TLDR;
This video provides a comprehensive overview of the determination of national income, covering key concepts, methods of calculation, and the Keynesian theory. It explains GDP, its limitations, and the difference between real and nominal GDP. The video also discusses factor income versus transfer income, adjustments for factor cost and market price, and methods for calculating national income using both income and expenditure approaches. Finally, it delves into the Keynesian theory, including the Keynesian model and the foreign trade multiplier.
- GDP and its limitations
- Real vs Nominal GDP
- Income and Expenditure Methods
- Keynesian Theory
Introduction: Determination of National Income [0:00]
The video introduces Chapter 6, "Determination of National Income," from the Business Economics book. The chapter is divided into two units: National Income Accounting and the Keynesian Theory of Determination of National Income. The session aims to cover everything in one class, including MCQs, numericals, diagrams, and theory.
GDP: Meaning & Definition [1:00]
GDP, or Gross Domestic Product, is the total money value of all goods and services produced within a country. It includes everything from electronics and furniture to alcohol and tobacco. GDP is calculated annually, typically from 1 April to 31 March. A higher GDP generally indicates a higher standard of living and greater welfare for the population. The definition of GDP refers to the value of all final goods and services produced within a country during a given period.
GDP and Welfare (Limitations) [8:08]
GDP is not a perfect indicator of welfare. It excludes income inequality, the quality of technological progress, illegal activities, non-market production, and various social and political factors. Income distribution is not reflected in GDP, meaning a high GDP doesn't guarantee equal prosperity. The quality improvements in technology are not directly included, only the increased production. Illegal activities like smuggling and gambling are excluded due to lack of data. Non-market productions, such as education and health levels, are also not counted. Additionally, GDP does not differentiate between spending on safety (like defence) and spending on growth (like technology).
Real vs Nominal GDP & GDP Deflator [22:20]
Nominal GDP is calculated using current year prices, while real GDP uses a base year's prices to adjust for inflation. Real GDP provides a more accurate measure of economic growth by excluding price changes. The GDP deflator, calculated as (Nominal GDP / Real GDP) * 100, indicates the percentage increase or decrease in the price level compared to the base year. Real GDP is also known as GDP at constant prices, while nominal GDP is GDP at current prices.
Factor Income vs Transfer Income [34:09]
Factor income is earned through the provision of factors of production (land, labour, capital, enterprise), while transfer income is received without providing any goods or services in return (gifts, pocket money). National income only includes factor income, not transfer income. Transfer income is one-sided and unearned, whereas factor income is two-sided and earned. Examples of transfer income include old-age pensions, scholarships, and compensation for property loss due to disasters.
FC, MP & Depreciation Adjustments [40:00]
Factor cost (FC) is the cost of production, while market price (MP) includes indirect taxes and subtracts subsidies. The formula to derive market price is: Market Price = Factor Cost + Indirect Taxes - Subsidies. Net Indirect Tax (NIT) is the difference between indirect taxes and subsidies. GDP at market price can be derived by adding NIT to GDP at factor cost. Indirect taxes can be divided into production tax and product tax, while subsidies can be divided into production subsidies and product subsidies. Depreciation, also known as consumption of fixed capital or current replacement cost, is the decrease in the value of fixed assets. Gross value minus depreciation equals net value.
Income Method (Numerical Approach) [1:11:28]
The income method calculates national income by summing up all factor incomes within a country. The steps are: first, calculate domestic income (NDP at FC) by adding compensation of employees, operating surplus, and mixed income of self-employed. Compensation of employees includes wages, salaries, bonus and employer contributions. Operating surplus includes rent, interest, profit and royalties. Profit is further divided into corporate tax, dividends, and undistributed profits. Then, add net factor income from abroad (NFIA) to domestic income to arrive at national income (NNP at FC).
Expenditure Method [1:23:32]
The expenditure method calculates GDP at market price by summing up all expenditures in the economy. The formula is GDP (MP) = private final consumption expenditure + gross domestic capital formation + government final consumption expenditure + net exports. Private final consumption expenditure includes household expenditure and expenditure by non-profit institutions. Gross domestic capital formation may be given as net domestic capital formation, in which case depreciation must be added. If gross fixed capital formation is given, then change in stock must be added. Net exports is exports minus imports.
Keynesian Theory of National Income [2:10:30]
National income can be divided into income accruing to the government sector and income accruing to the private sector. Government income includes income from property and entrepreneurship, and savings from non-departmental enterprises. Private income is derived by subtracting government income from national income and adding national debt interest, current transfers from government, and net transfers from the rest of the world. Personal income is calculated by subtracting corporate tax and undistributed profits from private income. Personal disposable income is personal income less personal taxes and non-tax payments, plus transfer income.
Keynesian Model: Detailed Explanation [2:56:42]
Keynesian economics uses terms like "ex-ante" (expected) and "ex-post" (actual). The consumption function is expressed as C = A + bY, where A is autonomous consumption and b is the marginal propensity to consume (MPC). The sum of the average propensity to consume (APC) and the average propensity to save (APS) equals 1, as does the sum of MPC and the marginal propensity to save (MPS). In a two-sector economy, equilibrium occurs when aggregate demand (AD) equals aggregate supply (AS), or when savings equal investment. Injections (investment, exports) increase national income, while leakages (savings, imports, taxes) reduce it. At equilibrium, injections equal leakages.
The video also explains the concepts of inflationary and deflationary gaps. An inflationary gap occurs when aggregate demand exceeds the economy's capacity at full employment, leading to rising prices. A deflationary gap occurs when aggregate demand is insufficient to achieve full employment, resulting in unemployment and lower output.
Foreign Trade Multiplier [3:40:00]
The video discusses the foreign trade multiplier, which is relevant in a four-sector economy. It also touches on trade balance, which is calculated as exports minus imports.
Conclusion [3:45:00]
The video concludes by encouraging viewers to practice module questions and revisit concepts for better understanding. It emphasizes the importance of hard work and dedication in pursuing their studies.
