(v) Net National Product
In the production process a country uses machines and equipment. When there is depreciation, we have to repair or replace the machinery. The expenses incurred for this are called the depreciation expenditure. Net National Product is calculated by deducting depreciation expense from gross national product.
(vii) NNP = GNP - Depreciation
National Income is calculated by deducting indirect taxes from Net National Product and adding subsidies. National Income (NI) is the NNP at factor cost.
NI = NNP - Indirect Taxes + Subsidies
(viii) Per Capita Income
(ix) Aims of Economic Growth
The following aims can be attributed to the study of economic growth:
(1) When growth is quantified , we can understand whether it is adequate or not for the given goals of the economy.
(2) We can understand its potential and accordingly set targets.
(3) We can adjust growth rates for their sustainability.
(4) We can prevent inflation or deflation to some extent if we see the performance of the economy in quantitative terms.
(5) We can balance the contributions of the three sectors of the economy and steer the direction of growth towards national goals- away from agriculture to manufacturing as in the case of India in recent years.
(6) Target appropriate levels of employment creation and poverty alleviation.
(7) Fore cast tax revenues for governmental objectives.
(8) Corporates can plan their business investments.
(x) Problems for Calculating National Income
The measurement of national income encounters many problems. The problem of double-counting. Though there are some corrective measures, it is difficult to eliminate double-counting altogether. And there are many such problems and the following are some of them.
(1) Black Money
Illegal activities like smuggling and unreported incomes due to tax evasion and corruption are outside the GDP estimates. Thus, parallel economy poses a serious hurdle to accurate GDP estimates. GDP does not take into account the ‘parallel economy’ as the transactions of black money are not registered.
(2) Non-Monetization
In most of the rural economy, considerable portion of transactions Occurs in formally and they are called as non monetized economy- the barter economy. The presence of such non-monetary economy in developing countries keeps the GDP estimates at lower level than the actual.
(3) Growing Service Sector
In recent years, the service sector is growing faster than that of the agricultural and industrial sectors. Many new services like business process outsourcing (BPO) have come up. However, value addition in legal consultancy, health services, financial and business services and the service sector as a whole is not based on accurate reporting and hence underestimated in national in come measures.
(4) Household Services
The national in come accounts do not include the ‘care economy’- domestic work and housekeeping. Most of such valuable work rendered by our women at home does not enter our national accounting.
(5) Social Services
It ignores voluntary and charitable work as it is unpaid.
(6) Environmental Cost
National income estimation does not account for the environmental costs incurred in the production of goods. For example, the land and water degradation accompanying the Green revolution in India. Similarly, the climate change that is caused by the use of fossil fuels. However, in recent years, green GDP is being calculated where the environmental costs are deducted from the GDP value and the Green GDP is arrived at.
GDP deflator
(xi) Business Cycles
Alternating periods of expansion and decline in economic activity is called business cycle. That is, the ups and downs of the economy. There are four stages in the business cycle: expansion, growth, slowdown and recession. Recession may not follow every time. When recession takes place, it may not be of the same intensity every times. For example, the 2008 global financial meltdown is the deepest since the WW2 and is called the Great Recession. If recession deepens, it is called depression and occurred only once in the last century in I930’s . All economies experience economic cycles. Explaining and preventing these fluctuations is one of the main focuses of macroeconomics.
(xii) Benefits and Side Effects of Economic Growth
(1) The first benefit of economic growth is wealth creation. It helps create jobs and increase incomes.
(2) It ensures an increase in the standard of living, even if it is not evenly distributed.
(3) Government has more tax revenues: fiscal dividend. Economic growth boosts tax revenues and provides the government with extra money to finances pending projects. For example, the flagship programmes of the government like the MGNREGA are a direct result of the tax buoyancy of growth It sets up the positive spiral:
(4) rising demand encourages investment in new capital machinery which helps accelerate economic growth and create more employment.
Economic growth can also have a self defeating effect:
(1) violate the principles of fairness and equity thus setting off social conflicts.
(2) Environmental costs are another disadvantage.
(xiii) Measure Of Real Progress FOR GDP
Ans. Economic growth is generally taken as the measure of advancement in the standard of living of the country. Countries with higher GNP often score highly on measures of welfare, such as life expectancy. However, there are limitations to the usefulness of GNP as a measure of welfare:
(1) GDP does not value intangibles like leisure, quality of life etc. Quality of life is determined by many other things than economic goods.
(2) The impact of economic activity on the environment may be harmful pollution, climate change, unsustainable growth, ecological refugees, life style diseases etc.
(3) It only gives average figures that hide stratification. Economic in equality is not revealed by GDP figures Condition of poor is not indicated For example, Indian economy grew at 8.9% in the first half of 2010-2011 but the food inflation was over 14% and on a high base causing immiserization of the lower classes.
(4) Gender disparities are not indicated.
(5) It does not matter how the increase in wealth takes place- whether by civilian demand or war.
(6) GDP does not measure the sustainability of growth. A country may achieve a temporarily high GDP by over-exploiting natural resources.
Advantages
The major advantages to using GDP per capita as an indicator of standard of living are that it is measured frequently, widely and consistently. Frequently in that most countries provide information on GDP on a quarterly basis, which allows a user to spot trends more quickly. Widely in that some measure of GDP is available for practically every country in the world, which allows crude comparisons between the standard of living in different countries. And consistently in that the technical definitions used within GDP are relatively consistent between countries, and so there can be confidence that the same thing is being measured in each country.
Disadvantages
(xiv) Other Measures Used as Alternative to GDP
Some economists have attempted to create a replacements for GDP which attempt to address many of the above criticisms regarding GDP. Other nations such as Bhutan have advocated gross national happiness as a standard of living, claiming itself as the world’s happiest nation.
An alternative measure, focusing on the amount of poverty in a country, is the Human Poverty Index. The Human Poverty Index is an indication of the standard of living in a country, developed by the United Nations.
Indicators used are:
(1) Lifespan
(2) functional literacy skills
Long-term unemployment
(3) Relative poverty (‘poverty with reference to the average per capita income).
(i) Green GDP
(i) Natural Resources Accounting
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