La Ruta del Agua, política y estrategia de turismo

A closed economy exists when there is no international trade. We shall also assume that in this particular closed economy there is no government spending or taxation. Here, households have two alternative uses of the income – they can consume it or they can save it. Savings are (S). AD aggregate demand consists of consumption (C) and savings (S). Savings are lost to Y and will reduce the level of Y. However, some (if not all) of S will be used to finance investment (I). I is the creation of real capital goods such as machinery and factories, and adds to Y. If S = I, then Y is in equilibrium.

Macro-economics Analysis

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i.e. income (Y) Rs. 1000

In this economy Y = AD Therefore, Y = C + I In equilibrium S = I

However, if S is greater than I, AD and Y will fall. If I is greater than S, AD and Y will rise.

3. The circular flow of income in an open economy:

An open economy is one in which international trade exists. Assume also that there is government spending and taxation.

Thus, households need not consume all of their income. Some may be saved (S), spent on imports (M), or taxed (T). So the savings (S) and imports (M) and taxes imposed (T) are known as “withdrawals” (W) or “Leakages” from the actual flow. An increase in withdrawals (W) will reduce the level of output and income (Y).

However, Y will be added to investment (I), government spending (G) and money spent by foreigners on exports (X). These are known as “injections” (J).

In an open economy the size of Y is determined by the size of AD, which is determined by C + I + G + X.

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Income (Y) Rs. 1000

Injections (J) Rs 200 Withdrawals (W) Rs 200

Over a period of time there are withdrawals (W) from the income flow. If individuals save, then the income is taken out of the circular flow. If an economy’s income is Rs. 1000 and it saves Rs.200, then only Rs. 800 is passed on as expenditure. Other withdrawals are taxes and imports. The later represents a loss of income from the domestic economy to some overseas economy. Alongside withdrawals there are also injections (J) into the flow of income. These are in the form of investment, government spending and exports, savings withdrawn and used to finance investment, either directly through the purchase of capital goods or indirectly via financial institutions such as Banks. Thus, the original withdrawal or savings ends up as an injection elsewhere in the system. Taxes end up as government spending on goods and services. Exports and financed from spending made by other countries. This spending enters into the circular flow as an injection of income.

In this economy, Y = AD

Therefore, Y = C + I + G + X

= C + J,

Where, J equals injections i.e. I, G and X.

For equilibrium we require all withdrawals to equal all injections i.e. W = J. If injections are greater than withdrawals then the level of national income (i.e. total incomes) will rise and vice versa.

6.4. NATIONAL INCOME AND KEYNESIAN MODEL

The most important aspects that shape the economy is the nation’s capacity to produce goods and services and keep various factors of production employed. The GNP growth rate, the most important indicator of the nation’s income, shows whether the nation’s income is expanding or contracting, and thus, it is the broadest statistical aggregate of our economic output and growth. The estimates of GNP and national income provide the policy makers and business community with the most useful tool for analyzing an economy’s economic performance, both in the short term and long term periods. However, it is crucial to prepare the accurate and reliable estimates of the nation product for purposes of meaningful economic analysis and reliable forecasting.

In simple terms, GNP is the sum of all final goods and services produced during a specified time period usually a year, with each class of goods services measured at its market

value i.e. at price usually paid. If the same is estimated in terms of factor cost i.e. at the sum of all income earned by factors of production (i.e. wages and salary, rents, interest and profits), then the aggregate is GNP at factor cost. In the definition stated above the term ‘final’ is used to avoid the possibility of double counting and to ensure that only the value of final goods and services is counted in GNP. Why? Because of the value of an intermediate class of goods is embodied within the value of final goods and services. The term ‘gross’ refers to the fact that depreciation (or capital consumption) of structures and equipment is not deducted from the value of output. Moreover, the aggregate GNP is a

‘flow’ concept. It is typically measured in terms of an annual rate i.e. over a period of time.

For instance, India’s GDP was Rs 14, 13,200 crore in 1997-98. This means that Rs 14, 13,200 crore worth of final goods and services were produced during 1997-98. Thus GDP is a device designed to measure the market value of production that flows through country’s various industries and shops per year.

When measuring GNP, or any other aggregate of nation product, we are interested in final value of goods and services. In other words, we are only interested in value added in each stage of production process. Value added is difference between the value of goods and services as they leave one stage of production and their cost when they entered that stage. We will consider one example- production of bread- to explain the concept clearly.

As shown in the figure below, there are many stages in production of wheat by the farmer to milling of wheat into the flour, the baking of bread by the baker and its final sale to the customer by the retail shop owner.

Value added in different stages of bread production

Stage:1 Stage:2 Stage:3 Stage:4 Stage:5

Value added value added by value added by value added final value by farmer= by Miller = by baker= by retailer= baked bread=

Rs 0.80 Rs. 1.50 Rs. 1.80 Rs 0.20 Rs. 4.30 As indicated in the diagram given below between one stage and another, value is added to the product in terms of cost incurred at each stage of production. The final value of the bread is the sum total of value added at each stage. If we add up all the prices at each stage, it would be a gross mistake of double counting. This will distort the actual value of the product in a specified period.

Macro-economics Analysis

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Relationship among eight variants of national product

The distinction between national product at market prices and national product at factor cost, based on whether or not net indirect taxes have been included and there is also a distinction between gross or net national product according to which whether investment is inclusive of capital consumption or not. Further, a distinction has been drawn between domestic and national product, according to whether we are measuring net factor income from abroad or whether we are measuring what is produced within the domestic economy.

This implies that there are eight combinations of national product aggregates as shown below.

Gross Domestic Product (GDP) at Market Price (MP) at Factor Cost (FC) Gross National Product (GNP) at Market Price (MP)

at Factor Cost (FC) Net Domestic Product (NDP) at Market Price (MP)

at Factor Cost (FC) Net National Product (NNP) at Market Price(MP)

at Factor Cost (FC)

The way that these national product aggregates are related to each other be understood from the figure given below.

We can sum up the differences between gross and net marketing prices and factor cost and national and domestic concepts in the following way:

Gross = Net + Depreciation

Market Prices = factor cost + [indirect taxes – subsidies]

National = Domestic + Net factor income from abroad.

There are some national product aggregates that are more frequently met with and we have several ways to ordering them. One of these is as follow:

Gross domestic product at market price + net factor income from abroad equals

Gross national product at market price – net indirect taxes (indirect taxes- Subsidies) equals

Gross national product at factor cost – capital consumption (depreciation) equals

Net national product at factor cost, which is popularly known as national Income REAL Vs. NOMINAL GNP

It’s important to distinguish between real and nominal values of macroeconomics aggregates. When comparing data at different points in time, economists often use terms such as real wage, real income or real GNP. The “real” refers to the fact that data have been adjusted for change in level of prices. Thus real GNP is the GNP in current rupees deflated for changes in the prices of the items included in the GNP. In contrast, nominal GNP (or money GNP, as they are often called) is expressed in current rupees. It measures the value of output in given period in the price of that period, or as it is some times put in current rupees. Over a period of time, nominal values reflect changes both in a) the real size of an economics variable and b) the general level of prices. In contrast, real values eliminate the impact changes in the price level. Stated another way, real economic data are adjusted for changes in purchasing power of the rupee.

Perhaps an example will clarify the difference between real and nominal values. In 1998- 99 the nominal GNP in India was Rs 16, 01,065 crore, compared to only Rs. 7, 69,265 crore in 1993-94. Does this mean we produce two times as much output in 1993-94? Not hardly. In 1998-99 the general level of price was higher than the level of prices in 1993-94.

Measured in terms of price level in 1993-94, real GNP in 1998-99 was worth Rs. 10, 71,073.

Nominal GNP will increase either if a) more goods and services are produced or if b) prices rise. Often both a) and b) contribute to an increase in GNP. Since we are really interested in comparing only the output or actual production during two intervals, GNP must be adjusted for the changes in prices.

A price index called GNP deflator is constructed to a price index to reveal the cost of purchasing the items included in GNP during the period relative to the cost of purchasing those same items during a base year (say 1993-94). Since the base year is assigned the value of 100, as the GNP deflator takes on values greater than 100, it indicates that prices have risen. The central statistical organization (CSO) estimates how much of each item included in GNP has been produced during a year. This bundle of goods will include automobiles, houses, office buildings, medical services, bread and all other goods included in GNP, in qualities actually produced during the current year. The agency then calculates the ratios of a) the cost of purchasing this representative bundle of goods at current price divided by b) the cost of purchasing the same bundle at the prices that were present during a designated base year. The base year chosen is given the value 100. The GNP deflator is equal to the calculated ratio multiplied by 100. If prices are, on average, higher during the current period than they were during the base year, the GNP deflator will exceed 100. The relative size of the GNP deflator is measure of the current price level compared to price level during the base year.

Macro-economics Analysis

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Changes in prices and the real GNP

The above table illustrates how real GNP is measured and why it is important to adjust for price changes. Between 1987-88 and 1991-92, nominal GNP increased 83.09%. However, a large portion of this increase in nominal GNP reflected higher prices rather than a larger rate of output. The GNP deflector in 1991-92 was 147.08 compared 100 in 1987-88.

Prices rose by 47.08% between 1987-88 and 1991-92. Determining the real GNP for 1991-92 in terms of 1987-88 prices,

Real GNP (1991-92) =Nominal GNP (1991-92) x [GNP deflator (1987-88)] / [GNP deflator (1991-92)].

Because prices were rising, the letter ratio is less than one. In terms of 1987-88 prices, the GNP in 1991-92 was Rs. 3, 63,785 crore, only 24.49% more than in 1987-88. So, although money GNP expanded by 83.09%, real GNP increased by only 24.49%.

A change in nominal GNP tell us nothing about what is happening to rate of real production unless we also know what is happening to prices. Money income could double while production actually declines, if prices more than double. On the other hand, money income could remain constant while real GNP increases, if prices fall during a time period. Data on money GNP and price changes are both essential for a meaningful duration a time period. Data on money GNP and price changes are both essential for a meaningful comparison of real income between two time periods. So we look at real rather than nominal GNP as basic measure for comparing output in different years.

The measurement of national income: output, expenditure and income methods of measurement

There are three methods of calculating national income, and they are all conceptually equivalent to each other. These are: the output method, the income method and the expenditure method. These three measures give rise to several different ways of describing the various macro-aggregates employed in compiling the national accounts and these are described and illustrated in tables.

1. The output method: The output method is followed either by valuing all final good