TERM 1- Credits 3 (Core)

Prof Madhu & Prof Rajasulochana

TAPMI, Manipal
Session 3

# Problem
Mangoland is a closed economy where people live only on mango juice. There is only one farm that produces
mango and a single company that manufactures mango juice. In 2010, the mango farm produced 10
mangos and sold them to mango juice company at Rs. 1 each. The mango juice company produced 3 bottles
of mango juice, and sold them all at a unit price of Rs. 10 plus 10% indirect tax collected by the govt. (So the
price paid was actually Rs. 11). The mango farm paid total wages of Rs. 6. The mango juice company paid
total wages of Rs. 10. both companies retained their 50% net profits after depreciation and paid the rest of
it as dividends to the households. After receiving their wage income and their dividends, the households
paid 10% direct tax on their total income to the govt. the govt. bought one mango juice for Rs. 11. The govt.
made no social transfer. Notice that the entities are not paying any direct taxes on their retained profits.
Compute the GDP of mango land using
(1) Income method
(2) Value added method and
(3) Expenditure method.

Solution to Mango land Problem

Income Method
Wages: Rs6 + Rs10 = Rs16
Profits of the farm: 10 6 = Rs4
Profits of the firm: TR Cost of raw
materials wages= 30 10 10 =
Rs10
Dividends: 50% (Rs4 +Rs10) = Rs7
Retained earnings: 50% (Rs4
+Rs10) = Rs. 7
Indirect tax: 10% x 30 = Rs. 3
Total Income = Rs.16 + Rs. 7 + Rs. 7
+ Rs. 3 = Rs. 33

Value Added/Output Method

Mango Farm = Rs1 x 10 = Rs10
Mango Juice firm: Rs10 x 3 + 10%
(30) - Rs10= Rs23
Value added = Rs10 + Rs23 = Rs. 33

Expenditure Method
3 Mango Juice Bottles = Rs10 x 3 +
10% (Rs10 x 3) = Rs. 33

Quick Quiz
The excess of private investment over saving of a country in a
particular year was Rs 2000 crores. The amount of budget deficit
was Rs 1500 crores. What was the volume of trade deficit of that
country?

Quick Quiz
(S-I) = (G-T) + (X-M)
-2000 = -1500 +(X-M)
(X-M) = -500

National Income Accounting: Terms and Concepts

Per Capita GDP

Defined as total GDP divided by mid year population.
It is commonly used as a measure of a countrys standard of
living
Measures of per capita GDP tell us nothing about how GDP is
actually distributed or used

NDP
Net domestic product (NDP) is the sum of consumption
expenditures, government expenditures, net foreign
expenditures, and investment minus depreciation.
Net domestic product is GDP adjusted for depreciation:

GDP = C + I + G + (X - M)
NDP = C + I + G + (X - M) - Depreciation

How is GDP different from GNP?

Difference between GDP and GNP

GDP

GNP

An estimated value of the total

An estimated value of the total
goods and services produced within
goods and services , produced by
its boundary, by its nationals and
citizens of a country, on its land or
foreigners, calculated over the
on foreign land, calculated over the
period of one year.
period of one year.
GDP = C + I + G + (X - M)
GNP = GDP + Net Factor Income
from Abroad (NFIA)

Problem
Question: An American consultant in IBM, Bangalore or profits by IBM,

Bangalore office earned belongs to GNP of ------- but GDP of -----.

a)

India, America

b)

America, India

NNP
Net National product (NNP) is GNP adjusted for depreciation:
NNP = GNP Depreciation

Factor Cost Vs Market Price

Market Price include indirect taxes and excludes subsidy granted
by Government. Hence national income aggregates are adjusted to
reflect the true factor cost.
GNP(FC)=GNP(MP)- (indirect taxes - subsidies)
NNP(FC)=NNP(MP)- (indirect taxes - subsidies)
Note: NNP at factor cost is National Income.

Example: NNP at Factor Cost and Market Price

Suppose we are producing two goods: Seeds and DVDs
100 kg of seed

100 unit of DVD

Total GDP

Original Value (FC)

500

100

600

- Govt. Subsidies

-50

-50

+ VAT

+10

+10

Market price

450

110

560

Other National Income Terms

Personal Income is the sum of all incomes actually received
by all individuals or households during a given year.
Personal income = National income + transfer payments to
Households from govt. and firms(TrH)- Corporate income
taxes(CT) Undistributed corporate profits(UP)- Social
security contributions(SSC)

Disposable personal income is what people have readily available to

spend.
DI = PI - personal taxes

Subcategories of Aggregate Income

NFIA
Depreciation
IT-Subsidies
GDP

GNP

NNP at market
Price

NNP at factor
Price
(NI)

TrH-CT-UP-SSC
Personal Income
(PI)

Personal
Income Tax

Disposable
Income
(DI)

Problem
In a single day Raju, the barber collects Rs. 500 from hair cut. Over
the day his equipments depreciates in value by Rs. 50 of the
remaining of Rs. 450, Raju pays sales tax of Rs. 30, takes home Rs.
200 and retain Rs. 220 for improvement and buying of new
equipments. He further pays Rs. 20 as income tax from his income.
Based on this information. Compute Rajus contribution in the
following measures of income: 1) GDP; 2)NDP at market price; 3)NDP
at factor price; 4)personal disposable income.

Solution
1) GDP (MP) = Rs 500 (Daily earnings)
2) NDP at market price = GDP at Market price Depreciation
= 500 -50 = 450
3)NDP at factor price = NDP at market price Indirect taxes + Subsidies
= 450 -30 =420
4)personal disposable income = NI+ TrH- UP- Direct Taxes
= 420 -220 -20= 180

Alternate way to measure GDP..

GDP in PPP terms

Purchasing Power Parity (PPP) - An economic theory of exchange rate
determination and a way to compare the average costs of goods and
services between countries.

GDP based on purchasing power parity (PPP). PPP GDP is gross

domestic product converted to international dollars using purchasing
power parity rates. An international dollar has the same purchasing
power as the U.S. dollar had in the United States in 2011 (base year).
The unit is often abbreviated as 2011 Int$.

Trends in Indias GDP at FC (Billion Rupees)

2012-13

2009-10

2006-07

2003-04

2000-01

1997-98

1994-95

1991-92

1988-89

1985-86

1982-83

1979-80

1976-77

1973-74

1970-71

1967-68

70000
60000
50000
40000
30000
20000
10000
0

https://www.rbi.org.in/Scripts/AnnualPublications.aspx?head=Handbook of Statistics on Indian Economy

Trends in Indias GDP (US $)

GDP at constant price in USD

2E+12
1.5E+12

1E+12
5E+11

http://data.worldbank.org/country/india?display=graph

2014

2011

2008

2005

2002

1999

1996

1993

1990

1987

1984

1981

1978

1975

1972

1969

1966

1963

1960

GDP trend in PPP terms

GDP, PPP (constant 2011 international $)
8E+12

6E+12
4E+12
0

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

2E+12

Source: World Bank

http://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD

Differences in Per capita ranking ..

Per Capita GDP

GDP (PPP) Per Capita

Check Out Big Mac Index..