Economy – Economy Basics
What is meant by Economy
is an area of the production, distribution, or trade, and consumption of goods and services by different agents in a given geographical location.
What is the purpose of Economy
The purpose of the economy should be to distribute the earth’s resources such as food, water, land, minerals etc among human beings in a sustainable manner.
Economy Basics – National Income
The total Value of all final goods and services produced in a country in a particular period (Generally one year).
Economy Basics – Measures of National Income
- GDP (Gross Domestic Product)
- GNP (Gross National Product)
- NNP (Net National Product)
- PI (Personal Income)
- DPI (Disposable Personal Income)
Economy Basics – GDP (Gross Domestic Product):
GDP is the total value of all final goods and services produced within the geographical boundary of the country during a particular period (Generally one year).
GDP = C + G + I + NX
= Consumption + Government Expenditures + Investment + Exports – Imports
Suppose there are 100 crore Indians who earn RS. 100 crores in Indian territory and 1 crore foreigners who earn RS. 10 crores in Indian territory and send it to their respective countries. At the same time, 10 crores Indians living in foreign countries earn RS. 40 crores and send it to India.
Here, GDP is (100 + 10 = 110 crores).
What is meant by GDP Growth Rate:
The percentage increase in GDP from quarter to quarter.
GNP (Gross National Product):
The total value of the final goods and services produced by Indians in India as well as abroad during a particular period.
GNP = GDP + Net income inflow from abroad – Net income outflow to foreign countries
The value of goods produced by resident citizens of a country
The value of goods produced by Non – resident citizens of a country
Note: The income of foreigners who reside in India is excluded.
Net National Product (NNP)
It is calculated by deducting depreciation from Gross National Product (GNP)
= GNP – Depreciation
– Cost incurred to produce goods and service.
For calculating market price we add Indirect taxes and deduct subsidies given by the government in Factor cost.
= Factor cost + Indirect Taxes – Subsidy
NNP at factor cost = NNP at market price – Indirect taxes + subsidy
- At factor cost NNP can be treated as National Income.
- It is the sum of all the income received by the people of the country in one year.
- Personal Income = National Income + Transfer payments – Undisclosed profits of corporate + Payment for social security provisions
- Transfer Payments are the payments that are not against any productive work. (Example- Old Age Pension, Unemployment compensation etc.)
- Social Security Provisions– Payment made by employees towards PF, Insurance etc
Disposable Personal Income:
- Income available to individuals after deducting direct taxes.
- Disposable Personal Income = Personal Income – Direct Taxes
- Calculating National Income on the basis of base year price, this is called the real income.
Economy Basics – Nominal Income:
- Calculating National Income on the basis of particular year (current year), this income is called
the Nominal income.
- Used to calculate overall price rise
Estimation of National Income in India:
- In 1868, Dadabhai Naoroji wrote a book ‘Poverty and Un British Rule in India’.
- It was the first attempt at the calculation of National Income.
- The first person to estimate National Income scientifically was Dr. V. K. R. V. Rao and he estimated national income for the period 1925-29.
- The National Income committee was formed after Independence in 1949 under the chairmanship of P.C. Mahalanobis.