MANAGERIAL ECONOMICS UNIT V

Macro- Economic aggregates and concepts

FISCAL POLICY

In economics, fiscal policy is the use of government expenditure and revenue collection to influence the economy.

Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the money supply.

The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy:

Aggregate demand and the level of economic activity; The pattern of resource allocation; The distribution of income. Fiscal policy refers to the use of the government budget to influence the first of these: economic activity.

MONETARY POLICY

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest to attain a set of objectives oriented towards the growth and stability of the economy. These goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy.

Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy rapidly, and a contractionary policy decreases the total money supply, or increases it slowly.
Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates to combat inflation. Monetary policy is contrasted with fiscal policy, which refers to government borrowing, spending and taxation

NATIONAL INCOME

National Income is the total value of goods and services produced annually in a country. According to National Income Committee a national income estimate measures the volume of commodities and services turned out during a given period, counted without duplication. National Income is calculated by Central Statistical Organisation (CSO), established in 1956.

National Income at Constant Prices (with reference to some base year in past) is also known as Real National Income. It eliminates the effect of rising prices.
National Income at current prices goods and services are valued at prices prevailing in the current year for which National Income is calculated. Base year is taken as 1999-2000 (from 2005-06). Earlier the base year was 1993-94.

GROSS DOMESTIC PRODUCT (GDP)

It is the money value of all the final goods and services produced within the geographical boundary of a country in a year. The money value is calculated at the market price. GDP at market price (nominal GDP) means the money value of all the final goods and services produced in the geographical area of a country during a given period time measured at the ruling prices.

GDPMP = GDPFC Subsidies + Indirect Taxes

GDPFC = GDPMP Indirect Taxes + Subsidies, or GDPFC = GDPMP Net direct taxes (Net direct taxes = Indirect taxes paid subsidies received)

Real GDP - GDP evaluated at a set of constant prices.

GDP Deflator Ratio of nominal to real GDP.

NET DOMESTIC PRODUCT (NDP)

NDP = GDP DEPRECIATION (Consumption of fixed capital) Aggregate value of goods and services produced within the domestic territory of a country which does not include the depreciation of capital stock. It is estimated as the ruling price of all such goods and services minus consumption of fixed capital.

GROSS NATIONAL PRODUCT (GNP)

GNP = GDP + (X M) X = Profit earned by an Indian outside India M = Profit earned by a foreigner in India

NET NATIONAL PRODUCT (NNP) AT MARKET PRICE

NNPMP = GNPMP DEPRECIATION

Depreciation occurs due to maintenance and technological obsolescence.

In India, GDP is calculated on the basis of factor cost of NNP. Price of a product on the basis of production is known as factor price.

Market Price = Factor price + Tax

Market Price = Factor cost + (Indirect taxes Subsidy). Market price is always more than Factor price.

NET NATIONAL PRODUCT (NNP) AT FACTOR COST

When NNP is measured at factor cost, it is known as National Income. NNPFC = NNPMP Indirect taxes + Subsidies

National Income = NNP at market price Net Indirect Taxes (i.e. total indirect tax subsidy)

MEASUREMENT OF NATIONAL INCOME

Value Added Method (Product Method) Calculating the net value of the final goods and services produced in an economy during a year. It includes (a) consumer goods, (b) gross domestic private investment, (c) production in government sector, (d) net exports (exports imports). Primary sectors (agriculture, forestry, fishing, mining & quarrying) use this method. Income Method The sum total of net incomes earned by working people in different sectors and commercial enterprises.

 National

Income = Total Rent + Total Interest + Total Wages + Total Profit.

In India the method of estimation adopted is a combination of product method and income method. Tertiary sector or service sector (banking, insurance, transport, communication & trade, finance & real estate, etc.) use this method.

Expenditure

Method (Consumption Method) = total consumption + total savings. Secondary sectors (manufacturing, construction, electricity, gas & water supply) use this method.

IMPORTANT POINTS TO REMEMBER

In any developing country GDP is always more than the GNP.

In any developed country GNP is always more than the GDP.

In India GDP is always greater than GNP. National disposable income = Net National Product at market prices + Other Current Transfers from the rest of the World. Gross = Net + Depreciation. National = Domestic + Net factor income from abroad.

Private Income = Factor income from net domestic product accruing to the private sector + National debt interest + Net factor income from abroad + Current transfers from government + Other net transfers from the rest of the world. Per Capita Income = net national product / population.

Purchasing Power Parity Introduced by International Comparison Program of United Nations. PPP Index is constructed by taking into account what a unit of currency can purchase in its own country as compared to what a dollar can purchase in the United States of a certain representative internationally traded goods or services.

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