- Human life depends on the uses (consumption ) of certain things (goods and services) some of which, up to a level, are also essential (such as food, water, shelter, cloth, etc.) for survival.
This challenge has two dimensions of it:
(i) These things need to be created (produced)
(ii) They should reach (distributed/supplied to) the needy people.
- For production, one needs to set up productive assets for which money needs to be spent (known as investment).
- Economy mainly is of four types:
- It is a set of reform policy package which was suggested by the International Monetary Fund, World Bank, and the US Department of the Treasury (i.e., the US finance ministry ) to the developing countries faced with the economic crisis.
- Since all of these institutions were based in Washington, the policy prescription was called Washington Consensus by the US economist John Williamson.
- The idea of Beijing Consensus was forwarded by Joshua Cooper Remo in 2004.
- Also known as Chinese Model of economic development, this refers to the policies which were followed by Deng Xiaoping since 1976 (the year Mao Zedong died).
- This model is believed to be forwarded as an alternative to the Washington Consensus (i.e., an anti-Washington Consensus view ) for the developing countries.
- Over the time experts interpreted this model in different ways rather it is believed to be based on three main pillars:
- The core idea is inclusion which should not be only economic but social too. This way, this is a socio-economic development model and is bound to have its local characteristics.
- This proposal from the World Bank inspired the world governments to focus more on the aspect of inclusive socio-economic growth. We see this happening in India also with the Government launching the third generation of economic reforms in 2002.
The national income of a country can be defined as the total market value of goods and services produced in the economy in a year.
The three important measure of calculating the National Income of a country are:
(i) The sum of the value of all final goods and services produced.
(ii) The sum of all incomes accruing to factors of production, i.e., Rent, Interest, Profit, and Wages.
(iii) The sum of consumer's expenditure, net investment, and government expenditure on goods and services.
- Gross Domestic Product (GDP) is the value of all final goods and services produced within the boundary of a nation during one year period.
- It is also calculated by adding national private consumption, gross investment, government spending, and trade balance (exports-minus-imports).
- The use of the exports-minus-imports factor removes expenditures on imports not produced in the nation and adds expenditures of goods and service produced which are exported but not sold within the country.
- Net Domestic Product (NDP) is the GDP calculated after adjusting the weight of the value of 'depreciation'. This is, basically, the net form of the GDP, i.e., GDP minus the total value of the 'wear and tear' (depreciation) that happened in the assets while the goods and services were being produced. Every asset go for depreciation in the process of their uses, which means they 'wear and tear'.
- The governments of the economies decide and announce the rates by which assets depreciate and a list is published, which is used by different sections of the economy to determine the real levels of depreciation in different assets.
NDP = GDP - Depreciation
Gross National Product (GNP) is the GDP of a country added with its 'income from abroad'. Here, the trans-boundary economic activities of an economy are also taken into account.
The items which are counted in the segment 'Income from Abroad' are:
(i) Private Remittances
(ii) Interest on External Loans
(iii) External Grants
Net National Product (NNP) of an economy is the GNP after deducting the loss due to 'depreciation'. The formula to derive it may be written like :
(i) NNP = GNP - Depreciation
(ii) NNP = GDP + Income from Abroad - Depreciation
5. Cost And Price of National Income
- Cost: Income of an economy, i.e., the value of its total produced goods and services may be calculated at either the 'factor cost' or the 'market cost', factor cost' is the 'input cost' the producer has to incur in the process of producing something (such as cost of capital, i.e., interest on loans, raw materials, labour, rent, power, etc.). This is also termed as 'factory price' or 'production cost/price'.
- Price: Income can be derived at two prices, constant and current. The difference in the constant and current prices is only that of the impact of inflation. Inflation is considered standstill at a year of the past in the case of the constant price, while in the current price, present day inflation is added. Current price is, basically, the maximum retail price (MRP) which we see printed on the goods selling in the market.