➢ Circular flow of income

➢ Stock and Flow

➢ Types of circular flow
➢ Circular flow in two-sector economy
➢ Domestic Territory
➢ Normal Residents
➢ Factor Income and Transfer Income
➢ Final goods and Intermediate goods
➢ Consumption goods and Capital goods
➢ Gross/Net Investment and Depreciation
➢ NIT / NFIA
➢ Basic Aggregates – With Examples
➢ Value Added Method – With Example
➢ Income Method – With Example
➢ Expenditure Method – With Example
➢ Nominal GDP and Real GDP
➢ GDP and Welfare
➢ Treatment of various items in NNPfc
 MEANING

It refers to cycle of generation of

income in the production process

Its distribution among the factors of

production

Its circulation from household to

firms in the form of consumption
expenditure on goods and services
produced by them
PHASES OF CIRCULAR FLOW Generation Phase
(Production)
OF INCOME
In this phase, firms
produce goods and
services with the help
of factor services

Distribution Phase
(Income)
Flow of factor income
from firms to the
household

Disposition Phase
(Expenditure)
The income received by
factors of production, is
spent on goods and
services produced by
firms
 DIFFERENCE BETWEEN STOCK AND FLOW

BASIS STOCK FLOW

Stock variable refers to that variable, Flow variable refers to that variable,
Meaning which is measured at a particular which is measured over a period of
point of time time
It has a time dimension as its
Time
It does not have a time dimension magnitude can be measured over a
Dimension
period of time
Nature of
It is a static concept It is a dynamic concept
concept
National wealth, Quantity of wheat National income, Quantity of wheat
Examples stored, Money supply, Population of produced, Expenditure in money,
India on 31.03.17 Number of birth during 2017
TYPES OF CIRCULAR FLOW – REAL FLOW

✓ Real flow refers to the flow of factors

services from household to firms and the

corresponding flow of goods and services

from firms to household

✓ It is also known as PHYSICAL FLOW

✓ There is only exchange of goods and

services between the two sectors without

involvement of any money

TYPES OF CIRCULAR FLOW – MONEY FLOW

Money Flow refers to flow of factor

payments from firms to household for

their factor services and flow of

consumption expenditure from

households to firms for purchase of

goods and services produced by the firm.

It is also known as NOMINAL FLOW

CIRCULAR FLOW - TWO SECTOR ECONOMY

✓ There are 2 sectors in the

economy – Household and Firms.
✓ Household sector supplies factor
services only to firms.
✓ Firms produce goods and services
and sell that to household.
✓ Household receive factor income
for their services and spend the
entire amount on consumption of
goods and services.
DOMESTIC TERRITORY / ECONOMIC TERRITORY

Domestic territory is the geographical

territory administered by a MEANING
government within which persons,
goods and capital circulates freely

Political boundaries, the territorial

INCLUDED IN water, aeroplanes and ships operated
DOMESTIC TERRITORY by a resident across different parts of
the word and its embassies

Foreign Embassies located within India

are not treated as a part of economic NOT INCLUDED
territory of India. They are treated as a IN DT
part of the economic territories of
their respective countries
 Production
DOMESTIC TERRITORY - EXAMPLES
Activity
Income not included in
Income included in Domestic
Domestic Product (Domestic
Product (Domestic Income)
Income)

Where? Profit earned by foreign Profit earned by an Indian

company in India company of USA

Profit earned by branch of Profit earned by branch of

foreign bank in India SBI in London
Inside the Outside the Salaries to the residents of Salaries of Indian residents
Domestic Domestic England working in Indian working in the Pakistan
Territory Territory embassy in England embassy in India
Rent paid by the embassy of
Profit earned by Reliance
England in India to an Indian
industries in India
resident
Not
Included in Rent received by Indian
Included in Rent received by an Indian
Domestic residents for their buildings
Domestic from his building in Singapore
Product rent out to foreigners in India
Product
 NORMAL RESIDENTS - CONCEPT

A resident whether a person or an

Resident of a country ordinarily
institution is one whose centre of
includes individuals, business units,
economic interest lies in the
government and their agencies.
economic territory of the country.

THE CENTRE OF ECONOMIC INTEREST IMPLIES TWO THINGS

➢ The resident lives or located within the domestic territory for one year.
➢ The residents carry out the basic economic activities of earning, spending or
accumulation from the location.
 NOT INCLUDED IN NORMAL RESIDENTS

Foreign tourists and visitors who visit a country for recreation,

holidays, medical treatment, study etc. 1

2 Foreign staff of Embassies, officials, diplomats and members of

the armed forces of a foreign country

International organisations like UNO, WHO, etc. are not considered

as normal residents of the country in which they operate. 3

4
Crew members of foreign vessels, commercial travelers and
seasonal workers, provided they stay less than one year.
 NORMAL RESIDENT - EXAMPLES
Production
Activity
Income not included in
Income included in National
National Product (National
Product (National Income)
Income)

Profit earned by an Indian Profit earned by a foreign

By Whom? company in USA company in India

Profit earned by branch of Profit earned by branch of

SBI in London foreign bank in India
Normal Non- Salaries to Indian residents Salaries to the residents of
Resident of Resident of working in the Pakistan England working in Indian
the country the country embassy in India embassy in England
Rent paid by the embassy of
Profit earned by a MNC of
Russia in India to an Indian
USA in India
Not resident
Included in
Included in
National Rent received by an Indian Rent received by a foreigner
National
Product from his building in Singapore from his building in India
Product
 CITIZENSHIP RESIDENTSHIP

➢ It is a legal concept based on the ➢ It is an economic concept based

place of birth of a person on the basic economic activities
➢ When a person is born in India, performed by a person.
he acquires automatic ➢ An individual is a normal resident
citizenship of India of a country if he ordinarily
➢ A person born outside India resides in the country for a
applies for citizenship and Indian period more than one year and
law allows him to become Indian economic interest also lies in
Citizen that country.
 BASIC CONCEPTS - FACTOR INCOME

Factor income refers to income

It is received for providing factors
received by factors of production
services of land, labour, capital and
for rendering factor services in the
enterprise.
production process.

Wages Interest
Factor income of normal resident
of a country is included in the
Rent Profit National Income
 BASIC CONCEPTS – TRANSFER INCOME

Transfer income refers to It is unilateral (one – sided)

income received without concept. It can be received either
rendering any productive within the domestic territory of a
service in return. country or from abroad

Old age pension Scholarship It is not included in National

Income as it does not reflect any

Unemployment production of goods and

Pocket Money
allowance services.
 BASIC CONCEPTS – FINAL GOODS WITH EXAMPLES

Machine Furniture
purchased by a purchased by a
If goods are purchased for final
firm is a final good school is a final
consumption that is for satisfaction of because it is product because
purchased for it is purchased
wants, or final investment, these are final investment. for investment.

called final goods. They have crossed

Milk purchased by Coal used by
the boundary line of production. No house hold is a household is a
final good final good
value will be added to it. National income because it is because it is
purchased for used for final
includes the value of final goods only. final consumption consumption
 BASIC CONCEPTS – INTERMEDIATE GOODS

Goods and services purchased by a

Intermediate goods are also called
production unit from other production
‘Single Use Producer goods’ Thus raw
units with the purpose of resale or
material or inputs purchased for
with the purpose of using them
producing goods are intermediate
completely during the same year are
goods.
called intermediate goods.

The value of intermediate goods is NOT INCLUDED IN NATIONAL INCOME because it is

already included in the value of final goods.
 EXAMPLES OF INTERMEDIATE GOODS

Chalk, duster etc purchased by a Mobile sets purchased by a mobile

1 school are intermediate products

because these are used up completely
2 dealer
because
are
these
intermediate
are
products
purchased for
during the same year. resale.

Fertilisers used by the farmers are Coal used by manufacturing firm is

3 intermediate products because these

are used up completely for producing
4 intermediate product because coal is
used for further production during the
grains during the same year. same year.
CONSUMPTION GOODS AND ITS CATEGORIES

Consumption goods are those goods that satisfy the wants of

consumers directly. For example: Television, mobile phones etc.

It refers to those goods which

can be used again and again
DURABLE
over a considerable period of
GOODS
time. Ex – Television
refrigerators etc.

Goods which can be used for a

limited period of time are
SEMI-DURABLE
termed as semi-durable
GOODS
goods. Ex – Clothes, crockery,
shoes, etc.
CONSUMPTION GOODS AND ITS CATEGORIES

Goods which are used up in a

single act of consumption are
NON-DURABLE
known as non-durable goods.
GOODS
Ex – Milk, bread, food grains,
paper etc.

Services refer to non-material

goods which directly satisfy
SERVICES the human wants. Neither
seen or touched. Ex – services
of teacher, doctor etc.
 These are also called durable use
CAPITAL GOODS
producer goods having a long span
of life . These are purchased by
business enterprises such as
machine makes production of
other goods. These are used for
The final goods of durable nature addition to their capital stock.
which are used in the production
of other goods and services are
called capital goods or investment
goods. Ex:- machines, tools,
equipment's.
ALL PRODUCER GOODS ARE NOT CAPITAL HOW TO CLASSIFY GOODS AS: CONSUMER
GOODS GOODS AND CAPITAL GOODS

SINGLE – USE PRODUCER GOODS The good can be consumption good and
also capital good. It depends on the
It includes raw material like coal, wood, etc.
economic nature of its use.
They are not capital goods as they cannot
be repeatedly used in production process.
Machine purchased by a household is a
consumption good whereas , if purchased
CAPITAL GOODS by a firm for use in business, then it is
It includes fixed assets like plant and capital good.
machinery, which can be repeatedly used in
the production process. Car purchased by household is
Consumption good, if purchased by a firm
All capital goods are producer goods, but all
producer goods are not capital goods. for use in business, then it is Capital Good.
 CONCEPT OF DEPRECIATION – WITH EXAMPLE

Depreciation refers to the fall in the value of fixed assets due to normal wear
and tear and expected obsolescence

Depreciation also known as Consumption of fixed capital and Replacement

Investment

Ex - Suppose a machinery is purchased for Rs.2,00,000 whose expected life is

10 years. Therefore Depreciation is (2,00,000/10)=Rs.20,000.
 INVESTMENT – FIXED AND INVENTORY INVESTMENT

➢ INVESTMENT is defined as addition to the stock of capital such as buildings,

equipment and inventory that adds to the future productive capacity of the economy.
➢ It is expenditure on the purchase of fixed assets and unsold during an accounting year.
➢ Investment is also called CAPITAL FORMATION.

Fixed investment refers to an Inventory Investment refers to

increase in the stock of fixed Inventory change in stock of finished
assets of the producers Investment goods, semi finished goods
during a year. Expenditure on and raw material during an
purchase of capital goods like Fixed accounting year. It is also
plants, machines, building etc. Investment called CHANGE IN STOCK
Fixed investment is also called (CLOSING STOCK – OPENING
FIXED CAPITAL FORMATION STOCK).
 GROSS INVESTMENT

Gross investment is the total addition made to the capital stock of an economy in a
given period.

Capital stock consists of fixed assets and unsold stock. Gross investment includes
depreciation

Fixed assets are used for several years, when they become obsolete, they need to be
replaced

Replacement of fixed asset due to normal wear and tear is a part of Gross Investment.
But it does not lead to increase in existing stock of capital.
 NET INVESTMENT

NET INVESTMENT means net addition to the stock of capital during a year.

NET INVESTMENT = Gross Investment - Depreciation

It is NET INVESTMENT which raises the level of capital stock of the economy.
 NET INDIRECT TAX (NIT)

Net indirect tax refers to the difference between indirect taxes and subsidies

NET INDIRECT TAX = INDIRECT TAXES - SUBSIDIES

INDIRECT TAXES – Refers to those taxes which are imposed by the

government on production and sale of goods and services. Ex - GST

SUBSIDIES – Refers to the economic assistance given by government to the

firms and household with a motive of general welfare.
 NET INDIRECT TAX (NIT) Cont.

FACTOR COST refers to the

amount paid to factors of MARKET PRICE

(-) Net Indirect Taxes

(+) Net Indirect Taxes
production for their contribution
in production process
NET INDIRECT TAX =
INDIRECT TAXES -
SUBSIDIES

MARKET PRICE refers to the

price at which product is actually
sold in the market. FACTOR COST
 NET FACTOR INCOME FROM ABROAD (NFIA)

NFIA refers to the difference between factor income received from

the rest of the world and factor income paid to the rest of the world.

NFIA = FACTOR INCOME EARNED FROM ABROAD – FACTOR INCOME PAID ABROAD

FACTOR INCOME FROM FACTOR INCOME TO NATIONAL

(-) NFIA
ABROAD ABROAD

(+) NFIA
It is the income earned by It is the factor income
the normal resident from paid to normal resident
rest of the world in form of other country (non-
of wages and salaries, resident) for their factor
rent, interest, dividend services within the
DOMESTIC
and retained earnings economic territory
COMPONENTS OF NET FACTOR INCOME FROM ABROAD
NET INCOME FROM PROPERTY AND
NET COMPENSATION TO EMPLOYEES ENTREPRENEURSHIP
Wages earned by Indian residents Rent, interest and dividend earned by
outside India - Wages earned by Indian residents abroad - Rent,
foreign residents in India interest and dividend earned by
foreign residents in India

NET RETAINED EARNINGS

Retained Earnings of Indian companies
located abroad – Retained earnings of
foreign companies located in India

NFIA IS POSITIVE = Income earned from abroad > Income paid to abroad
NFIA IS NEGATIVE = Income earned from abroad < Income paid to abroad
NFIA IS ZERO = Income earned from abroad = Income paid to abroad
 National Income is the sum total of factor
income (Rent, Wages, Interest, Profit)
earned by normal residents of a country
during a period of one year.

MEANING OF NATIONAL INCOME

And
Sum total of market value of all final goods
and services produced by normal resident

Related Aggregates
of a country during a period of one year.
 GROSS DOMESTIC PRODUCT AT
MARKET PRICE (GDP MP)

It refers to gross market value of all final goods and

services produced within the domestic territory of
a country during a period of one year.

GROSS in GDP MP signifies that no provision has

been made for depreciation, it includes depreciation.

GROSS in GDP MP signifies that no provision has

been made for depreciation, it includes depreciation.

DOMESTIC signifies that it includes goods and

services produced by all units located within the
domestic territory.

MARKET PRICE signifies that NIT has been included

 ( - ) D epreciation
MARKET PRICE GROSS

(-) Net Indirect Taxes

(+) Net Indirect Taxes

(+) D e p r e c i a t i o n
NET INDIRECT TAX = DOMESTIC
INDIRECT TAXES -
CONCEPTS
SUBSIDIES

FACTOR COST NET

GROSS DOMESTIC PRODUCT AT NET DOMESTIC PRODUCT AT

FACTOR COST (GDP FC) MARKET PRICE (NDP MP)
GDP FC = GDP MP - NIT NDP MP = GDP MP - DEPRECIATION

NET DOMESTIC PRODUCT AT FACTOR COST (NDP FC)

NDP FC = GDP MP – NIT - DEP
 MARKET PRICE GROSS NATIONAL

(-) Deprec i at i o n
(-) Net Indirect Taxes
(+) Net Indirect Taxes

(+) D e p r e c i a t i o n

(-) NFIA
(+) NFIA
NET INDIRECT TAX =
INDIRECT TAXES -
SUBSIDIES

FACTOR COST NET DOMESTIC

GROSS NATIONAL PRODUCT AT GROSS NATIONAL PRODUCT AT

MARKET PRICE (GNP MP) FACTOR COST (GNP FC)
GNP MP = GDP MP + NFIA NATIONAL GNP FC = GNP MP - NIT

CONCEPTS
NET NATIONAL PRODUCT AT NET NATIONAL PRODUCT AT
MARKET PRICE (NNP MP) FACTOR COST (NNP FC)
NNP MP = GNP MP - DEP NNP FC = GNP MP – NIT - DEP
 GDP at MP

NDP at MP Relationship Between

GDP at FC Domestic Concepts

NDP at FC

GNP at MP

Relationship Between
National Concepts NNP at MP GNP at FC

NNP at FC
 DOMESTIC
INCOME (NDP FC)
V/S
NATIONAL
INCOME (NNP FC)
 DOMESTIC INCOME (NDPFC) V/S NATIONAL INCOME (NNP FC)

BASIS DOMESTIC INCOME NATIONAL INCOME

It is a territorial concept as it It is a national concept as it

Nature of includes the value of final goods and includes the value of final goods
concept services produced within domestic and services produced in the
territory of a country entire world

Category of It considers all producers within the It considers all producers who are
Producers domestic territory of the country normal residents of the country

NFIA It does not include NFIA It includes NFIA

 SOLVED PRACTICAL -1

Calculate Domestic Income or NDP at FC

S.NO Particulars Rs in Crores
1 GNP at MP 6,000
2 Subsidies 200
3 Depreciation 100
4 Net factor income from abroad 400
5 Indirect tax 300

NDP at FC = GNP at MP – Depreciation – NFIA – (Indirect tax – Subsidies)

= 6,000 – 100 – 400 – (300 – 200)
= Rs 5,400 Crores (NDP at FC)
 SOLVED PRACTICAL - 2

Calculate GNP at FC
S.NO Particulars Rs in Crores
1 NDP at MP 25,000
2 Depreciation 5,000
3 Subsidies
29
30
4 Factor income from abroad 400
5 Factor income to the rest of the world 600

GNP at FC = NDP at MP + Depreciation + (Factor income from abroad –

Factor income to rest of the world) + Subsidies
= 25,000 + 5,000 + (400 – 600) + 30
= Rs 29,830 Crores (GNP at FC)
 SOLVED PRACTICAL - 3

Calculate National Income or NNP at FC

S.NO Particulars Rs in Crores
1 GDP MP 5,500
2 Consumption of Fixed Capital 300
3 Goods and Services Tax 120
4 Factor income from abroad 150
5 Subsidies 70
6 Factor income to abroad 250

NNP at FC = GDP MP – Consumption of Fixed Capital + (Fixed income from

abroad – Factor income to abroad) – (Goods and Services Tax – Subsidies)
= 5,500 – 300 + (150 – 250) – (120 – 70)
= Rs 5,050 Crores (NNP at FC)
 SOLVED PRACTICAL - 4
Calculate Factor Income to Abroad
S.NO Particulars Rs in Crores
1 GNP at MP 4,500
2 Replacement of Fixed Capital 100
3 Indirect Taxes 300
4 Subsidies 200
5 Factor Income from abroad 700
6 NDP at FC 3,900

Factor Income to Abroad

= NDP at FC + Replacement of Fixed Capital + (Factor income from abroad
– Factor income to abroad) + (Indirect Taxes – Subsidies) – GNP at MP
= 3,900 + 100 +700 (300 – 200) – 4,500
= Rs 300 Crores (Factor Income to Abroad)
 SOLVED PRACTICAL - 5

Calculate Subsidies
S.NO Particulars Rs in Crores
1 GNP at FC 27,710
2 Consumption of Fixed Capital 4,000
3 Indirect Taxes 120
4 Factor Income from abroad 400
5 NDP at MP 24,000
6 Factor Income to abroad 600

Subsidies = GNP at FC – Consumption of Fixed Capital – Factor income

from abroad – Factor income to abroad) + Indirect Taxes NDP at MP
= 27,700 – 4,000 – (400 – 600) + 120 – 24,000
= Rs 30 Crores (Subsidies)
 SOLVED PRACTICAL - 6

Calculate Net Indirect Tax

S.NO Particulars Rs in Crores
1 GNP at MP 7,000
2 Domestic Income or NDP at FC 6,200
3 Depreciation
29
600
4 Net Factor Income from Abroad (-) 400

Net Indirect Tax = GNP at MP – Depreciation – Net Factor Income from

abroad – NDP at FC
= 7,000 – 600 – (-) 400 – 6,200
= Rs 600 Crores (Net Indirect Tax)
 SOLVED PRACTICAL - 7

Calculate Consumption of Fixed Capital

S.NO Particulars Rs in Crores
1 National Income or NNP at FC 4,000
2 GDP at MP 5,000
3 Net Indirect
abroad Tax 300
4 Net Factor income from abroad 200

Consumption of Fixed Capital

= GDP at MP – Net Indirect Tax + Net Factor from abroad – NNP at FC
5,000 - 300 + 200 – 4,000
= Rs 900 Crores (Consumption of Fixed Capital)
 UNSOLVED PRACTICAL - 1

Calculate GNP at MP, NDP at FC and NNP at FC

S.NO Particulars Rs in Crores
1 GDP MP 5,500
2 Depreciation 75
3 Indirect Taxes 250
4 Subsidies 120
5 Net factor income from abroad 400

ANSWERS - GNP MP = Rs 5,900 Crores, NDP FC = Rs 5295 Crores,

NNP FC = Rs 5695 Crores
 UNSOLVED PRACTICAL - 2

Given the following data, calculate - GNP MP,

NNP MP, NDP MP, NDP FC
S.NO Particulars Rs in Crores
1 GNP FC 6,200
2 Consumption of fixed capital 160
3 Sales tax 105
4 Net factor income to abroad (-) 100
5 Excise duties 75
6 Subsidies 140

ANSWERS - GNP MP = Rs 6,240 Crores, NNP MP = Rs 6,080 Crores,

NDP MP = Rs 5,980 Crores, NDP FC = Rs 5,940 Crores
 UNSOLVED PRACTICAL - 3

Calculate Net Factor Income to Abroad

S.NO Particulars Rs in Crores

1 GDP MP 2020
2 Indirect taxes 35
3 Subsidies 25
4 National Income 1985
5 Consumption of fixed capital 45

ANSWER – Net Factor Income to Abroad = Rs (-) 20 Crores

 UNSOLVED PRACTICAL - 4

Calculate Indirect Taxes

S.NO Particulars Rs in Crores
1 Depreciation 100
2 Net factor income from abroad (-) 20
3 GDP MP 1000
4 Subsidies 20
5 NNP FC 870

ANSWER – Indirect Taxes = Rs 30 Crores

 UNSOLVED PRACTICAL - 5

Calculate Consumption of Fixed Capital

S.NO Particulars Rs in Crores

1 NNP MP 1080
2 Indirect Taxes 35
3 Net factor income from abroad (-) 60
4 Subsidies 25
5 GDP FC 1280

ANSWERS – Consumption of fixed capital = Rs 150 Crores

 UNSOLVED PRACTICAL - 6

Calculate – National Income and Factor Income from Abroad

S.NO Particulars Rs in Crores

1 Domestic Income 9450
2 Consumption of fixed capital 400
3 GNP MP 10000
4 Subsidies 250
5 Indirect Taxes 500
6 Factor income to abroad 500

ANSWER – Factor Income from Abroad = Rs 400 Crores and

National Income = Rs 9350 Crores
 M E A S U R E M E N T O F N AT I O N A L I N C O M E
Value Added Method
Income Method
Expenditure Method

All the three methods give same value of National Income because they are used to
measure same physical output at three different phases. In India, the task of estimating
national income is entrusted with CENTRAL STATISTICAL ORGANISATION (CSO).
 VALUE ADDED METHOD / PRODUCT METHOD / INVENTORY
METHOD / NET OUTPUT METHOD

Value added method is the method which measures domestic income by estimating the
contribution of each producing enterprise in the domestic territory of the country in an
accounting year.

CONCEPT OF VALUE OF OUTPUT

VALUE OF OUTPUT = SALES (Q X P) +
Value of output refers to market value of
CHANGE IN STOCK (Closing stock –
all goods and services produced during a
period of one year Opening stock)

1. Sales = Rs 2000, Exports = Rs 400 TREATMENT OF EXPORTS

Answer - Value of Output = 2000 Exports are not separately included if
2. Domestic Sales = Rs 700, Exports = Rs 200 sales are given, and domestic sales are
Answer – Value of Output = 700 + 200 = 900 not specifically mentioned.
 VALUE ADDED METHOD Cont.

CONCEPT OF VALUE ADDED

Value added refers to the addition of value of the raw material (Intermediate goods) by a
firm, by virtue of its production activity

VALUE ADDED = Value of Output – Intermediate Consumption

Suppose a baker needs only flour ✓ Flour is intermediate consumption = Rs 500

to produce bread. He purchases ✓ Bread is the output = Rs 700 (Value of output)
flour as inputs worth Rs 500 from ✓ Value of output – Intermediate consumption =
the miller and then by its virtue of Value Added (Rs 700 – Rs 500 = 200)
its production activities, converts ✓ Value added by each producing enterprise is
the flour into bread and sells the GROSS VALUE-ADDED AT MARKET PRICE
bread for Rs 700. ✓ Sum total of GVA MP = GDP MP
 VALUE ADDED METHOD Cont.

INTERMEDIATE CONSUMPTION
Intermediate consumption refers to the expenditure incurred by a production unit on
purchasing those goods and services from other production units, which are meant for resale
or for using up completely during the same year.

CALCULATION OF INTERMEDIATE
INTERMEDIATE CONSUMPTION CONSUMPTION
if value of intermediate consumption 1. Intermediate consumption / Purchase of
is given, then imports are not included Raw material = Rs 1200, Imports = Rs 300
separately. If domestic purchases are Answers = Rs 1200 (IC)
mentioned, then imports will be 2. Purchase of raw material from domestic
included. firm = Rs 500, Imports = Rs 100
Answers = Rs 500 + Rs 100 = Rs 600 (IC)
VALUE ADDED METHOD cont. STEPS

GVA MP of Primary Sector Identify and classify the production units into
(+) GVA MP of Secondary Sector
primary, secondary and tertiary sector
(+) GVA MP of Tertiary sector

Gross Domestic Product at Market Price

Estimate Gross Domestic Product at Market Price
(GDP MP)

(-) Depreciation
(-) Net Indirect Taxes
Adjustment for Depreciation and Net Indirect
Taxes and calculate Domestic Income (NDP FC)
Domestic Income (NDP FC)

Estimate Net factor income from abroad (NFIA) to

(+) NFIA = NATIONAL INCOME (NNP FC)
arrive at National Income
VALUE ADDED METHOD - PROBLEM OF DOUBLE COUNTING

CONCEPT OF DOUBLE COUNTING

In measuring the National Income, the
value of only final goods and services
is to be included.

It refers to counting of an output more

than once while passing through
✓ Wheat is final product for farmer, flour for miller
various stages of production.
and bread for baker
✓ Every producer treats his commodity as final
The problem of double counting
output
arises when value of intermediate ✓ Total value of output = 500 + 700 +100 = 2,200
goods is also included along with ✓ As a result the value of wheat and flour are
value of final goods counted more than once. This cause the problem
of double counting.
 HOW TO AVOID DOUBLE COUNTING ?

TWO WAYS FOR AVOIDING DOUBLE COUNTING

1. FINAL OUTPUT METHOD 2. VALUE ADDED METHOD

According to this method, value of only According to this method, sum total of
final goods should be added to the value added by each producing unit
determine the national income. In the should be taken in the national income.
example given in last slide, value of In the example given in last slide, value
bread of Rs 1,000 sold to final added by farmer (Rs 500), miller (Rs 200)
consumers should be taken in the and baker (Rs 300), total of Rs 1,000
national income. should be includes in National Income.
 PRECAUTIONS - VALUE ADDED METHOD

1. Intermediate Goods are not included in National Income to avoid double counting

2. Sale and Purchase of second – hand goods is not included as they were included
in the year they were produced

3. Domestic services like services of housewife are not included in National Income

4. Production of goods for self-consumption will be included as they contribute to

current output.

5. Imputed value of owner-occupied houses is included (Estimated rent is imputed rent)

6. Change in stock of goods (inventory) will be included as it is a part of capital formation

 VALUE ADDED METHOD SOLVED PRACTICAL - 1

Calculate Net Value Added at Factor Cost (NVA FC)

Rs in
S.NO Particulars GVA MP = Sales – Intermediate
Crores
Consumption + Change In Stock
1 Goods and Services Tax 25
= 540 - 140 + (10 – 20)
2 Consumption of Fixed Capital 5
= 540 - 140 + (-) 10
3 Closing Stock 10 = 390
4 Corporate Tax 15 NVA MP = GVA MP – Depreciation
5 Opening Stock 20 = 390 – 5 = 385

6 Sales 540 NVA FC = NVA MP – NIT = 385 – 25

7 Purchase of raw Materials 140 = Rs 360 Crores

 VALUE ADDED METHOD SOLVED PRACTICAL - 2

Calculate Gross Value Added at Factor Cost (GVA FC)

Rs in GVA MP = Sales – Intermediate

S.NO Particulars
Crores
Consumption + Change in Stock
1 Goods And Services Tax 40 = 700 – 400 + (20 – 10)
15 = 700 – 400 + 10
2 Consumption Of Fixed Capital
= 310
3 Closing Stock 20 GVA FC = GVAMP – NIT
4 Sales 700 NIT = Indirect Taxes (GST) –
Subsidies
5 Subsidy 5
= 40 – 5 = 35
6 Intermediate Consumption 400 GVA FC = 310 – 35
10 = Rs 275 Crores
7 Opening Stock
 VALUE ADDED METHOD SOLVED PRACTICAL - 3

Calculate Gross Value Added at Market Price (GVA MP)

Rs In
S.No Particulars
Crores

Goods And Services Tax 90 GVAMP = Sales – Intermediate

1
Sales 800 Consumption + Change in Stock
2
Depreciation 50 = 800 – 360 + (-) 40
3

4 Net Change In Stock (-) 40 = 440 + (-) 40

5 Purchase Of Raw Materials 360 = Rs 400 Crores

6 Corporate Tax 10
 VALUE ADDED METHOD SOLVED PRACTICAL - 4
Calculate Value Added by Firm X and Firm Y

Rs in Value Added By X = Sales – IC + Stock

S.NO Particulars Sales Of X = 300
Crores
IC = Purchase From Y + Import Of Raw
1 Closing Stock Of Firm X 20 Materials = 100 + 50 = 150
2 Closing Stock Of Firm Y 15 In Stock = Closing Stock – Opening
Stock = 20 – 5 = 15
3 Opening Stock Of Firm Y 10
Value Added By X = 300 - 150 + 15
4 Opening Stock Of Firm X 5 = Rs165 Crores
5 Sales By Firm X 300
Value added by Y = Sales – IC + Stock
6 Purchases By X From Firm Y 100
Sales = 250
7 Purchases By Y From Firm X 80 IC = Purchase from X = 80
Stock = Closing Stock – Opening Stock
8 Sales By Firm Y 250
= 15 – 10 = 5
9 Import Of Raw Materials By Firm X 50 Value Added by Y = 250 – 80 + 5
10 Export By Firm Y 30 = Rs 175 Crores
 VALUE ADDED METHOD SOLVED PRACTICAL - 5
Calculate Value Added by Firm A and Firm B

Rs in Value added by A = Sales – Intermediate

S.NO Particulars
Crores Consumption + Change in Stock
Sales by A = Purchases by B from A = 40
1 Purchases By Firm B From A 40 Intermediate Consumption = Purchase by
from A from firm B = 20
2 Sales By Firm B 80 Change in Stock = CS – OS = 20 – 10 = 10
Imports By Firm B 10 Value Added by A = 40 – 20 + 10
3
= Rs 30 Crores
4 Rent Paid By Firm B 5

5 Opening Stock Of Firm B 15 Value added by B = Sales – Intermediate

Consumption + Change in Stock
6 Closing Stock Of Firm B 20 Sales = 80
Intermediate Consumption = Purchase by
7 Purchases By Firm A From Firm B 20 firm B from firm A + Imports by B
Closing Stock Of Firm A 20 = 40 + 10 = 50
8 Change in Stock = CS – OS = 20 – 15 = 5
9 Opening Stock Of Firm A 10 Value Added by B = 80 – 50 + 5 = Rs 35 Cr
VALUE ADDED METHOD UNSOLVED PRACTICALS – 1 & 2
1. Calculate GVA FC 2. Calculate NVA FC
Rs in Rs in
S.NO Particulars S.NO Particulars
Crores Crores
1 Sales 450 1 Sales 450
2 Value of Output 700 2 Purchases of machine 100
3 Closing Stock 40
3 Imports of raw material 55
4 Depreciation 35
4 Depreciation 25
5 Subsidies 25
5 Subsidies 40
Purchases of raw material
6 40 6 Purchases of raw material 200
from domestic market
7 Exports 35 7 Exports 25
8 Imports 25 8 Sales tax 35
9 Rent 100 9 Excise duties 20
ANSWER – GVA FC = Rs 660 Crores ANSWER – NVA FC = Rs 210 Crores
S.NO Particulars Rs in Crores
VALUE ADDED
1 Sales by firm A 300
METHOD UNSOLVED
2 Sales by firm B to firm A 100
PRACTICAL - 3
3 Sales by firm A to firm B 50
4 Sales by firm B to household 50
5 Change in stock of firm A 25 3. Calculate GDP MP and
6 Closing stock of firm B 20 National Income
7 Opening stock of firm B 10
8 Exports of firm A 35
ANSWER
9 Imports of firm B 25 GVA MP of firm A = Rs 200 Cr
10 Imports of firm A 25 GVA MP of firm B = Rs 115 Cr
11 Exports of firm B 30 GDP MP = Rs 315
12 Net Indirect Taxes 20 National Income = Rs 280 Cr
13 Consumption of fixed capital 10
14 Net factor income from abroad (-) 5
15 Wages and salaries 200
16 Rent 100
 INCOME METHOD / FACTOR PAYMENT METHOD /
DISTRIBUTIVE SHARE METHOD

According to this method, all the incomes that accrue to the factors of production by
way of wages, profits, rent, interest, etc. are summed up to obtain the national income.

COMPONENTS OF INCOME METHOD

1. COMPENSATION OF EMPLOYEES (COE) (b) WAGES AND SALARIES IN KIND – it

includes all non-monetary like rent free
COE refers to amount paid to employees by
employer for rendering productive services. house, free car, free medical and
education.
Elements of COE-

(c) EMPLOYERS’ CONTRIBUTION TO

(a) WAGES AND SALARIES IN CASH – it SOCIAL SECURITY SCHEMES – It
includes all monetary benefits, like wages, includes contribution made for social
salaries, bonus, dearness allowances etc. security of employees. Ex- PF, gratuity.
 COMPONENTS OF INCOME METHOD cont.

2. OPERATING SURPLUS
It refers to sum total of income from property (Rent + Royalty + Interest) and income from
entrepreneurship (Profit)

(a) PROFIT - It is a reward to the entrepreneur for his

(a) RENT AND ROYALTY – Rent is
contribution to the production of goods and
the part of national income
services. The profit is used for 3 purposes-
which arise from ownership of
(CORPORATE TAX + DIVIDEND + RETAINED
land and building.
EARNINGS or SAVINGS OF PRIVATE SECTOR)
✓ Corporate Tax is the direct tax paid by an enterprise
(b) INTEREST - it refers to the to the government on total profit.
amount received for lending ✓ Dividend is that part of profit, which is paid to the
funds to a production unit. It shareholders in the ratio of their shareholdings.
includes interest on loan taken ✓ Retained Earnings is kept as reserves to meet
for productive services only. unexpected contingencies.
COMPONENTS OF INCOME METHOD STEPS OF INCOME METHOD

3. MIXED INCOME OF SELF EMPLOYED COMPENSATION OF EMPLOYEES

+ RENT AND ROYALTY
➢ It is the income generated by own –
+ INTEREST
account workers (farmers, barbers, + PROFIT
etc.) and unincorporated enterprises + MIXED INCOME

like retail traders, small shopkeepers.

➢ Mixed income arises from productive DOMESTIC INCOME (NDP FC)
services of self-employed persons,
whose income includes wages, rent,
(+) NFIA
interest and profit and these elements
cannot be separated from each other.
NATIONAL INCOME (NNP FC)
 PRECAUTIONS - INCOME METHOD

1. Transfer Incomes like donations, scholarships, old age pensions etc. are not included

2. Sale and Purchase of second – hand goods is not included in national income as
their original sale has already been counted

3. Windfall gains are not included as there is no productivity activity connected.

4. Income from sale of shares, bonds and debentures will not be included as such
transactions do not contribute to current flow of goods and services.

5. Imputed value of services provided by owners of production units will be included

6. Payments out of past savings (like death duties, gift tax etc.) are not included as they
do not add to current flow of goods and services.
 INCOME METHOD SOLVED PRACTICAL - 1
Calculate National Income by Income Method

Rs in
S.NO Particulars NDP FC = COE + OS + MI
Crores
1 Wages and Salaries 500 COE = 500
2 Royalty 20 OS = Royalty + Interest +Rent + Profit
3 Interest 40 Profit = Profit after tax + Corporate
4 Change in Stock 10 Tax = 100 + 20 = 120
5 Indirect Tax 100 OS = 20 + 40 + 50 + 120 = 230
6 Rent 50 NDP FC = 500 + 230 + 0 = 730
7 Profit after tax 100 NNP FC = NDP FC + NFIA
8 Corporate tax 20
= 730 + (-) 5
9 Subsidies 30
= Rs 725 Crores (NNP FC)
10 Net Factor Income from Abroad (-) 5
 INCOME METHOD SOLVED PRACTICAL - 2
Calculate National Income by Income Method
Rs in
S.NO Particulars NDPFC = COE + OS + MI
Crores
COE = Wages and salaries+ Employer’s
1 Mixed Income of self employed 200
2 Old age pension 20 contribution to social security schemes

3 Dividends 100 = 500 + 50 = 550

4 Operating Surplus 900 Operating Surplus = 900
5 Wages and salaries 500 Mixed Income = 200
6 Profits 400 NDP FC = 550 + 900 + 200
Employer’s Contribution to Social 50 = 1650
7
Security Schemes
NNP FC = NDP FC + NFIA
8 Net factor income from abroad (-) 10
= 1650 + (-) 10
9 Consumption of fixed capital 50
= Rs 1640 Crores NNP FC
10 Net Indirect Tax 50
 INCOME METHOD SOLVED PRACTICAL - 3

Calculate Gross National Product at Market Price (GNP MP)

Rs in NDP FC = COE + OS + MI
S.NO Particulars
Crores COE = 100
1 Compensation of Employees 100 OS = Rent + Interest + Profit
2 Rent 20 = 20 + 10 + 10 = 40
MI = 110
3 Profit 10
NDP FC = 100 + 40 + 110 = 250
4 Interest 10 GDP FC = NDP FC + Depreciation
5 Consumption of fixed capital 20 = 250 + 20 = 270
6 Net Indirect Taxes 30 GDP MP = GDP FC + NIT
= 270 + 30 = 300
7 Net factor income from abroad (-) 20
GNP MP = GDP MP + NFIA
8 Change in Stock 10 = 300 + (-) 20
9 Mixed Income 110 = Rs 280 Crores (GNP MP)
 INCOME METHOD SOLVED PRACTICAL - 4
Calculate Gross Domestic Product at Market Price (GDP MP)

Rs in
S.NO Particulars NDP FC = COE + OS + MI
Crores
1 Mixed Income of Self Employed 280 COE = 240, OS = 100, MI = 280

2 Compensation of Employees 240 NDP FC = 240 + 100 + 280 = 620

Net factor income from the rest of (-) 5 GDP FC = NDP FC + Depreciation
3 the world
= 620 + 40 = 660
4 Goods and Services Tax 90
GDP MP = GDP FC + NIT
5 Change in Stock 35
NIT = Indirect Tax – Subsidies
6 Consumption of fixed capital 40
= 90 – 10 = 80
7 Subsidies 10
GDP MP = 660 + 80
8 Rent, interest and profit 100
= Rs 740 Crores (GDP MP)
9 Interest on National Debt 10
 INCOME METHOD SOLVED PRACTICAL - 5

Rs in
S.NO Particulars Calculate National Income by
Crores
Income Method
1 Rent 80
2 Interest 100 NDP FC = COE + OS + MI
3 Profits 210
COE = 500
4 Tax on profits 30
OS = Rent + Interest + Profit
Employer’s contribution to social 50
5 = 80 + 100 + 210 =390
security schemes
6 Mixed Income of Self Employed 250 MI = 250
7 Net Indirect Tax 60 NDP FC = 500 + 390 + 250 = 1140
Employees contribution to social 25 NNP FC = NDP FC + NFIA
8
security schemes
= 1140 + (-) 20
9 Compensation of Employees 500
= Rs 1120 Crores
10 Net factor Income from abroad (-) 20
 INCOME METHOD UNSOLVED PRACTICALS – 1 & 2
1. Calculate NNP MP 2. Calculate GNP MP
Rs in Rs in
S.NO Particulars S.NO Particulars
Crores Crores
1 Interest 400
1 Rent 20
2 Wages and Salaries 1,000
2 Interest 30
Net factor income from
3 (-) 20 3 Dividends 45
abroad
Social security contribution 4 Undistributed Profits 5
4 100
by employers
5 Corporate Tax 10
5 Net indirect tax 80
6 Compensation of Employees 400
6 Rent 300
7 Consumption of fixed capital 10
7 Consumption of fixed capital 120
8 Corporation Tax 50 8 Net Indirect Tax 50
9 Dividend 200 Net factor income from
9 (-) 10
abroad
10 Undistributed profits 60
ANSWER – NNP MP = Rs 2,210 Crores ANSWER – GNP MP = Rs 560 Crores
 EXPENDITURE METHOD / INCOME DISPOSAL METHOD
Factor income earned by factors of production is spent in the form of expenditure on purchase of
goods and services purchased by firms. This method measures national income as sum total of final
expenditures incurred by household, business firms, government and foreigners. The total final
expenditure is equal to GROSS DOMESTIC PRODUCT AT MARKET PRICE (GDP MP)

COMPONENTS OF FINAL EXPENDITURE

Govt. Final Gross Domestic Net Exports

Private Final Consumption
Consumption Capital
Expenditure Exports(X) – Imports(M)
Expenditure Formation

Gross Fixed Capital

Formation
+
Inventory Investment
 EXPENDITURE METHOD - COMPONENTS

1. PRIVATE FINAL CONSUMPTION EXPENDITURE (C)

It refers to expenditure incurred by household and private non -
profit institutions serving household on all types of consumer
goods. It includes expenditure incurred by normal resident,
whether in domestic territory or abroad.

2. GOVERNMENT FINAL CONSUMPTION EXPENDITURE (G)

It refers to the expenditure incurred by general government on
various administrative services like defence, law and order,
education etc. Government produces goods and services with
the aim of social welfare without any intention of earning profit.
 EXPENDITURE METHOD - COMPONENTS

3. GROSS DOMESTIC CAPITAL FORMATION OR GROSS INVESTMENT (I)

It refers to the addition to capital stock of the economy. It represents the
expenditure incurred on acquiring goods for investment by the
production units located within the domestic territory.

4. NET EXPORTS (X – M) Components of Gross Domestic Capital Formation

It refers to the difference between

exports and imports of a country Gross Fixed Capital Inventory Investment
Formation (Change in Stock)
during a period of one year.

Gross Business Gross Residential Gross Public

Fixed Investment Construction Investment
Investment
 PRIVATE FINAL CONSUMPTION EXPENDITURE
(+) GOVERNMENT FINAL CONSUMPTION EXPENDITURE
(+) GROSS DOMESTIC CAPITAL FORMATION
(+) NET EXPORTS

GROSS DOMESTIC PRODUCT AT MARKET PRICE (GDP MP)

STEPS OF
EXPENDITURE
(-) DEPRECIATION (-) NET INDIRECT TAXES METHOD

DOMESTIC INCOME (NDP FC)

+ NFIA
NATIONAL INCOME (NNP FC)
 PRECAUTIONS – EXPENDITURE METHOD

1. Expenditure on Intermediate Goods will not be included in national income as it is

already included in the value of final expenditure

2. Purchase of second – hand goods is not included as it has already been included
when they were originally purchased.

3. Transfer Payments are not included as there is no value addition.

4. Production for self-consumption, imputed value of owner-occupied houses will be

included as these are productive services

5. Purchase of financial assets like shares, debentures, bonds etc. will not be included
as such transactions do not contribute to current flow of goods and services.
 EXPENDITURE METHOD SOLVED PRACTICAL - 1

Calculate Gross Domestic Product at Market Price (GDP MP) by Expenditure Method

Rs in
S.NO Particulars
Crores GDP MP = Private Final Consumption

Private Final Consumption Expenditure + Government Final

1 1,200
Expenditure
Government Final Consumption Consumption Expenditure + Gross
2 200
Expenditure
Fixed Capital Formation + Change in
3 Gross Fixed Capital Formation 300
Stock + (Exports – Imports)
4 Change in Stock 400
= 1,200 + 200 + 300 + 400 + (600 – 500)
5 Imports 500
GDP MP= Rs 2,200 Crores
6 Exports 600
 EXPENDITURE METHOD SOLVED PRACTICAL - 2

Rs in
S.NO Particulars Calculate National Income by
Crores
Private final consumption
Expenditure Method
1 1000
expenditure
Government final consumption GDP MP = C + I + G + (X – M)
2 600
expenditure
1000 + (450 +100) + 600 + (150 + 170)
3 Net domestic capital formation 450
1000 + 550 + 600 – 20
4 Change in stock 50
5 Depreciation 100 GDP MP = Rs 2130 Crores

6 Exports 150 NNP FC = GDP MP – Dep – NIT + NFIA

7 Imports 170 2130 – 100 – (100 – 75) + (-)40
8 Net factor income from abroad (-) 40
= 2130 – 100 – 25 – 40
9 Indirect taxes 100
NDP FC = Rs 1965 Crores
10 Subsidies 75
 EXPENDITURE METHOD SOLVED PRACTICAL - 3

Calculate Gross Domestic Fixed Capital Formation

Rs in
S.NO Particulars
Crores

Private final consumption GDP MP = C + I + G + (X – M)

1 1000
expenditure
2500 = 1000 + GDFCF + (200 – 300) +
Government final consumption
2 500
expenditure 500 + 500
3 Net factor income from abroad 20
2500 = 1000 + GDFCF – 100 + 500+500
4 Net Exports 500
2500 = 2000 + GDPCF – 100
5 GDP MP 2500

6 Opening Stock 300 GDFCF = Rs 600 Crores

7 Closing Stock 200

 EXPENDITURE METHOD SOLVED PRACTICAL - 4
Rs in
S.NO Particulars
Crores Calculate GNP FC by Expenditure
Net domestic fixed capital Method
1 350
formation
2 Closing Stock 100
Government final consumption
3 200 GNP FC = C + G + I + (X – M) + Dep – NIT
expenditure
4 Net indirect taxes 40
+ NFIA
5 Opening Stock 60
6 Consumption of fixed capital 50 = 1500 + 200 + 350 + (100 – 60) + (-) 10 +
7 Net exports (-) 10
Private final consumption 50 – 40 + (-) 30
8 1500
expenditure
9 Imports 20 GNP FC = Rs 2,060 Crores
10 Net factor income from abroad (-) 30
 EXPENDITURE METHOD SOLVED PRACTICAL - 5
Calculate (a) Closing Stock (b) National Income (c) Government Final Consumption Expenditure

Rs in (a) Closing Stock

S.NO Particulars
Crores
Gross domestic capital formation = NDFCF +
Private final consumption (Closing stock – Opening stock) + Dep
1 900
expenditure Closing stock = GDCF – NDFCF + OS – Dep
Net domestic fixed capital Closing Stock = 2800 – 2100 + 100 – 550
2 2100
formation Closing stock = Rs 250 Crores
3 Net factor income to abroad 40 (b) National Income = NNP MP – NIT
4 NNP MP 5230 = 5230 – 150 = Rs 5080 Crores
(c) Govt. final consumption expenditure
5 Net Indirect taxes 150
NNP FC = PFCE + GFCF +GDCF + Net Exports –
6 Opening Stock 100 Dep – NIT – Net factor income to abroad
Gross domestic Capital GFCE = NNP FC – PFCE – GDCF – Net Exports +
7 2800
Formation Dep + NIT + Net factor income to abroad
8 Consumption of fixed capital 550 = 5080 – 900 – 2800 + 550 – 700 +40 + 150
9 Net Exports 700 GFCE = Rs 1420 Crores
 LIST OF VARIOUS ITEMS NOT INCLUDED IN NATIONAL INCOME

S.NO ITEMS NOT INCLUDED IN NATIONAL INCOME REASON

Transfer Income and Payments like They are not connected with any
1 scholarship, old age pension, gifts, productive activity and there is no
remittances from abroad etc. value addition.
They are transfer payments and
Compulsory Transfer Payments like interest
2 government does not make any
tax, capital gain tax and indirect taxes
promise of providing service in return.
Sale and Purchase of financial assets like Such transactions do not contribute to
3
shares, bonds, debentures etc. current flow of goods and services.
Windfall Gains like winning from lottery, horse There is no productive activity
4
race, contests etc. involved with windfall gains
Non-Market Transactions like domestic It is difficult to ascertain their market
5
services rendered by a housewife value and are not rendered for income
 LIST OF VARIOUS ITEMS NOT INCLUDED IN NATIONAL INCOME

S.NO ITEMS NOT INCLUDED IN NATIONAL INCOME REASON

Intermediate Consumption Expenditure like Such expenditure are already included

6
purchase of raw material by a firm in the final expenditure

Sale and Purchase of second hand goods like They have already been included in the
7
sale and purchase of an old house etc. year of their original sale or purchase

Capital Loss like destructions of building, They do not affect the national product
8
machinery etc. by earthquake directly

Capital Gains like profit due to increase in They do not add to the flow of goods
9
price of land, shares etc. and services in the economy

National debt interest or interest paid by Interest paid on loans taken for
10
household to the commercial banks consumption purposes is not included
 LIST OF VARIOUS ITEMS INCLUDED IN NATIONAL INCOME

S.NO ITEMS INCLUDED IN NATIONAL INCOME REASON

Brokers’ Commission on the sale / purchase of Services rendered by the brokers are
1
second – hand goods or financial assets productive

Services provided by the owners of production

They contribute to the current output
2 units like imputed rent of owner – occupied
of goods and services
house, production for self consumption

Capital Formation (Investment) like purchase As they are a part of the gross
3
of machinery by a firm, addition to stock etc. domestic capital formation

Payment of Bonus, contribution to PF by These are a part of compensation

4
employer, rent free home given by employer given to employees
 LIST OF VARIOUS ITEMS INCLUDED IN NATIONAL INCOME

S.NO ITEMS INCLUDED IN NATIONAL INCOME REASON

Profit earned by an Indian company from its

branches abroad, profits earned by a branch of As they are a part of the factor
5
an Indian bank in London, wages received by income from abroad
Indian employees working in foreign embassies
Free services (dispensary, education) by They are a part of the Government
6
government final consumption expenditure
As the exported goods are produced
Expenditure incurred by a foreign tourist in the
7 within the country’s domestic
country
territory
Interest is paid on loans taken by
8 Interest on loans paid by Commercial Banks commercial banks for productive
purposes
ITEMS INCLUDED / EXCLUDED IN NATIONAL INCOME
Included /
ITEMS REASON
Excluded
ITEMS INCLUDED / EXCLUDED IN NATIONAL INCOME
Included /
ITEMS REASON
Excluded
ITEMS INCLUDED / EXCLUDED IN DOMESTIC INCOME
Included /
ITEMS REASON
Excluded
 INCOME & EXPENDITURE METHOD – SOLVED PRACTICAL - 1

S.NO Particulars Rs.Cr Calculate National Income (NNP FC)

1 Compensation of employees 250
2 Imports 20 NNP FC by Income Method
3 Mixed income of self employed 50 NNP FC = COE + MISE + Rent + Interest +
4 Gross fixed capital formation 120 Profit + NFIA
5 Private final consumption expenditure 550 = 250 + 50 + 100 + 200 + 50 + 20
6 Consumption of fixed capital 10 = Rs 670 Cr
7 Net factor income from abroad 20 NNP FC by Expenditure Method
8 Indirect taxes 100 Gross fixed capital formation + Change in
9 Change in stock 20 stock + Private final consumption exp +
10 Subsidies 20 Govt final consumption exp + (X – M) – Dep –
11 Rent 100 (Indirect taxes – Subsidies) + NFIA
12 Interest 200 = 120 + 20 + 550 + 60 + (10 – 20) – 10 –
13 Profit 50 (100-20) + 20
14 Exports 10 = Rs 670 Cr
15 Government final consumption expenditure 60
 INCOME & EXPENDITURE METHOD – SOLVED PRACTICAL - 2

S.NO Particulars Rs.Cr Calculate National Income (NNP FC)

1 Private final consumption expenditure 2000
NNP FC by Income Method
2 Net capital formation 400
3 Change in stock 50 NNP FC = COE + Operating Surplus +
4 Compensation of employees 1900 NFIA
5 Rent 200 = 1900 + 720 + (-20)
6 Interest 150 = Rs 2600 Cr
7 Operating surplus 720
NNP FC by Expenditure Method
8 Net indirect tax 400
Private final consumption exp + Net
Employers’ contribution to social security
9 100
schemes capital formation + (X – M) + Govt final
10 Net exports 20 consumption exp - NIT + NFIA
11 Net factor income from abroad (-) 20
= 2000 + 400 + 20 + 600 – 400 + (-20)
12 Government final consumption expenditure 600
= Rs 2600 Cr
13 Consumption of fixed capital 100
 INCOME & EXPENDITURE METHOD – SOLVED PRACTICAL - 3

S.NO Particulars Rs.Cr Calculate GNP FC

1 Compensation of employees 1000
2 Operating surplus 500 GNP FC by Income Method
Employers’ contribution to social security = COE + Operating surplus + MISE +
3 120
schemes
Dep – Net factor income to abroad
4 Net exports (-) 30
= 1000 + 500 + 600 + 40 – 20
5 Net indirect taxes 40
6 Mixed income of self employed 600 = Rs 2120 Cr
7 Net factor income to abroad 20 GNP FC by Expenditure Method
8 Consumption of fixed capital 40 PFCE + GFCE + Gross fixed capital
9 Private final consumption expenditure 1440 formation + Change in stock + (X - M)
10 Government final consumption expenditure 490
– NIT – Net factor income to abroad
11 Gross fixed capital formation 250
= 1440 + 490 + 250 + 30 +(- 30) – 40 - 20
12 Change in stock 30
13 Interest on national debt 25 = Rs 2120 Cr
 INCOME & EXPENDITURE METHOD – SOLVED PRACTICAL - 4
Calculate NDP FC by Expenditure and GDP MP by Income Method
S.NO Particulars Rs.Cr
1 Gross fixed capital formation 130 NDP FC by Expenditure Method
2 Private final consumption expenditure 510 = Gross fixed capital formation +
3 Mixed income of self employed 280
Change in stock + PFCE + GFCE + (X-M)
4 Net factor income from ROW (-) 5
– Dep – (Indirect Taxes – Subsidies)
5 Exports 50
= 130 + 30 + 510 + 70 + (50 – 60) – 40
6 Imports 60
– (90 – 10)
7 Compensation of employees 240
= Rs 610 Cr
8 Government final consumption expenditure 70
9 Consumption of fixed capital 40 GDP MP by Income Method
10 Indirect taxes 90 = MISE + COE + Rent, Interest, Profit +
11 Subsidies 10 Dep + (Indirect taxes – Subsidies)
12 Rent, interest and profit 90 = 280 + 240 + 90 + 40 + (90 – 10)
13 Change in stock 30 = Rs 730 Cr
14 Interest on national debt 10
 INCOME & EXPENDITURE METHOD – SOLVED PRACTICAL - 5
Calculate (A) Domestic Income (B) Compensation of Employees
S.NO Particulars Rs.Cr
Domestic Income
1 Net factor income from abroad (-) 20
2 Net exports 10 = Net exports + PFCE + Net domestic
3 Net indirect taxes 50 capital formation + GFCE – NIT
4 Rent and Royalty 20 = 10 + 400 + 50 + 100 – 50
5 Consumption of fixed capital 10
= Rs 510 Cr
6 Private final consumption expenditure 400
Compensation of Employees
7 Corporate tax 10
8 Interest 30 = NDP FC – Rent and Royalty – Interest
9 Net domestic capital formation 50 – Corporate tax – Dividends –
10 Dividends 22 Undistributed profits – Mixed Income
11 Government final consumption expenditure 100
= 510 – 20 – 30 – 10 – 22 – 5 – 23
12 Undistributed profits 5
= Rs 400 Cr
13 Mixed Income 23
 INCOME & EXPENDITURE METHOD – SOLVED PRACTICAL - 6
Calculate (A) GDP MP by Income Method (B) Closing Stock
S.NO Particulars Rs.Cr
1 Private final consumption expenditure 450 (A) GDP MP by Income Method
2 Rent 120 = Rent + Interest + Profit + MISE + COE
3 Government final consumption expenditure 50
+ Dep + (Indirect taxes – Subsidies)
4 Indirect taxes 60
= 120 +150 + 250 +20 +200 + 30+(60-10)
5 Interest 150
6 Mixed income of self employed 20 GDP MP = Rs 820 Cr
7 Consumption of fixed capital 30 (B) Closing Stock
8 Opening stock 10
= GDP MP – PFCE – GFCE – Gross fixed
9 Gross fixed capital formation 300
capital formation + Opening stock – Net
10 Compensation of employees 200
11 Net exports (-) 10 exports
12 Net factor income from abroad (-) 10 = 820 – 450 – 50 – 300 + 10 – (-) 10
13 Subsidies 10
Closing Stock = Rs 40 Cr
14 Profit 250
 INCOME & EXPENDITURE METHOD – SOLVED PRACTICAL - 7
Calculate (A) GDP FC (B) Factor Income To Abroad
S.NO Particulars Rs.Cr Depreciation = GDCF – (Net fixed
1 Compensation of employees 800 capital formation + Change in stock
= 300 – (200 + 50) = Rs 50 Cr
2 Profits 200
(A) GDP FC
3 Dividends 50
Compensation of employees + Profits +
4 Gross national product at market price 1400
Rent + Interest + Depreciation
5 Rent 150
= 800 + 200 + 150 + 100 + 50
6 Interest 100 = Rs 1300 Cr
7 Gross domestic capital formation 300 (B) Factor Income From Abroad
8 Net fixed capital formation 200 = Factor income from abroad – GNP MP
9 Change in stock 50 – GDP FC + NIT
10 Factor income from abroad 60 = 60 – 1400 – 1300 + 120

11 Net indirect taxes 120 = Rs 80 Cr

 REAL GDP (GDP AT CONSTANT PRICES AND NOMINAL GDP
(GDP AT CURRENT PRICES)

✓ Real GDP values the current year’s

output at some base year prices
✓ It is the value measured at constant
prices (base year prices) of all the final
goods and services produced in the
domestic territory of a country during
one year. (Output X Base year Prices)
✓ Nominal GDP values current year’s
output at current year prices
✓ It is money value of all final goods and
services measured at current prices
produced in the domestic territory of a
country during one year. (Output X
Current year prices)
EXAMPLE OF REAL GDP (GDP AT CONSTANT PRICES AND NOMINAL
GDP (GDP AT CURRENT PRICES)
Base Year CY Real GDP
Nominal GDP (2010 -11) Nominal GDP (2014 -15)
(2010-11) (2014-15) (201-15)
ITEM 1 2 1X2 3 4 3X4 3 2X3
2
Output Price Market Output Price Market Output Market
Price (Rs)
(Units) (Rs) Value (Units) (Rs) Value (Units) Value (Rs)

A 500 10 5000 400 25 10,000 10 400 4000

B 200 5 1000 50 20 1000 5 50 250

C 100 2 200 50 10 500 2 50 100

Total 6,200 11,500 4,350

Nominal GDP of 2010 – 2011 = Rs 6,200

Nominal GDP of 2014 – 2015 = Rs 11,500
Real GDP of 2014 – 2015 = Rs 4,350
 ADVANTAGES OF REAL GDP
Real GDP is useful in finding out the effect of increased production of goods and
services on the real development capacity of the economy in general

Real GDP also enables one to make a year to year comparison of the change in the
growth rate of output of goods and services

An expansion phase of the economy is a period of rising real GDP

It is better indicator of economic growth. An increase in the real GDP improves the
standard of living

It is also often used in making international comparisons of economic

performances across the countries
 DIFFERENCE BETWEEN REAL GDP (GDP AT CONSTANT PRICES
AND NOMINAL GDP (GDP AT CURRENT PRICES)
REAL GDP NOMINAL GDP
BASIS
(GDP AT CONSTANT PRICES) (GDP AT CURRENT PRICES)
It is value of current output at base It is the value of current output at
Meaning
year prices current year prices
it can rise either when output of
It can increase only when output of
Change goods and services rise or current
goods and services rise
price rise
It is a reliable index of economic It is not reliable index of economic
growth and economic welfare. More growth, there is no confirmed
Reliable Index
GDP at constant prices implies relationship between GDP at current
more economic growth prices and economic growth
Base Year Price X Current Year Current Year Price X Current Year
Measurement
Output Output
 CONVERSION OF NOMINAL GDP TO REAL GDP

GDP at Current Prices (Nominal GDP)

REAL GDP = X 100
Current Price Index

CONVERSION OF REAL GDP TO NOMINAL GDP

NOMINAL = GDP at Constant Prices (Real GDP) X Current Price Index

GDP
100

GDP DEFLATOR (PRICE INDEX)

It measures the average level of the prices of all

Nominal GDP
goods and services produced in the economy
GDP Deflator = X 100
Real GDP during an accounting year. It shows change in
the GDP because of change in price level.
 GDP AND WELFARE
(LIMITATIONS OF GDP AS INDICATOR OF WELFARE)

1. DISTRIBUTION OF GDP - If GDP of the country is rising, it is

not necessary that the welfare will also rise. This is because with
every increase in the level of GDP, distribution of GDP is getting
more unequal, GDP may be concentrated in few hands of very
few individuals or firms

2. COMPOSITION OF GDP - If product mix has more of war goods

like explosives, guns, bombs then destruction will increase, and
welfare will reduce. Similarly, increase in GDP may be purely due to
increase in the goods which are not socially desirable such as
drugs etc. This will surely not enhance economic welfare.
 GDP AND WELFARE
(LIMITATIONS OF GDP AS INDICATOR OF WELFARE)

3. NON - MONETARY EXCHANGES - Many transactions or activities in an economy are non-

market transactions or non evaluated in monetary terms but increasing the welfare. In
developing economies like India where many remote regions are underdeveloped, barter
system of exchange is not totally non-existent

4. EXTERNALITIES - Externalities refer to the benefits or harms a firm or an individual

causes to another for which is not paid. Positive Externalities – GDP will underestimate the
actual welfare of the country; Ex – Use of Public Parks increases welfare through positive
effect on health. Negative Externalities – Decreased the welfare; Ex – Polluting river by an oil
refinery reduces welfare through negative effect on health and environmental.
REAL GDP AND NOMINAL GDP – SOLVED PRACTICALS - 1

1. If Real GDP is Rs 300 and Price Index (with base = 100)

is 110, calculate Nominal GDP.

Nominal GDP
REAL GDP = X 100
Price Index

Nominal GDP
300 = X 100
110

Nominal 300 X 110

=
GDP 100

Nominal GDP= Rs 330

REAL GDP AND NOMINAL GDP – SOLVED PRACTICALS - 2

1. If the Nominal GDP is Rs 2400 and Price Index (with

base = 100) is 120, calculate Real GDP)

Nominal GDP
REAL GDP = X 100
Price Index

2400
REAL GDP = X 100
120

Real GDP = Rs 2000

 GDP DEFLATOR – SOLVED PRACTICAL

1. If the Nominal GDP is Rs 15000 Crores and Real GDP is

Rs 12000 Crores, Calculate GDP Deflator

Nominal GDP
GDP Deflator = X 100
Real GDP

15000
GDP Deflator = X 100
12000

GDP Deflator = Rs 125