Article – 2: National Income, Growth, Development and other concepts

Quiz November 30, 2018
December 2, 2018
Article -3: Basic economy concepts
December 3, 2018

Current Affairs for Engineering Service Exam

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Article 2: National Income, Growth, Development and other concepts


1.National Income

2. Concept of Economic Growth and Development

3. Concept of Human Resource Development

4. Quiz

1.National Income

  • National Income is the total value of all final goods and services produced by the country in certain year.
  • In other words the total amount of income accruing to a country from economic activities in a year’s time is known as national income.

1.1 Methods of Measuring National Income

There are four methods of measuring national income.

1.1.1 Product Method

  • The total value of final goods and services produced in a country during a year is calculated at market prices.
  • Only the final goods and services are included and the intermediary goods and services are not taken in the calculation.

1.1.2 Income Method

  • The net income payments received by all citizens of a country in a particular year are added up.
  • This will account the net incomes that accrue to all factors of production by way of net rents, net wages, net interest and net profits.
  • But incomes received in the form of transfer payments(ex: subsidies) are not included.

 1.1.3 Expenditure Method

  • The total expenditure incurred by the nation in a particular year is added together
  • It includes personal consumption expenditure, net domestic investment, government expenditure on goods and services, and net foreign investment.

  1.1.4 Value Added Method

  • It measure national income in different phases of production
  • The difference between the value of material outputs and inputs at each stage of production is accounted.

1.2 Measurements of National Income:

1.2.1 Gross domestic product

  • Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
  • GDP includes all private and public consumption, government outlays, investments, private inventories, paid-in construction costs and the foreign balance of trade (exports are added, imports are subtracted).
  • GDP = consumption + investment + government spending + (exports − imports).

Significance of GDP:

  • It is used as an indicator of the economic health of a country.
  • It is used as an indicator of the standard of living.
  • To compare the productivity of various countries with a high degree of accuracy.
  • Helps a government make decisions
  • It provides a framework for investment decision-making.
  • Helps business undertakings to plan for production activities

Real GDP:

  • Real GDP is equal to the economic output adjusted for the effects of inflation.

Nominal GDP:

  • Nominal GDP is economic output without the inflation adjustment.
  • Nominal GDP is usually higher than real GDP because inflation is typically a positive number.

GDP Deflator:

  • The GDP deflator measures the ratio of nominal (or current-price) GDP to the real (or chain volume) measure of GDP.
  • It  is a measure of price inflation/deflation with respect to a specific base year.

1.2.2 The Net Domestic Product:

  • The net domestic product (NDP) is an annual measure of the economic output of a nation that is adjusted to account for depreciation, calculated by subtracting depreciation from the gross domestic product (GDP).
  • NDP=GDP – Depreciation
  • Depreciation is the amount of GDP required to purchase new goods to maintain existing stock.

Significance of NDP:

  • To understand the historical situation of the loss due to depreciation of the economy.
  • To understand and analyse the sectoral situation of depreciation in industry and trade in comparative periods.
  • To show the achievement of the Economy in the area of Research and Development.

1.2.3. Gross National Product

  • It is total value of all the final products and services in a given period by the means of production owned by a country’s residents.
  • Any output produced by foreign residents within the country’s borders must be excluded in calculations of GNP, while any output produced by the country’s residents outside of its borders must be counted.
  • GNP does not include intermediate goods and services to avoid double-counting since they are already incorporated in the value of final products and services.

The items counted in the segment income from abroad:

  1. Private remittance
  2. Interest on External loans
  3. External Grants

Significance of GNP:

  • The GNP figures help us to know the economic position of the people of the various countries and we can make comparison with our own GNP.
  • It provides us the information about the marginal prosperity to consume and saving.
  • It throws light on the earnings of the various factors of production and the total output of the country.
  • It also informs that distribution of wealth is equal or unequal.

The Difference Between GNP and GDP:

GNP and GDP are very closely related concepts, and the main differences between them comes from the fact that there may be companies owned by foreign residents that produce goods in the country, and companies owned by domestic residents that produce products for the rest of the world and revert earned income to domestic residents.

1.2.4. Net National Product:

  • Net national product (NNP) is the monetary value of finished goods and services produced by a country’s citizens, overseas and domestically, in a given period minus depreciation
  • Depreciation is the amount of GNP required to purchase new goods to maintain existing stock.
  • NNP = GNP – Depreciation
  • NNP = GDP + Income from Abroad – Depreciation

Significance of NNP:

  • It  is a key identity in national accounting
  • It has role as a dynamic welfare indicator.
  • It  has featured prominently as a measure in environmental economics
  • It is an indicator of sustainability

1.3 National Income Accounting

  • National income accounting is a bookkeeping system that a government uses to measure the level of the country’s economic activity in a given time period.
  • It include data regarding total revenues earned by domestic corporations, wages paid to foreign and domestic workers, and the amount spent on sales and income taxes by corporations and individuals residing in the country.

Significance of NIA:

  • It provides useful insight into how well an economy is functioning.
  • It provides us information regarding the associated population, data regarding per capita income and growth can be examined over a period of time.
  • Some of the metrics calculated by using national income accounting include gross domestic product (GDP), gross national product (GNP) and gross national income (GNI).
  • It can provide guidance regarding inflation policy

1.4 Concept of Per Capita Income:

  • The average income of the people of a country in a particular year is called Per Capita Income for that year.
  • It can be calculated for a country by dividing the country’s national income by its population.
  • Per capita Income= National Income/ Population

2. Concept of Economic Growth and Development

2.1 Economic Growth

  • Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another.
  • It can be measured in nominal or real terms, the latter of which is adjusted for inflation.

How to Generate Economic Growth:

  1. Discovery of new or better economic resources.
  2. To grow the labor force.
  3. To create superior technology or other capital goods.
  4. Increased specialization.

2.2 Economic Development

  • Economic Development is defined as the process of increase volume of production along with the improvement in technology, a rise in the level of living, institutional changes, etc.
  • In short, it is the progress in the socio-economic structure of the economy.

Economic development often is categorized into the following three major areas:

  1. Governments working on big economic objectives such as creating jobs or growing an economy.
  2. Programs that provide infrastructure and services such as bigger highways, community parks, new school programs and facilities, public libraries or swimming pools, new hospitals, and crime prevention initiatives.
  3. Job creation and business retention through workforce development programs to help people get the needed skills and education they need.

2.3 Key Differences Between Economic Growth and Economic Development:

  1. Economic growth is the positive change in the real output of the country in a particular span of time economy. Economic Development involves a rise in the level of production in an economy along with the advancement of technology, improvement in living standards and so on. Economic development can be seen when there is an increase in real national income.
  2. Economic growth is one of the features of economic development.
  3. Economic growth is an automatic process. Economic development, which is the outcome of planned and result-oriented activities.
  4. Economic growth enables an increase in the indicators like GDP, per capita income, etc. On the other hand, economic development enables improvement in the life expectancy rate, infant mortality rate, literacy rate and poverty rates.
  5. Economic growth is a short-term process which takes into account yearly growth of the economy. But if we talk about economic development it is a long term process.
  6. Economic Growth applies to developed economies to gauge the quality of life. It is an essential condition for the development in developing countries also. In contrast, economic development applies to developing countries to measure progress.
  7. Economic Growth results in quantitative changes, but economic development brings both quantitative and qualitative changes.

3. Concept of Human Resource Development:

  • Human Resource is an important factor of economic development.
  • The prosperity of a country is determined by the skill, efficiency and attitude of the people of the country.
  • Human Resource Development(HRD) means increases in human capital.
  • Human capital is accumulated and improved upon in several ways: through programs of education and formal training, training on the job, and through individual initiative.
  • HRD ‐ leads to a number of social and economic benefits including jobs; reduction in poverty; increase standard of living and better quality of life; better civil society etc

3.1 Measurements of HRD:

3.1.1 PQLI:

  • The Physical Quality of Life Index (PQLI) is an attempt to measure the quality of life or well-being of a country.
  • The value is the average of three statistics: basic literacy rate, infant mortality, and life expectancy at age one
  • All three are equally weighted on a 0 to 100 scale.

3.1.2 HDI:

  • The Human Development Index (HDI) is a statistic composite index of life expectancy, education, and per capita income indicators
  • It is used to rank countries into four tiers of human development.
  • A country scores a higher HDI when the lifespan is higher, the education level is higher, and the GDP per capita is higher.
  • It was developed by Indian Nobel prize winner Amartya Sen and Pakistani economist Mahbub ul Haq.
  • The human development rankings are yearly by the United Nations Development Programme (UNDP).
  • India’s HDI value for 2017 is 0.640, which put the country in the medium human development category.

3.1.3 Gender Inequality Index:

  • The Gender Inequality Index (GII) is an index for measurement of gender disparity
  • It was introduced in the 2010 Human Development Report by the United Nations Development Programme(UNDP).
  • This index is a composite measure to quantify the loss of achievement within a country due to gender inequality.
  • It uses three dimensions to measure opportunity cost: reproductive health, empowerment, and labor market participation.

4. Quiz

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