out to buy a CIAZ
ZDI+. He has two options, going for a new car at the price mentioned above or buy
a 2014 manufactured model available through a broker at INR9,50,000.

In both these cases there would be fees for the following transactions:
1. Gaziabad: Registration INR73,276 (new car) ; Change of registration INR 15000
(old car)
2. Fees to avail bank loan INR 2500 (similar for avail loan for new or old car)
3. Pay the broker who has brought the 2nd hand deal an amount INR15,000 for his
services
What would be the impact on GDP in either case?
QUIZ: Non marketable output

Other things remaining constant a farmer in a country grows 1000 kg of Potato.

The ongoing market price of Potato is Rs. 20 per kg. He decides to sell 750kg of his
output in the market while keeping the remaining for his own use.

What would be the impact on the country’s GDP for these actions of the farmer?
Exercise: GDP is prejudiced as to where the output is produced but is blind as to
the national origin of the input.

Suppose an US Professor of Economics spent a week in IMT Ghaziabad to deliver a

series of lecture sponsored by the Government of India. How will it affect US and
Indian GDP?

How does it affect US & Indian GNP?

By the way what is GNP?

GNP of any country: Value of goods and services produced by the country’s
residents irrespective of their location.

GNP = GDP + NFIA where NIFA: Net Factor Income from Abroad

NNP = GNP – accrued capital consumption

 Pvt Disposable Income
Private Disposable Income = GDP
+ net factor income
+ transfer payments received from the
government
+ interest payments on government debt
– taxes
 Measuring GDP – Equivalence of three measures

3 ways to measure GDP

• Output (O) – the value added approach

• Expenditure (E) – the value of spending on final goods

and services

• Income (Y) – the value of income paid by firms to

households in return for land, labour and capital
Refer to the excel Table
 Reason behind Equivalence of 3 ways of measuring GDP
Revenues
Household
earned by
Expenditure
business

Payment to
Household inputs by
Income business
 Injections and withdrawals
• Every economy will have injections and
withdrawals where money is being injected
into the circular flow and being withdrawn
from it
• What flows could withdraw from or inject into
the circular flow?
 Injections
• These do not come from households but inject
into the circular flow:
– Government spending
– Investment (by firms)
– Exports (foreigners buying Indian goods and
services)
 Withdrawals
• This is when spending does not flow back to
households
• Savings – households, and firms, save money
which takes out from the circular flow
• Imports – bought by households and firms
and this money flows abroad
• Taxes – takes money from the circular flow to
the government
Injections Withdrawals

Government
Spending
Savings

Investment Imports

Exports Taxes

GIX SMT
 Effect on equilibrium

• If injections = withdrawals then…..economy in equilibrium

 a constant flow of income, consumption, production, and
factor payments moving between the household and business
sectors

• If injections > withdrawals then……multiplied expansion in output

– volume of the basic flow expands and aggregate production
increases.

• If injections < withdrawals then…..multiplied contraction in output

– volume of the basic flow contracts and aggregate production
decreases.
 Measuring GDP: The Expenditure
Approach
• GDP is the total spending on currently
produced final goods and services in the
economy
• National income identity:
Y = C + I + G + NX
where
Y = GDP = total production (output)
C = consumption expenditure
I = investment
G = govt. purchases of goods & services
NX = net exports = exports – imports
 Consumption Expenditure
• Total spending for currently produced
consumer goods and services
• Basic categories:
1. Consumer durables
2. Nondurable goods
3. Services
 Investment
• Spending on currently produced capital goods
that are used to produce goods and services
over an extended period of time
• Basic categories:
1. Fixed investment
2. Inventory investment
3. Residential investment
 Meaning of the Word Investment
• For non-economists, an investment normally
refers to the purchase of common stocks or
bonds
• For this course, investment spending refers to
the purchase of physical assets, such as new
machines or new houses—purchases that add
to GDP
 Government Purchases
• Spending by the government on currently produced goods
and services
• Government consumption includes government purchases
for short-lived goods and services like health care and
police
• Government investment includes spending for capital
goods like buildings and computers represents
• Pure government transfers (e.g., Social Security and
Medicare) are excluded from G
– This is because transfer payments are a way of redistributing
money from one party to another, rather than buying goods or
services. Instead, transfer payments are considered part of
personal income and are used to alleviate poverty, support
specific demographics, and ensure a basic standard of living
for citizens
 Net Exports
• Net exports (or trade balance) are exports
minus imports
• Why subtract imports from GDP?
• Answer: Spending on imports is included in
consumption expenditure, investment, and
government purchases, but is not produced in this
country
 An International Comparison of
Expenditure Components
• The United States differ from other countries
by having the highest share of GDP going to
consumption, the lowest share of
investment, and net exports have been
negative
• By contrast, China has the lowest share of
consumption, the highest share of
investment, and the largest share of net
exports
Shares of Expenditure Components for
Different Countries

Source: OECD and for China estimates from National Bureau of Statistics. The data are for the year 2010.
 Measuring GDP: The Income
Approach
• Compensation of employees – wages and salaries of employees, and
employee benefits
• Corporate profits – profits after taxes of corporations
• Other income – income of the self-employed, royalty income and net
interest earned by individuals, etc.
• Depreciation – the loss of value of capital from wear and tear
– net domestic product = GDP – depreciation
• Net factor income – wages, profits, and rent paid to U.S. residents by
foreigners minus factor income paid by U.S. residents to foreigners
 Injection –leakages balance & balance between agg expending and agg production
A balance between injections and leakages generates the same equilibrium as a balance between
aggregate expenditures and aggregate production. A little manipulation of the Y = AE equilibrium
condition illustrates why???
Aggregate expenditures (AE): AE = C + I + G + (X - M)

The income generated by aggregate production (Y) is used by the household sector for
consumption (C), saving (S), and net taxes (T). Where T = TR - TA

Y=C+S+T

Substituting each of these equations into the Y = AE equilibrium condition gives us:C + S + T
= C + I + G + (X - M)

Because consumption (C) is on both sides, it cancels out.S + T = I + G + (X - M)

For reasons that will be apparent later, let's move imports (M) to the left-hand side. S + T +
M=I+G+X
This last equation indicates that equilibrium can be achieved by equating injections I + G +
X with leakages S + T + M. Most importantly, when aggregate expenditures equal aggregate
production (Y = AE), then injections are necessarily equal to leakages S + T + M = I + G + X.
GDP: Nominal or Real?

• What is meant by GDP 2014-15?

• What is meant by GDP 2014-15 at 2011-12 prices and current prices
Indian GDP: The base year of national accounts were revised in the following
chronological order:

 Shift in the reference year for measuring the real growth

 Updating surveys and studies
 Incorporating conceptual changes, as recommended by the international guidelines
 Incorporate statistical changes like revisions in the methodology of data compilation
 Adoption of latest classification systems and inclusion of new and recent data
sources
 Incorporate changes in the presentation of estimates to improve ease of
understanding for analysis and facilitate international comparability
 Source: MOSPI, Changes in Methodology and data sources in the new series of National Accounts, Pg. 70

• Notable changes in the overall growth rates of GDP due to base yr change….
• …on account of changes in procedures, methodology and data sources and use of latest data from survey
results
• The weighting pattern of various activities in the GVA (Gross Value Added) in the old and new series for the
year 2011-12 also influences to some extent the overall growth rate in GVA.
• Marked changes have been observed in the shares of two major industries, namely, ‘manufacturing’ and
‘trade’.
• For manufacturing, with the availability of the new database, coverage of the activities other than
manufacturing in the companies has improved significantly
• Estimates of ‘trade and repair services’ has become lower than in the old series because of two
reasons
• Trade carried out by manufacturing companies, which has now become part of
‘manufacturing’, was earlier covered in ‘trade’
• In 2004-05, no recent survey of unorganised trade enterprises was available for incorporation
and hence the estimates were based on the survey conducted in 1999-2000. This has now
been updated with the survey on ‘Unincorporated Enterprises’ conducted by NSS in 2010-11

Go to Excel Sheet:
 GDP at factor cost and GVA at basic price

In the revision of National Accounts statistics done by Central Statistical Organization

(CSO) in January 2015, it was decided that sector-wise wise estimates of Gross Value
Added (GVA) will be given at basic prices instead of factor cost as per the UN System
of National Accounts (SNA).

GVA at factor cost + (Production taxes less Production subsidies) = GVA at basic prices

GDP at market prices = GVA at basic prices + Product taxes- Product subsidies

Production taxes or production subsidies are paid or received with relation to production and
are independent of the volume of actual production. Some examples of production taxes are land
revenues, stamps and registration fees and tax on profession. Some production subsidies include
subsidies to Railways, input subsidies to farmers, subsidies to village and small industries,
administrative subsidies to corporations or cooperatives, etc.

Product taxes or subsidies are paid or received on per unit of product. Some examples of
product taxes are excise tax, sales tax, service tax and import and export duties. Product
subsidies include food, petroleum and fertilizer subsidies, interest subsidies given to farmers,
households, etc. through banks.

Reading material: India to change the way it measures growth_ live mint 29 Jan 2015
 Real GDP – Measured at a base year price

Indian GDP Nominal Indian GDP Real

Rs crore Rs Crore
FY12 8832012 8832012
FY13 9988540 9280803
FY14 11345056 9921106
FY15 12541208 10643983
Source: CSO, press release May 29 2015
 GDP( Nom ) 
GDPDeflator    X 100  Measure _ of _ Agg _ Pr ice _ level
 GDP(Re al ) 

What does this data say about growth and inflation?

How does it reflect in the high frequency quarterly data?

Does it have any policy implication?

Discussion: Ten takeaways for the Reserve Bank from the GDP data
Economic growth slows to 7% in the June 2015 quarter
 • Inflation
• Rate of Change in prices (generally annual rate of change)

Inflation

GDP deflator WPI inflation PPI inflation CPI inflation

No definite Defined commodity Defined commodity Definite commodity
commodity basket basket basket bundle

Perception of Price of bulk Sellers perspective Consumers

Agg prices transactions perspective

CPI: Consumer Price Index: Movement of a wtd basket of goods faced by an average consumer – Measures
average retail price faced by the consumer (used to adjust income and expenditure streams for changes in the
cost of living )

WPI: Wholesale Price Index: Movement of a wtd basket of wholesale prices – Measure of price of bulk
transactions at a primary stage in domestic economy. It includes excise duty as well as transport costs

PPI: Producer Price Index: Measures the average selling prices received by domestic producers of goods and
services – doesn’t incorporate sales and excise tax (used to deflate revenue streams to measure real output)
 CPI example
• If the basket consists of 10 gallons of gas and
2 apples, then the CPI for 2014 with a base
year of 2005 is:
 Inflation Rate
• The inflation rate is the % rate of
change of the price level over a
particular period:
Pt - Pt 1 Pt
t = =
Pt 1 Pt 1

where
t = inflation rate in period t

Pt = period level at time t

 WPI or CPI Which is a better measure of inflation in India
Increased relevance of CPI
WPI was in focus earlier But rising relevance of CPI
• Now there is one representative measure of retail inflation (combined
• Until 2011, there was no single CPI, CPI)
representative of the whole country.
There were three or four CPI • CPI monthly inflation data released couple of days prior to WPI
measures, relevant for different inflation data for the same month.
segments of population.
• WPI excludes prices of services (such as education, healthcare, and
• WPI was earlier available with a rents which account for nearly 60 per cent of GDP) – does not reflect
shorter lag only a 2-week delay domestic supply side situation
compared with CPI inflation which
came with a 2-month lag. • The new CPI (combined) measure assigns nearly 40%weightage on
services - hence a better reflector of demand side pressures in the
economy, than wholesale prices.

• WPI assigns nearly 15% and 10.7% weightage for the fuel group and
Final Take: metal and metal products group, respectively. Any sharp movements
RBI has been using consumer price
in international prices of fuels and metals lead to sharp changes in WPI
inflation as its nominal anchor since which make it difficult to gauge the underlying inflationary pressures.
Raghuram Rajan took charge of Indian
monetary affairs in September 2013, and • Retail inflation is an indicator of the underlying demand situation in
the new monetary policy framework it has the economy. In a strong demand environment, retailers pass on the
signed with the finance ministry has entire increase in wholesale prices or even more to their end-
formalized this policy shift.
consumers, if demand remains weak, retailers witness pressure on
margins.
 Notion of Core inflation……
Most core measures are based on the concept that total inflation can be separated into two components:
the core part, representing the underlying trend of inflation as shaped by the pressure of aggregate
demand against capacity, and the non-core part, which reflects price movements caused by temporary
shocks or relative price changes.

Chairman Bernanke of the US Fed in its report to the Congress (July 2007) emphasised that core measures
were motivated by a desire to track and predict persistent inflation: “… food and energy prices tend to be
quite volatile, so that, looking forward core inflation (which excludes food and energy prices) may be a
better gauge than overall (headline) inflation of underlying inflation trends”.

Core inflation is a convenient guide to help the central bank achieve its objective of controlling total
inflation. Most countries use measures of core inflation in addition to headline measures of inflation and
not as a substitute.

Not many of the inflation targeting countries do target core inflation (Thailand, Canada, Sweden, Norway,
New Zealand are some of the few who does)
Possible Reasons for the divergence between CPI & WPI inflation

The CPI include services. Considering that India is a services economy,

these domestic services are important if you want to assess the price
increase for the general population.

The weight of food items is another difference between the two measures
of inflation in India. Food items—including food grains, fruits, vegetables,
milk, eggs, meat, fish, condiments, spices, tea, and coffee—account for
14.34% of the WPI. In contrast, they make up 39.73% of the CPI. Food,
beverages, and tobacco make up 49.71% of the CPI.

Meanwhile, the WPI is more sensitive to fuel. It assigns a weight of 14.91%

to fuel prices. The CPI assigns 9.49% to fuel. Also, higher transaction costs
and taxes are only reflected in the CPI.

Reading: Sharp divergence between WPI & CPI inflation

Followed by Discussion
 CPI can overstate inflation

CPI does not allow for a substitution effect. When the price of mutton biriyani rises, consumers
will cut back on it and possibly move to chicken biriyani or possibly veg biriyani. The CPI market
basket is fixed, so it misses this substitution effect.

The CPI does not measure quality changes. Cars, laptops, mobiles are more expensive today
than seven to ten years back… but they are also safer, with added features, more reliable
technology, and possibly uses less power. The CPI attempts to adjust for quality changes but
does so imperfectly, and with a time lag.

The Boskin Commission, formally called the "Advisory Commission to Study the Consumer Price Index", was
appointed by the United States Senate in 1995 to study possible bias in the computation of the Consumer
Price Index (CPI), which is used to measure inflation in the United States. Its final report, titled "Toward A
More Accurate Measure Of The Cost Of Living" and issued on December 4, 1996, concluded that the CPI
overstated inflation by about 1.1 percentage points per year in 1996 and about 1.3 percentage points prior
to 1996.
The report was important because inflation, as calculated by the Bureau of Labor Statistics, is used
to index the annual payment increases in Social Security and other retirement and compensation programs.
This implied that the federal budget had increased by more than it should have, and that projections of
future budget deficits were too large. The original report calculated that the overstatement of inflation
would add $148 billion to the deficit and $691 billion to the national debt by 2006.
 From GDP to Disposable Income…a notion

1. 𝐹𝑟𝑜𝑚 𝐺𝐷𝑃 𝑚𝑘𝑡 𝑝𝑟𝑖𝑐𝑒 𝑡𝑜 𝐺𝑁𝑃 (𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒): 𝐺𝑁𝑃𝑚𝑝 = 𝐺𝐷𝑃𝑚𝑝 + 𝑁𝐹𝐼𝐴

2. 𝐹𝑟𝑜𝑚 𝐺𝑁𝑃 𝑚𝑘𝑡 𝑝𝑟𝑖𝑐𝑒 𝑡𝑜 𝐺𝑁𝑃 (𝑓𝑎𝑐𝑡𝑜𝑟 𝑐𝑜𝑠𝑡): 𝐺𝑁𝑃𝑓𝑐 = 𝐺𝐷𝑃𝑚𝑝 − 𝑁𝑒𝑡 𝐼𝑛𝑑𝑖𝑟𝑒𝑐𝑡 𝑡𝑎𝑥𝑒s

3. 𝐹𝑟𝑜𝑚 𝐺𝑁𝑃 𝑓𝑎𝑐𝑡𝑜𝑟 𝑐𝑜𝑠𝑡 𝑡𝑜 𝑁𝑁𝑃 (𝑓𝑎𝑐𝑡𝑜𝑟 𝑐𝑜𝑠𝑡): 𝑁𝑁𝑃𝑓𝑐 = 𝐺𝑁𝑃𝑓𝑐 − 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛

4. 𝐹𝑟𝑜𝑚 𝑁𝑁𝑃 𝑓𝑎𝑐𝑡𝑜𝑟 𝑐𝑜𝑠𝑡 𝑡𝑜 𝑵𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆 𝑵𝑰 : 𝑁𝐼 = 𝑁𝑁𝑃𝑓𝑐

𝐹𝑟𝑜𝑚 𝑁𝑎𝑡𝑖𝑜𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑜 𝑷𝒆𝒓𝒔𝒐𝒏𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆 𝑷𝑰 :

𝑃𝐼 = 𝑁𝐼 + 𝐼𝑛𝑐𝑜𝑚𝑒 𝑒𝑎𝑟𝑛𝑒𝑑 𝑏𝑢𝑡 𝑛𝑜𝑡 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 + 𝐼𝑛𝑐𝑜𝑚𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑏𝑢𝑡 𝑛𝑜𝑡 𝑒𝑎𝑟𝑛𝑒𝑑

Income earned but not received: Undistributed profits of corporates, corporate taxes
Income received but not earned: Transfer, payments received not in lieu of current services, gifts, welfare transfers

𝐹𝑟𝑜𝑚 𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 𝑡𝑜 𝑫𝒊𝒔𝒑𝒐𝒔𝒂𝒃𝒍𝒆 𝑰𝒏𝒄𝒐𝒎𝒆 𝑫𝑰 :

𝐷𝐼 = 𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝐼𝑛𝑐𝑜𝑚𝑒 − 𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙 𝑇𝑎𝑥𝑒𝑠

 Measuring Unemployment
• The unemployment rate is the
percentage of people in the civilian
population who want to work but
who do not have jobs
1.Employed
2.Unemployed
3.Not in the labor force
• Discouraged workers (those who would live to
work but have given up looking, and those who have
voluntarily left the labor force)
 Measuring Unemployment cont..
Labor Force =
Number of Employed + Number of Unemployed

Number of Unemployed
Unemployment Rate =
Number of Employed
 Labour force participation

Labor Force
Labor-Force Participation Rate =
Adult Population

Employed
Employment Ratio =
Adult Population
 Measuring Interest Rate
• An interest rate is the cost of
borrowing, or the price paid for the
rental of funds
• Interest rates are returns for holding
debt securities, such as bonds
Different interest rates in Economy
– Prime lending rate
– Repo rate
– Bank Rate
– London Inter-Bank Offered Rate
(LIBOR)
– Treasury bill rate.
– Ten-year Treasury bond rate
– Mortgage rates
 Real vs Nominal Interest Rate
• A nominal interest rate makes no allowance for
inflation
• The real interest rate is the amount of extra
purchasing power a lender must be paid for the
rental of his/her money
– The ex ante real interest rate is adjusted for
expected changes in the price level
– The ex post real interest rate is adjusted for actual
changes in the price level
 Real Vs Nominal Rate
• The Fisher equation:
i = nominal interest rate
r = nominal interest rate
pe = expected inflation

i = r + pe
e
or r =i-p
 Real Versus Nominal Interest Rates
(cont’d)
• Example: For a one-year loan with a
4% nominal interest rate (i=4%) and
you expect the inflation to be 6% in a
year ( e =6%), then:
r = 4% - 6% = -2%

• When the real interest rate is low, there

are greater incentives to borrow and
invest, but fewer incentives to lend.
 The Important Distinction Between
Real and Nominal Interest Rates
• Credit markets are where households and
businesses get funds (credit) from each other
• Because the real interest rate reflects the real
cost of borrowing, it is likely to be a better
indicator of the incentives to borrow, invest,
and lend in credit markets than nominal
interest rates
 US Real and Nominal Interest Rates (Three-
Month Treasury Bill), 1955-2013

Source: Federal Reserve Bank of St. Louis, FRED Database. http://research.stlouisfed.org/fred2/; with the real interest rate calculated
using the Procedure outlined in Mishkin, Frederic S. 1981. The real interest rate: An empirical investigation. Carnegie-Rochester
Conference Series on Public Policy 15: 151–200.
Example: GDP accounting

Following National Income accounts for hypothetical country

Rs. Crore
GDP 6000
Gross Investment 800
Net Investment 200
Consumption 4000
Govt purchases of goods and services 1100
Government budget surplus 30

1. What is NDP?
2. How much is net exports?
3. Government taxes minus transfers?
4. Disposable personal Income?
5. Saving?
 Formulae for: GVA, GDP, NDP & Disposable income as used in India

1. GVA at basic prices = CE + OS/MI + CFC + Production taxes less Production subsidies
2. GVA at factor cost (earlier referred to as GDP at factor cost) = GVA at basic prices – Production taxes less
Production subsidies
3. GDP = ∑ GVA at basic prices + Product taxes - Product subsidies
4. NDP/NNI = GDP/GNI - CFC
5. GNI = GDP + Net primary income from ROW (Receipts less payments)
6. Primary Incomes = CE + Property and Entrepreneurial Income
7. NNDI =NNI + other current transfers from ROW, net (Receipts less payments)
8. GNDI = NNDI + CFC = GNI + other current transfers from ROW, net (Receipts less payments)
9. Gross Capital Formation= Gross Savings+ Net Capital Inflow from ROW
10. GCF = GFCF + CIS + Valuables + “Errors and Omissions”
11. Gross Disposable Income of Govt. = GFCE + Gross Saving of GG
12. Gross Disposable Income of Households = GNDI – GDI of Govt. – Gross Savings of All Corporations

Details of the Acronyms

 Consider an economy with:
Producers, Consumers, Financial system, Investors, Govt, External Trade

• What is the Agg expenditure (Agg Demand) in the economy

• How will the total income be allocated spent ?

• In Eqlbm:
Y = Agg spending: i.e. AE = C + I + G + (X - M)……….(i)

Y = Total income = factors into which it gets allocated

i.e. Y = C + S+TA-TR……………………..(ii)

Hence:
Agg Spending = factors into which total income gets allocated into
i.e. C + I + G + (X - M) = C + S+TA-TR
Or G+I+X = S+M+T (Where T = Net tax paid = TA-TR, injc = withdrwl)