Professional Documents
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2
2
DURING A SPECIFIED PERIOD OF TIME (1 Yr.) WHICH CAN BE MEASURED AT MARKET VALUE (GNPmp) OR AT FACTOR COST (GNPfc) ARRIVING AT REAL GNP NOMINAL GNP IS GROSS NATIONAL PRODUCT EXPRESSED IN CURRENT Rs. Where as REAL GNP IS DEFLATED FOR CHANGES IN THE PRICES OF ITEMS
REAL GNP (current period) = NOMINAL GNP * GNP DEFLATOR (base period) (current period) GNP DEFLATOR (current period)
= NNPfc RETAINED EARNINGS CORPORATE TAXES + TRANSFER PAYMENTS + NET INTEREST AND DIVIDENDS = WAGES + PROPRIETORS INCOME + NET INTEREST + DIVIDENDS + TRANSFER PAYMENTS PERSONAL DISPOSABLE INCOME - CONSUMPTION
PRIVATE INCOME = INCOME FROM DOMESTIC PRODUCTION ACCRUING TO THE PRIVATE SECTOR + NET FACTOR INCOME FROM ABROAD+ CURRENT TRANSFER FROM GOVERNMENT + NET TRANSFERS FROM ROW TO THE PRIVATE SECTOR
PERSONAL INCOME
NET FACTOR INCOME FROM ABROAD = FACTOR INCOMES PAID income generated in domestic productive activity paid to foreigners(eg repatriated profits, payment to consultants)- FACTOR INCOMES RECEIVED(domestic residents earn incomes abroad)
SIMPLE ECONOMY
WAGES&PROFITS(Y) Rs1000
PRODUCTIVE SECTOR
Y=AD Y=C
HOUSEHOLD SECTOR
CLOSED ECONOMY
WAGES&PROFITS(Y) Rs1000
PRODUCTIVE SECTOR
HOUSEHOLD SECTOR
INVESTMENT Rs 200
SAVING Rs 200
OPEN ECONOMY
WAGES&PROFITS(Y) Rs1000
PRODUCTIVE SECTOR
HOUSEHOLD SECTOR
WITHDRAWALS(W)=(200)
GDP at Market Price Value at market prices of all goods and services during a specified period GDPmp = C+I+G+E-M
GDP at Factor Cost Income generated in the productive activities in an economy during a year GDPfc = W+INT+P+R
KEY TO FLOW CHART NATIONAL PRODUCT DOMESTIC PRODUCT = NET INCOME FROM ABROAD (NIA) GROSS VALUE NET VALUE = DEPRECIATION MARKET PRICE FACTOR COST = INDIRECT TAXES + SUBSIDIES
GNPMP -depreciation -net income from Abroad =NNPMP GDPMP -net indirect taxes -depreciation -net income from Abroad =NNPFC = NDPMP -net income from Abroad -depreciation -depreciation -net income from Abroad =GNPFC -net indirect taxes
= NDPFC
KEY RELATIONSHIPS
GNPmp-NET INDIRECT TAXES = GNPfc
CONCEPTUAL FRAMEWORK
STOCKS AND FLOWS Stocks Measured at a point of time eg. Total number of persons employed at a time in India Flows Measured over a period of time eg. No. of persons who get new jobs
Stocks
MONEY SUPPLY CPI FOREX RESERVES CAPITAL STOCK UNEMPLOYMENT
Flows
INFLATION EXPORTS / IMPORTERS INVESTMENT WAGES TAXES
Manufacturing Industries Services and construction Gross Domestic Product at factor cost
40 40 90
plus
equals less
equals
80
INCOME METHOD
MONEY PAYMENTS MADE TO ALL FACTORS OF PRODUCTION FACTOR INCOMES FOR CURRENT SERVICES TO PRODUCTION Income from employment Income from self employment Gross trading profits of cos Gross trading surplus of public cos Rent Total domestic income Stock appreciation GDPfc NFIA GNPfc 80 10 10 10 10 120 -30 90 10 100
EXPENDITURE METHOD
AGGREGATES ALL MONEY SPEND BY PRIVATE CITIZENS FIRMS AND GOVERNMENT
Consumer Expenditure (C) Govt.Expenditure (G) Gross Domestic Fixed Capital Formation (GDFC) (I) Value of Physical increase in stocks Total domestic expenditure (mp) Exports & factor income received Imports & factor income paid GNPmp Indirect Taxes Subsidies GNPfc
70 + 20
+ 20 + 10 120 + 20 - 30 110 - 20 +10 100
DIFFICULTIES IN MEASUREMENT OF NI
Non Market production Imputed values Underground economy Side effects and Economic Bads Double counting USE OF NI ECONOMIC PLANNING STANDARD OF LIVING CHANGES IN COUNTRYS ECONOMIC GROWTH COMPARATIVE ANALYSIS FACILITATED
Possible steps by the RBI to correct Rs slide- Intervention Possible steps by the Govt to correct Rs slideDemand for gold ,silver which has seen a 56% increase in demand Because it is thought of as a hedge against inflation So provide inflation indexed bonds with high returns Decontrol diesel prices, allow third party marketing to break The oil companies cartel Opening up organised retail to foreign investment and give resettlement package to deserving beneficiaries
BACKGROUND
CLASSICAL SCHOOL *Full employment - SayS Law Supply creates its own demand No room for Fiscal or M policy-Automatic equilibrium.
KEYNESIAN SCHOOL SHOT INTO PROMINENCE DURING THE GREAT DEPRESSION OF 1930
According to a recent CRISIL study released today, the IT and ITeS services sector has a multiplier effect on the Indian economy with every input of a rupee resulting in a 100 per cent return.
The study, conducted for NASSCOM, says, "Every rupee spent by the IT-ITeS sector translates into a total output of 2 rupees in the economy.
Nearly 58% of GDP comprises of Consumption expenditure which is a component growing in importance
#REF!
NX
One way or another, there's really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can't spend more unless they make more The only sustainable source of consistent growth is rising median wages. The rich just don't spend enough all by themselves. Kevin seems to be arguing that as income distribution gets more tilted from the poor and middle class towards the rich, consumption as a share of national income will fall. OK, we are currently concerned about an insufficiency of aggregate demand given that the sum of net investment and net exports is barely above zero. During the transitional (perhaps defined as a couple of years) Keynesian period of weak investment demand, we have the paradox of thrift where any upwards shift of the national savings schedule will only deepen the recession.
The business climate index increased somewhat in wholesaling and clearly in retailing. The business situation is assessed more positively than previously at both levels of trade. In addition, retailers and wholesalers are more optimistic. This suggests brisk Christmas trade.
EQUILIBRIUM OUTPUT
EQUILIBRIUM OUTPUT = QUANTITY OF OUTPUT PRODUCE EQUALS AGGREGATE DEMAND
AGGREGATE DEMAND
EXPORTS
AD
Y AD
=
= =
C+I+G+NX
C+I+G+NX Y
EXANTE SENSE
ALL THE ABOVE MENTIONED VARIABLES ARE PLANNED OR DESIRED VALUES AND NOT ACTUAL VALUES
I+G+NX
C=a+by
C Y S S
= = = =
MARGINAL PROPENSITY TO CONSUME = INCREASE IN CONSUMPTION PER UNIT IN INCOME AD = = A AD = = C+I+G+NX a+by+I+G+NX (I+G+NX) A+by
0.82
Marginal propensity to consume India Japan West Germany Australia 0.82 0.66 0.72 0.76
SAVINGS FUNCTION
TWO SECTOR ECONOMY - INCOME IS EITHER SAVED OR SPENT Y = C+S which implies S = Y-C Substituting the consumption function we get S = Y-C = Y-a-by = -a+(1-b) Y (1-b) = MPS = Marginal propensity to save (MPS) Increase in savings per unit of income
MPC + MPS = 1
CONSUMPTION FUNCTION
C = a+by
Y
PLANNED INVESTMENT (I) GOVERNMENT PURCHASES & NET EXPORTS AD = = = = C+I+G+NX a+by+I-G+NX (a+I+G+NX) +by A+by (where A = (a+I+G+NX)
AD
AD=A+by C=a+by
DETERMINATION OF CONSUMPTION
STOCK OF WEALTH EXPECTATIONS TAXATION POLICY Wealthier economies consume more Regarding future movements in incomes and prices Taxation policy influences the Average propensity to consume and shifts the consumption function Income accruing greatly to the Higher income class is likely to Be saved Young families have higher Propensities to consume
AD = a+by+I+G+NX Where (I+G+NX) are AUTONOMOUS components (independent of the level of income)
GIVEN THE ABOVE FACTS EQUILIBRIUM INCOME IS WHERE (AD) CURVE EQUALS THE 45 DEGREE LINE AS SHOWN IN THE FIG(PLANNED(EXANTE) SPENDING=ACTUAL (EXPOST)OUTPUT
AD=A+by
A
C = a+by
a 45o y
INPUT OUTPUT
Y = AD = A + by A = Y(1-b)
yd = T Y I G = = = =
(a) CALCULATE EQUILIBRIUM INCOME, AGG CONS,. GOVT. BUDGET DEFICIT, I = 50, G = 40
SOLUTION C = 50 + 0.9 yd y (10+0.2y) 50-+0.9 (y-10-0.2y) 50+0.9 y 9 0.18y 41+0.72y C+I+G 41+0.72y+50+40
Yd = C = = C Y Y = = =
= 467.86-103.57 = 364.29
C= 50+0.9Yd = 50+0.9 x 364.29= 377.86 Budget deficit = Govt. expenditure Taxes 40-103.57
MPS =
(1-0.72) = 0.28
Multiplier effect
2.4
D Fi Fs Fo ef e M n re nc s e hin s e inin st e g g r r
O th er
se rv
So c
MULTIPLIER ANALYSIS
Multiplier INCREASE IN THE LEVEL OF EQUILIBRIUM INCOME FOR A UNIT INCREASE IN AUTONOMOUS SPENDING
SUMMARY
1.
(a)
SIMPLE ECONOMY
Y = AD = C+S = a+by y-by y (1-b) y1
1 b
= = =
a
1a (1 b)
1 1 1 MPC MPS
=
=
(C)
= =
(a+b(y-ty+j)) + (c+dy) + G
1
1 b (1 t )
*(a+G+bJ+c)
OPEN ECONOMY
Y M C I M Y
=
= = = = = =
C+I+G+X-M m(y) Imports are a function of income a+b (y-by+j) c+dy my a+b(y-ty+J) + c+dy +G + x my * (a+c+G+x+bj)
1 1 d b(1 t ) m
simple model
Consumption function (C) = 250+ 0.75Y Investment function ( I ) = 65 + 0.15 Y Government exp (G ) = 90 Exports (X) = 125 Import function (M) = 0.15Y Due to an exogenous boost in the economy exports Increase by 25. Compute the change in equilibrium Level of income and also compute foreign trade multiplier
Y= C+ I+G+X-M Y = 250 + 0.75 Y + 65 + 0.15Y + 90 +125 - 0.15 Y Y = 530 + 0.75Y 0.25Y = 530 Y = 530/0.25 = 2120 When X increases by 25
0.25Y = (530 + 25) = 555 Y = 2220 Increase in income is 100 Foreign trade multiplier = 100/25 =4
Balanced budget multiplier 1/1-b x G 1/(1-b) (a-bt +I+G) -b/1-b x T Since G = T (1/1-b - b/1-b) G
1-b/1-b = 1
Eg. a =20, b = 0.80 , I = 50 If G = T = 10 then
2. Using the consumption function C= 40+byd If MPC is 0.8 calculate the consumption for Disposable income of a) 800 b) 90
Factory output and order book touched a six month high, RBI hinted a rate Cut . However investors are wary. Manufacturing activity rises in the first six months -8 core industries Register growth. PMI also shows growth. However growth should Remain the priority Weak Rs to encourage margins in IT companies. Companies to lower Prices to raise volumes Fiscal deficit in India 2008-09 6.4 2009-10 5.1 2010-11 5.5
INVESTMENT FUNCTION INVESTMENT DEMAND -DEMAND BY BUSINESS FOR OUTPUT WITH WHICH TO MAINTAIN OR INCREASE THE TOTAL CAPITAL STOCK
Interest rate I
I- i
Planned investment spending
STRUCTURE
OF THE INCOME
IS LM
MODEL
ASSETS MARKET Money mkt Bond mkt Demand Demand Supply Supply
Interest rates
Monetary policy Fiscal policy
I- i
AD C I G NX [a b(Y tY J )] [ I i ] [G ] [ NX ]
A b(1 t )Y i (Where A a b J I G NX )
For equilibriu m in the goods market Y AD A b(1- t)Y - i A i Y 1 - b(1- t)
Solving for i
i A
[1 b(1 t )]
Y ( IS curve)
I- i
AD=Y
AD2
E1 A-i1
Y1
Y2
IS curve shows Combinations of Y i1 and i i2 Where demand for goods(AD)= Its supply
E1
E2
IS
y1
y2
See derivation
Now, let us derive some important properties of the IS curve. The equation of the IS curve is
[1 b(l t )] Y
From the above equation it can be seen that the steepness of the IS curve depends on the multiplier () and investment sensitiveness to change in interest rates () is large, then the IS curve would flat because 1/ would be small. It can also be inferred that larger the multiplier, the flatter would be the IS curve. Since the slope of the IS curve is dependent on the multiplier and the multiplier in turn is dependent on fiscal policy more specifically, the tax rate t we see that fiscal policy can affect the slope of the multiplier. An increase in the tax rate would reduce the multiplier, which in turn increases the steepness of the IS curve). Thus the steepness of the IS curve and the tax rate go in the same direction.
K Y
L2=kY2-hi L1=kY1-hi
Demand for money
k,h is the sensitivity of Demand for real balances to changes in income and interest rate
DERIVATION OF THE LM CURVE E2 (Combinations of interest rate and income where Md=Ms E2 i2
E1 E1 L2
i1
L1
M/P
Y1
Y2
LM
Shifts in LM Curve
E1 LM1
E1
E2
Income Output
M kY hi P 1 M i (kY ) h P
E i
LM
IS
Monetary PolicyDIG1
LM E LM1 E
Fiscal PolicyDIG2
LM
E1
i0 i1
E1
i1 i0
IS
E2
IS1
IS y0 y1 y2
Y0
Income Output
Y1
(2)
Portfolio adjustments lead to change in asset prices to
(3)
spending adjusts changes in Output adjusts to AD change in
(4)
interest rate
Monetary policy(dig1) Govt. uses the monetary tool of open market operations to increase Money Supply - Shifts LM curve to the right to LM1. Initially in intersects the IS Curve at E1. In Ms with constant Md i i and also causes
a)changes in portfolio and people start holding more financial assets thereby raising its prices and reducing yields. b) Investment to pick up thereby raising AD and moving to point EWhere IS and LM1 curve intersects at i1(interest rate) and goods market and money Market are in equilibrium.(note:at E1 only money market was in equilibrium)
Fiscal Policy(dig2)
G - pushes IS curve to the right to IS1 thereby reducing i and reaching point E2 at income Y2.(Here only goods market is in Equilibrium). b)Now in Y raises Md with Ms being constant and this in turn raises i which leads to falls in private I and Y at E1 where new IS1 curve intersects old LM curve and goods and money market equilibrium is restored. However this leads to crowding out(of Private I) and reduction of Y WHICH IS CALLED CROWDING OUT CONTROVERSY
CROWDING
OUT
EFFECT
LM
INTERACTION OF MONETARY AND FISCAL POLICY
Crowding Out
i2 i0
E1
LM1
IS1
IS
Dig 3 Shows that the only way to prevent crowding out is to Reduce i to i0 by increasing money supply so as to push LM curve to LM1.
New equilibrium is obtained at E1 where (new IS curve) IS1=(new LM curve) LM1 and both goods and money markets are in equilibrium
POLICY EFFECTS ON
POLICY
EQUILIBRIUM INCOME
EQUILIBRIUM
INTEREST RATES
+ +
ALTERNATIVE
FISCAL
POLICIES
C + + +
I +
Y (GDP) + + +
GDP
IG
UNEM
INF
Source: Economist
The Business Confidence Index (BCI) of SACCI is a market-related index that reflects not what business is saying, but what it is doing and experiencing. It is therefore not an opinion/perception-based index. It is likely that in any one month the business mood will be influenced both positively and negatively by various developments in the economy. The BCI seeks to reflect the net results of these influences.
The BCI is a composite weighted index of thirteen sub-indices. Various economic indicators are used to compile the thirteen sub-indices. The indicators that are monitored have been judged by business to have the greatest bearing on the business mood.
Average monthly weighted exchange rate of the rand against the US dollar, the euro and the British pound as well as the volatility of the rand exchange rate Core consumer inflation rate for metropolitan and urban areas The real predominant prime overdraft rate Retail sales volumes Rate of change in real credit extension to the private sector Average weighted US dollar price of gold and platinum Merchandise import volumes Merchandise export volumes New vehicle sales Liquidations of companies and closed corporations Volume of manufacturing production Real value of private sector building plans passed, and
Results of the December 2011 Ifo Business Survey The Ifo Business Climate for trade and industry in Germany continued to improve in December after stabilising in the previous month. Survey participants responses showed that their assessment of the current business situation continues to remain favourable. Business expectations improved for the second time in succession. The German economy seems to be successfully countering the downturn in Western Europe. This bodes well for Christmas.
In manufacturing the business climate remains unchanged. Manufacturing firms may assess their current business situation as slightly less positive than in November, but there is no question of a meltdown comparable to that of 2008. On the contrary, the German economy is showing signs of stabilisation. Firms even view their six-month business outlook more favourably. They also see greater opportunities in the export business. The overhang of firms wishing to increase their staff numbers has nevertheless fallen slightly.
But even the most die-hard Keynesians accept the Solow proposition that in the long-run, any increase in national savings will encourage more investment. And if Kevin is right about the rich having a lower propensity to consume that is, a higher propensity to save the old trickle down nonsense about taking from the poor to give to the rich would at least spur more investment demand and long-term growth.
Figure 1 confirms the continuation of the long term downward trend of US savings, with inevitable oscillations in business cycles, since 1981. Each cyclical savings peak was lower than previous one 21.4% of GDP in 1981, 19.0% in 1998, and 16.4% in 2006. Each cyclical trough was also lower than the one before 14.2% in 1992, 13.6% in 2003, 10.2% in 2009.
JAPAN
30
25
20 Axis Title
15
inv sav
10
0 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
USA
25
20
0 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
India
45 40 35 30 Axis Title 25 I 20 15 10 5 0 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 S
#REF!
NX
Yr
1995-96 1996-97
Nominal GNP
2500 3200
GNP deflator
120 145
Base yr GNP deflator 1994 -95 =100 What is real GNP of 1995-96 What is the real GNP of 1996-97
What is the growth rate of real GNP from 1995-96 to 1996-97? What is the inflation rate in 1996-97 in relation to 1995-96 ?
Growth rate
Growth Rate = Real GNP 1996-97 Real GNP 1995-96
2207/2083.3 1
0.059 = 5.9%
Inflation rate
GNP deflator (cp- 96-97) - GNP(BP95-96) GNP def (1995-96)bp
145-120/120 x 100 = 20.83%
Following are the data relating to the national accounts Of an economy for the year 1995 in mn units of currency Capital consumption allowance Personal consumption spending Corporate income taxes Undistributed corporate profits Net exports Dividends Rent Interest Indirect business taxes Gross private investment Compensation to employees Government spending Proprietors income 1000 12500 500 250 25 750 1000 500 1250 550 8487.5 912.5 1250
(b)
From the following figures compute a) GDP at factor cost b) National income c) Personal disposable income GNP mp Personal income tax Corporate taxes Subsidies FIPA FIRFA Undistributed profit Indirect taxes Depreciation 5000 1000 800 400 800 900 200 450 350
National income NNPfc = GNP fc - Dep 4950 350 4600 Personal disposable income = Personal income Personal Taxes Personal income = National income - Retained earning - Corp tax 4600 -200 800 = 3600
GDP mp 6000 Corporate income tax 1200 Personal income tax 900 Subsidies 475 Factor incomes received from abroad 1500 Factor incomes paid 1200 abroad Undistributed profits 225 Indirect taxes 900 Depreciation 600 Compute Personal Disposable income, national income and GNP at market prices
GNPmp
National income = NNPfc GNPfc = GNP mp + Subsidies - Indirect taxes = 6300 + 475 -900 =5875
NNPfc = 5875- 600 5275
Personal disposable income = National income - Retained earnings - Corporate taxes - Personal txes 5275 -225 -1200 -900 = 2950
NATIONAL ACCOUNTING INVOLVES A SUBSTANTIAL AMOUNT OF AGGREGATION HELPS IDENTIFY IMPORTANT ECONOMIC RELATIONSHIPS
MAJOR TYPES OF ACCOUNTS NATIONAL ECONOMY NATIONAL INCOME ACCOUNTS FLOW OF GOODS AND SERVICES IN AN ECONOMY DURING A YEAR FLOWS OF GOODS AND SERVICES BETWEEN PRODUCTIVE AND HOUSEHOLD SECTORS REFLECTS NATIONS WEALTH AT A POINT OF TIME
NATIONAL ACCOUNTS
NUMBER OF HOUSEHOLDS SINGLE FIRM (OWNED BY SOME HOUSEHOLDS) LABOUR IS THE ONLY SCARCE INPUT
PRODUCTION ACCOUNT Dr. Wages 90 Profits 10 Sales (to households) 100 HOUSEHOLD ACCOUNT Wages Profits Consumption Sales (to households) 90 10 100 100 Cr. --100 100
SIMPLE ECONOMY
100
Dr.
Cr.
1340 310 50
1700
INVENTORY INVESTMENT
GNP IS NOT EQUAL TO GNI-ROLE OF SAVING & INVESTMENT PRODUCTION A/C
325 35 360
SAVINGS A/C
360
35 35 35 35
Wages and salaries Dividends Retained profits Corporate profit tax Sales to households Sales to Government Domestic investment
GOVERNMENT SECTOR
Wages and salaries Purchases Taxes collected 500 1000 1500 1500 1500
HOUSEHOLD A/C
Dr. Wages & Salaries Dividends Personal income tax Consumption Personal Saving Cr. 1500 500
2000
1000 1000
Wages and salaries Dividends Retained profits Corporate profit tax Sales and excise taxes Sales to households Sales to Government Domestic investment
GOVERNMENT SECTOR
Wages and salaries Purchases Taxes collected 700 1100 1800 1800 1800
HOUSEHOLD A/C
Dr. Wages & Salaries Dividends Personal income tax Consumption Personal Saving Cr. 1700 500
2200
1100 1100
Factor Incomes
(a) Paid to domestic residents (b) Paid to foreign residents Retained Profits Corporate Profit tax Indirect taxes Imports
85
(80) (5) 8 1 6 5
Sales to households
Sales to Government Domestic Investment (a) Fixed Investment (b) Inventory Investment Exports Subsidies from Govt.
78
4 12 (10) (2) 3
105
105
EXTERNAL A/C.
Dr. Exports Transfers from foreigners Incomes from abroad Deficit on current a/c. 8 3 4 1 16 Dr. Fixed Investment Inventory 10 2 Personal Saving Business Saving Government Saving Deficit on current a/c. 12 Imports Transfer to foreigners Income paid to foreigners Cr. 5 6 5 16 CR 2 8 1 1 12
HOUSEHOLD SECTOR
Dr. 78 10 5 2 Consumption Personal Income Tax Transfers to foreigners Personal Saving Incomes from domestic production Income from abroad Transfers from Govt. Transfers from foreigners
Cr. 86 4 2 3
95
95
GOVERNMENT A/C.
Dr.
5 4 Wages & Salaries Purchases of goods & services Corporate profit tax Indirect Tax
Cr.
1 6
Transfers abroad
Transfers to household Subsidies to producers Surplus
1
2 3 1 17
Income Tax
10
17
12 10 8 6 4 2 0
9.8 9.5
8.5 7
ia
na m
hi n
In d
or e ap
Si ng
S. Ko
Vi et
re a
A comparitive picture
s. Korea India Euro China Japan US 0 0.9 1 1.3 1.6 5 10 15 0.9 1.3 8.5 9.8 4.2 4.4 7.1 7.7 GDP growth 2009 GDP growth 2008
-3.40%
Growth in industrial production 12.80% 14.00% 12.00% 9.10% 10.00% 7.10% 8.00% 6.00% 4.00% 2.40% 2.00% 0.00% -2.00% -1.50% -1.70% -4.00%
In di a S. Ko re a
Eu ro C hi na
.S .
(39)
The following is the information from the national income accounts for a hypothetical country :
GNP MP Gross Investment Net Investment Consumption Government purchases of goods and services National Income Wages and Salaries Proprietors income + rental income of persons Dividends Government budget surplus Interest Transfer payments Personal tax and non-tax payments 2400 400 150 1500 480 1925 1460 160 50 15 60 260 300
Required to compute :
(a) NNP at market prices (d) Corporate profits (g) Disposable personal income (b) Net exports (e) Taxes Transfers (h) Personal saving (c) Net indirect taxes (f) Personal income
(39)
(a) NNP = = = = = = GNP Depreciation 2400-250 2150 Gross Investment Net Investment 400-150 250 = GNP (C+I+G) 2400-(1500+400+480) 20 = NNP National Income 2150-1925 225
Depreciation
(b)
(c)
(d)
NI (Wages and Salaries + Proprietors Income + Rental Income 1925-(1460+160+60) 1925-1680 245 Gross Purchases + Budget Surplus 480+15 495 National Income Corporate Profits + Transfer Payments + Dividends (1925-245) + 260+50 Rs. 1990
(e)
(f)
(g)
=Personal Income Personal Taxes and Non-Tax payments 1990-300 Rs. 1690
Personal Disposal Income Consumption 1690 1500 Rs. 190
(h)
2.
WAGES & SALARIES 100 DIVIDENDS( ) EXCISE TAX PROFIT TAX RETAINED PROFIT
160 30
10
20 20
DOMESTIC INVESTMENT INVESTMENT IN INVENTORIES
NET FOREIGN INVEST
10
(30)
10
60
10
Fill up the missing entries and compute GDP & GNPfc GDP & GNPmp Personal Disposable Income
2.
WAGES & SALARIES 100 DIVIDENDS(10) EXCISE TAX PROFIT TAX RETAINED PROFIT
GOVT. PURCHASE 30 PERSONAL SECTOR A/C. PERSONAL SECTOR PURCHASES (BF) 110) 20 PURCHASES 110 INCOME TAX 20 20 EXPORTS 20 40 SAVING 60 10 FIXED INVESTMENT FIXEDINVESTMENT 20 20 20 50 NET CHANGE IN I 10 FOREIGN SECTOR IMPORTS (BF) __-10 -1MPORTS(BF) 10 FACTOR INCOMES 20
160 30
eXPORTS
40
10
10
30
30 30 10
30 -50
20 20
20
10
60
10
(-30)
50
-50
Fill up the missing entries and compute GDP & GNPfc GDP & GNPmp Personal Disposable Income
(45)
The following are inter-industry transactions in an economy. (The figures represent money valued of output)
X 50 20 30 200
Y 80 60 40 240
Z 30 50 60 160
Calculate the National Income in the economy and value added in industry Y
(45)
The National Income in the Economy = Total final output in the Economy - Sales to household sector. The sales to household sector by X, Y and Z industries are as follows :X Y Z = = = 200-(50+80+30) = 40 240-(20+60+50) = 110 160-(30+40+60) = 30 =40+110+30= 180 = = = = Output of Y Input from the industries 240-(80+60+40) 240-180 60
National Income
(14)
The following is the information from the national income accounts for a country XXX
Rs. In Crore National Income 3850 Government purchases 930 Consumption 3000 Net investment 300 Gross investment 800 GNP 4800 Personal Tax and non-tax payments 600 Transfer payments 510 Net interest 120 Government budget surplus 30 Dividends 100 Proprietors incme and rental income 320 of persons W ages and salaries 2920
Required to compute : a. Net Indirect Tax b. Taxes Transfers. c. Personal Income d. Net Exports
a.
=
=
(14)
b. Taxes Transfers
c. Personal Income
d. Net Exports
= GNP at Market Price (GI-NI) National Income [where Gross Investment (NI) = Depreciation ] = 4800-(800-300)-3850 = 4800-500-3850 = 450 = Government purchases + Budget surplus = 930+30=960 = (Wages + Proprietors income + Net Interest + Dividends + Transfer Payments) = 2920+320+120+100+510 = 3970. = GNP (C+I+G) = 4800 (3000+800+930) = 70
(20)
The following is the information drawn from the National Income Accounts for an economy
Amount (Rs. In crore) A. GNP 4850 B. Gross investment 854 C. Net investment 310 D. Consumption 3095 E. Government Spending 968
Calcutta the NNP and net export for the economy.
Item
(20)
NNP = = Net Exports = = GNP Depreciation (i.e. Gross Investment Net Investment) 4850-544=4306 GNP Domestic absorption (i.e. C+I+G) 4850-4917= -67
PROBLEMS
(88) C I Ms = = = 120+0.6Y 150-80i 300
Mt
Ma
=
=
0.3Y
120-160i
Required to compute : a. b. c. d. e. Equilibrium Interest Rate Equilibrium Income Consumption C, Investment (I) in the Economy Transaction Demand for Money (Mt) Speculative Demand for Money (Ma)
SOLUTIONS
(a) The equation of the IS curve is :
Y or Y or Y-0.6Y or Y = = = 120+0.6Y+150-80i 270+0.6Y-80i = 270-80i (i)
675-200i
The equation of the LM curve is MS = Md or 300 or Y = = 0.3Y + 120 160i 600+533.33i . (ii)
or, 733.33i
or i =
=
75 733.33
75
or, i
0.10%
(b)
675-200x0.10
or, Y
655
(c)
Consumption
120+0.6x655
=
Investment = =
513
150-80x0.10 142
(d)
Mt
= =
0.3x655 196.50
(e)
Ma
= =
120-160i 104
(107)
Savings function
Disposable income Tax Function
S
Yd T
=
= =
-50+0.2 Yd
Y-T 0.25Y
=
= Mt=
200-10i
400 0.25Y 125-50i 250
If the Government decides to increase its expenditure(G) by 135 1)Required to compute crowding out of private investment 2)If the government does not want to crowd out private investment by increasing money supply What will the required money supply be to meet this end
IS Curve
Savings function
Consumption function Y =
=
=
-50+0.2Yd
50+0.8Yd
C+I+G
=
= 0.40 Y Y = =
Transactions demand Mt
Supply of money Ms
250
When money market and goods market are in equilibrium IS = LM 1625-25i = 500+200i 1625-500 = 200i + 251 1125 1125=225i 225 =5
= Investment (I) = 200 10i = 200-(10*5) = 150 When the Government increases its expenditure by 135, IS curve will change but LM curve will remain unchanged. New IS curve of IS Y = 50+0.8 (Y-0.25Y) + 200-10i+(400+135) = 50+0.8Y 0.2Y +200-10i+535 0.4 Y = 785-10i
Investment (I)
= =
200-10i
200-10(6.5) 135
Crowing out of private investment on account of increase in Government expenditure is = 150-135 =15
b)Investment will not be crowded out if money supply is maintained at 5%. This can happen only when LM Curve shifts to the right
IS curve after increase in Government expenditure is
Y=1962.5-25i
Substituting i=5% in the above equation Y=1837.5