National Income Of India:

National Income measures the net value of goods and

services produced in a country during a year and it also
includes net earned foreign income. National Income is
a flow not a stock.
In India, National income estimates are related with the
financial year (April 1 to 31st March ).
Concepts of National Income:
The various concepts of national income are as follows:

Gross Domestic Product (GDP) - It is the total money value of

all final goods and services produced within the geographical
boundaries of the country during a given period of time.

Gross National Product (GNP) – It refers to the money value

of total output or production of final goods and services
produced by the nationals of a country during a given period of
time, generally a year.

In the calculation of GNP income produced and received

by nationals of a country within the boundaries of foreign
countries should be added in Gross Domestic Product (GDP) of
the country. Similarly, income received by foreign nationals
within the boundary of the country should be excluded from
GDP.

In equation form:

GNP= GDP + X- M,

Where,
X= Income earned and received by nationals within the
boundaries of foreign countries.

M = Income received by foreign nationals within the country

If X=M, then GNP=GDP.

Similarly, in a closed economy X= M=0

Then also, GNP=GDP

Net National Product (NNP) : NNP is obtained by subtracting

depreciation valve from GNP.

In equation form:

NNP= GNP- Depreciation.

NNP can be calculated in two ways-

(i) at market price of goods and services

(ii) at factor cost

When NNP is obtained at factor cost, it is known as

National Income. National Income is calculated by subtracting
net indirect taxes (i.e. total indirect tax – subsidy) from NNP at
market price. The obtained value is known as NNP at factor
cost or National Income.

In equation form:

NNP at factor cost or National Income = NNP at Market Price

–(Indirect Taxes- Subsidy)
Disposable Personal Income = [Personal Income –
Direct Taxes]

1.What do you mean by national income? Analyse

clearly the circular flow of income in the economy?

Ans: Like many other terms in common use, the

concept of national income has also various
connotations. It is also known as National product or
National dividend. The term “ national income”
refers to the total income of a nation. It is the
aggregate flow of goods and services which are
available to a nation during a period of one year. In
other words, National Income is the aggregate money
value of all the goods and services produced in a
country during a year account being taken of the
deduction made due to the wear and tear and
depreciation of plants and machineries used in the
production of goods and services.
National Income has been calculated in three
different ways:
1. Product Method
2. Income Method
3. Expenditure Method

1. Product Method: This method has been

developed by Marshal. According to him national
income of a country is exactly equal to the aggregate
money value of all thee goods and services produced
during a year.

2. Income Method : Unlike Marshall, Prof. Pigou

views national income as being equal to the sum total
of all the incomes derived by the people in the form
of rent, wages, interests and profit.

3. Expenditure Method: But, Fisher analyses

national income from the consumption angle.
According to him the total national income of a
country, is exactly equal to the total expenditure
(C+I) made during a year.

Difficulties in the Measurement of National Income

1. There is difficulty of defining “Nation” in national Income.
Every nation has its political boundaries but in the calculation
of national income, the income earned by a nationalities of a
country living in foreign countries also included.

2. National incomes is always measured in terms of money, but

there are a number of goods and services which are difficult to
be assessed in terms of money. For example:- Painting as a
hobby by an individual, the services of mother towards her
child ( bringing up a child) etc.

3. The greatest difficulty in calculating national income is of

double counting which arises from the failure to distinguish
between a final and an intermediate product. There always
exists the fear of a commodity or service being included more
than once. Some goods are final product in some industries
while these are treated as intermediate in others. (EX- Flour
mill and bakery). Hence, the difficulty of double counting.

4. Income earned through illegal activities such as smuggling,

gambling, illicit extraction of wine etc. is not included in the
computation of national income. By living them aside, the
national income works out to be less than what it should be.

5. Another difficulty of the measurement of national income is

whether transfer payments such as pensions, provident fund
benefits, unemployment allowances, interest in public loan etc.
are to be included in national income. Because, one hand they
form the consumers income while on the other they constitute
the expenditure of the government. To avoid this difficulty
these are excluded from the national income.

7. It is very difficult to estimate the currency depreciated value

of a piece of capital whose expected life is very long. Hence,
there is the difficulty in getting a true picture of the net
national income.

8. Changes in price level do not give a correct picture of the

national income. When price level in the country rises, the
national income also rises and vice-versa, even though there is
no change in the GNP. Even construction of price index can
not solve this problem accurately.
9. In calculating national income a good number of public
services are also taken which can not be estimated correctly.
For example, it is very difficult to determine the actual values
of the police or military services rendered by the govt.

10. In the calculation of national income only those goods and

services are included which are traded or valued in the market.
But, in under developed countries a large number of goods and
services do not come in to the market. These are retained for
personal consumption and hence are not included in national
income.

Q.NO. 2.
What d you mean by National Income? Analyse clearly
the circular flow of income in the economy?

Ans:-

Circular flow of income

A two sector economy refers to that economy where there is
the existence of households and firms. These two are the basic
economic sectors in an economy. House holds sell their
productive services as factors of production to the firm and
earn their income in the form of rent, wages, interest & profit.
Thus, the expenditure of the firms becomes the income of the
household. On the other hand household purchase the final
goods and services produced by firms & pay the price which is
equal to the value of the final output of the firms.
Thus, the expenditure of the households become the
income of the firms. In this sense both households and firms
are interdependent on one another.

2. Circular Flow in a Three Sector Economy ( Closed

Economy )

When the government sector is added to the firm and

households, we get a three sector closed economy.
The households supply factor services to the firms & in turn get
factor payments while the firms provide final product and get back
the payment in the form of price. Now, the inclusion of
government makes the process complex. The government collects
the taxes from the households and in turn provides benefits such as
old age pension, unemployment allowances, relieve etc. and other
services like health, education, transport etc.
Such expenditures of the government are injection to the
circular flow while taxes are the leakages from it.

3. Circular Flow in a Four Sector Economy(OpenEconomy )

In the modern days there is hardly any economy in the world

which is a closed economy. All economies are open economy
where foreign trade plays an important role. Here, exports are
considered to be the inflows or injections while imports are the
leakages.
Thus, in an open economy there are four sector- household,
firms, Governments and the foreign sector.

The household purchases goods (imported) from abroad

and make payments for them and this constitute the leakages.
In turn the households receive payments from the foreigners
for the services rendered by them in foreign countries. This
payment constitute the inflows.

In so far as the business sector is concerned it exports goods to

foreign countries and thus the receipts are the injections into
the circular flow. Savings, taxes and imports constitute the
leakages from the circular flow.

Shipping, insurance, banking, etc. for which they receive

payments from abroad. Interest, dividends etc. from
investment abroad all these are inflows in to the circular flow.
But, the payment for import of capital goods, consumer goods,
raw material & services constitutes the leakages.