GDP - III

• INCOME METHOD

For every rupee's worth of goods and services produced, a rupee's income is generated. Hence the GDP calculated under VA method and income method gives similar results.

The income method measures GDP from the side of the payments made to the primary factors of production for their productive services in an accounting year. The primary factors of production are:

i. Land

ii. Labour

iii. Capital

iv. Enterprise

The respective factor payments made to the above factors are:

i. Rent ( for land)

ii. Wages ( for labour)

iii. Interest ( for capital)

iv. Profits ( for enterprise i.e entrepreneur / govt. in case of PSU)

Along with these 4 , the mixed income of self emplyed people is also added. (as told earlier, they are the doctors, barbers, etc...... who do not come under the other 4 categories)

Few precautions which need to be taken under Income Method are :-

i. Transfer payments ( i.e voluntary like donations, use wiki ) are not included.

ii. Illegal incomes should not be include; as these might lead to double counting.

iii. Windfall gains like lotteries should not be included.

iv. Corporation Tax is a part of Profits. While calculating national income, profits before deduction of corporation tax have to be included. While doing so , corporation tax should not be included separately. Similarly, wages includes the income tax to be paid by workers. Hence, similarly the taxes should not be included separately (infact even these taxes are transfers; forced transfers in economic terms)

v. Death duties, gift tax, wealth tax, and tax on widfall gains are paid from wealth or past savings of the tax payers. Since they are not paid from the current income of the tax payers, they are not a part of national income.

vi. If a person rcvs. money by selling his second hand goods, the sale proceeds are not income since he has not rendered any productive service. Only there is a change of ownership of the second hand goods sold and purchased. This transaction has not contributed anything to the current flow of goods and services.Similarly, thousands of rupees are rcvd by persons who sell bonds and shares ( both old and new ones). in the market. The money reciepts are not income since there is no corresponding production of goods and services and income generation.

Hence GDP in Income Method = Wages + Rent + Interes + Profit + income of self employed

• EXPENDITURE METHOD

(The doubts this method should clear is .... imports wala doubt, cost price sale price ka koi doubt tha i guess, and many more)

Will explain each item one by one after the formula;

GDP by exp. method = Private final consumption expenditure + govt. final consumption expenditure + gross fixed capital formation + change in stocks + net exports.

Now we know private and govt. expenditure kya hain ... We require two types of data to calculate this -

a> total volume of sales in the market

b> retail prices.

By multiplying the volume of final sales with the retail prices of the durable, semi durable and non durable goods and services to the consumer households we get private final consumption expenditure in the domestic market. NOW this expenditure includes the direct purchases in the domestic market by non resident households. Therefore, their share of expenditure has to be deducted from the pvt. final con. exp. Also resident households make direct purchases abroad. These direct purchases have to be added to the pvt. final cons. exp.

The second item is govt.'s final con. exp. It consists of the compensation of govt employess and net purchases of goods and ser. by the govt. By multiplying the total volume of sales to the govt. by the enterprises with the retail prices, g.f.c.e is obtained. To this we have to add purcahes from abroad.

Also production for self consumption will be added to GDP by multiplying the price of the produce with the produce (by the self emplyed).

Now, Gross fixed capital formation includes total expenditure on construction ( steel, bricks, wood, etc) and machinery and equipments.

As regards expenditure on physical change in stocks with the producers, the physical change has to be multiplied with the market prices.

Finally Net exports ...... In open economies, govt. and consumer households of one country make direct purchases in the domestic market of some other country. These purchases are exports from the side of the selling country and import frm the side of the purchaser. Direct purchase of goods and services by foreigners is only a part of the total exports of goods and services of a country. For eg take India, we export tea, coffee, jute, cotton , etc. these are called merchandising exports. We also export services like shipping, insurance , banking, air transport, etc. When foreigners use our ships for transporting goods and passengers , our ships export shipping services. Similarly Indian insurance companies export insurance services when foreigners pay insurance premium for goods and passengers moving frm one country to another. All these exports of goods and services are provided by the producers of the domestic territory of the country.

Similarly India imports services of foreign nations. These import are part a part of the domestic product of foreign countries. Hence, we have to deduct the value of imports of goods and services from the value of exports to arrive at net exports.

Note :- As in the case of income method; similar precautions need to be taken here also....... expenditure on IG are not to be included (as already explained in detail), exp. on old shares and bonds not included, on second hand goods not included, on transfer payments not included, etc.