ECONOMICS ENVIRONMENT

NATIONAL INCOME
ACCOUNTING
NATIONAL INCOME
 LEARNING OBJECTIVES

 What is national income?

 Importance of national income
 Concepts of National income
 National income estimates in India.
 Measuring National income
 Trends in National income
 Difficulties in measuring national income.
NATIONAL INCOME

What is National Income?

National Income is the money value of

all goods and services produced in a
country during a year.

J.M Keynes
NATIONAL INCOME

While family income reflects the economic

Position of household, national income shows
the economic position of a Nation.

The basic objective of an economy is to achieve

economic Progress.

National income – help assess & compare the

progress achieved by a country over a period of
time
 IMPORTANCE OF NATIONAL INCOME

1. With national income, we can chart the movement

of country from depression to prosperity.

2. The economic welfare of community can be

measured with national income.

3. It helps in finding standard of living.

4. It helps in determining the pace of economic

development of the economy.
 IMPORTANCE OF NATIONAL INCOME

5. It helps to understand the contribution made

by different sectors to the economy.

6. It helps in development planning of a

country.

7. It provides information of the savings,

consumption and investment structure of
the economy.
DIFFERENT CONCEPTS OF NATIONAL INCOME

There are five concepts of National Income:

1. Gross National Product

2. Net National Product
3. National Income
4. Personal Income
5. Disposal Income
DIFFERENT CONCEPTS OF NATIONAL INCOME

 GNP- -defined as the total market value of final goods and

services produced in a year.

 The money value of only final goods to be considered not the

value of intermediate goods.

 GDP- aggregate values of output of goods and services

produced in a country without adding net factor incomes
received from abroad.

 GDP = GNP - Income received from abroad.

 NNP – means the market value of all final goods and services
after providing for depreciations.
DIFFERENT CONCEPTS OF NATIONAL INCOME

 NNP – means the market value of all final goods and

services produced in a year is considered.

 It means that in the production of goods & services ,

there is the consumption of capital goods such as
equipment & machinery.

 To get NNP the value of depreciation has to be

reduced from GNP.

 Hence NNP=GNP-Depreciation
 DIFFERENT CONCEPTS OF NATIONAL INCOME

3. NI at factor cost – shows how much it costs to

society in terms of economic resources for their
contribution of land, labour , capital and
entrepreneurial ability which go into the year’s net
production.

 NI at factor cost=NI at market prices – taxes-

depreciation + subsidies

 NI at market price = NI at factor cost +taxes –

subsidies +depreciation
DIFFERENT CONCEPTS OF NATIONAL INCOME

 Ex: A motor car costs 2 lakhs which includes excise

duty of Rs.20,000. Market price of a car is 2 lakhs
 While the factors engaged in production get Rs.1.80
lakhs.

 Thus the value of national income at factor would be

 Equal to the market prices minus the indirect taxes
plus subsidies.
NATIONAL INCOME -CONCEPTS

PERSONAL INCOME : PI is that income actually received by

the individuals or households in a country during the year,
from all sources.

DISPOSABLE INCOME: DI is that part of income which is left

behind after the payment of direct taxes is called Disposable
Personal Income.

Disposable income can either be consumed or saved.

Therefore Disosable Personal Income =Consumption +Savings
DPI = PI - TAXES
NATIONAL INCOME -CONCEPTS

PERCAPITA INCOME :index of changes in the standard of

living of the people of a country.

The percapita income indicates the economic progress in

terms of goods and services available per head of the
Population.

PI=NI/population
ESTIMATION OF NATIONAL INCOME

 The work on National income in India had started in the 19th century, by
Dadabhai Naoroji.

 A number of research had taken place since 1900.

 VERV Rao made the first national income estimate on a scientific way
for the year 1931-32.

 Government of India also prepared the estimates for the year 1948-49.

 1949- The national income committee was formed.

 The Central Statistical organization (CSO) was entrusted with the work
of estimation and the first official paper “White Paper” was released in
the year 1956. Now it is knows as national accounts statistics.
NATIONAL INCOME ESTIMATION

NI estimation can be studied under two categories:

1. Pre-independence period estimation

2. Post independence period estimation

Pre-independence period estimation: several estimates were

prepared in the British period.

A) Dadabhai Naoroji,Wadia & Joshi : estimated the value of output

of the agricultural sector and then added certain percentage as
the income to the non-agriculture sector. This was devoid of any
scientific basis
NATIONAL INCOME ESTIMATION

B) DR.VERV Rao made use of a combination census of output and

census of income method. Here the economy was divided into two
Categories:

First- included agriculture pastures, mines forest, fishing,& hunting

Output method was used to evaluate the product derived from
these sectors.

Second- included industry trade transport public services & admin.

Profession liberal arts & domestic service for which census of
income method was used.

To these two subtotals was added the income so obtained the values of
goods and services consumed in production were excluded.
By adding the net income earned from abroad an estimate of the Ni
Was computed.
 NATIONAL INCOME ESTIMATION
C) JR hicks, M Mukherjee & SL Ghosh: calculated the rates of
growth per capita income for the period :
TIME PERIOD RATE OF GROWTH

1860-1885 1.1

1885-1905 -0.3

1905-1925 1.3

1925-1950 -0.1

1860-1945 0.5

The Indian economy presents a picture of stagnation over a long

period with a growth rate of 0.5% during the British rule.
 NATIONAL INCOME ESTIMATION
POST INDEPENDENCE PERIOD ESTIMATION:

Soon after independence the Govt. Of India appointed the National income
committee in August 1949 to compile the national income estimated.

1951- First report appeared

1954- Final report =landmark in history as it was the first time even that NI
data was provided for whole India.
 NATIONAL INCOME ESTIMATION
POST INDEPENDENCE PERIOD ESTIMATION:

National income & CSO (Central Statistical organisation )estimates

It provides NI data at current prices at for the period upto 1964-65.

It divides the economy into 13 sectors. Two methods were used for these 13
Sectors.

a. Net output method

b. Net Income method
 NATIONAL INCOME ESTIMATION
Net output method: Income from 6 sector

Agriculture, Animal husbandry,forestery,fishing,mining & Factory

establishments:
i) Agriculture: each crop output is estimated by multiplying the area sown
by the yied per hectare.

From the gross values so obtained deductions for the costs of seed manures
& fertilizers, market charges repairs & depreciation are made to derive the net
value of the product from agriculture.

Gross value in agriculture= area sown X yield /hectare

Net value= GROSS VALUE – cost of materials, depreciation etc
 NATIONAL INCOME ESTIMATION

ii) For animal husbandary, forestery, fishery, mining and Factory

establishments, the estimates of production are multiplied
with market price to obtain gross value.

GROSS VALUE = PRODUCTION X MARKET PRICE

NET VALUE = GROSS VALUE – COST OF MATERIALS,
DEPRECIATION ETC
 NATIONAL INCOME ESTIMATION
2. Net Income method: income from seven sectors , i.e. small enterprises,
organised banking & insurance, commerce & transport, profession, public
authorities, house properties.
Contribution of small enterprises: total No. of workers X average earning
Obtained.

For Banking & insurance the balance sheets of the firms provide requisite
information wages salaries directors fees and dividends are all added to get
the contribution.
For public sector wages salaries pensions other benefits dividends or surplus
are added to arrive at the contribution.
METHODS OF MEASURING NATIONAL INCOME

National income of an economy can be measured in

three ways.
 Product Method
 Income Method
 Expenditure Method

Each method gives the same result, there is no question of

appropriate method Application of suitable method depends upon
various factors such as, availability of data, nature of economic
activity, economic and social structure..

So for calculating national income a combination of all three

methods used in India.
METHODS OF MEASURING
NATIONAL INCOME
National income of an economy can be measured in three ways.

Product Method : There are two approaches in product method for

measuring National Income.

This method is used for estimating domestic product in the following

sectors: Agriculture and allied activities Forestry, Fishing
Mining and quarrying Registered Manufacturing.

In this approach, Gross Market Value of all final goods and services
produced in a financial year in the domestic territory of country are
taken into account for measuring national income.

The value so arrived is called Gross Domestic Product (GDP) at

Market Price
METHODS OF MEASURING
NATIONAL INCOME
INCOME METHOD: In income method, National income is
calculated by adding all the factor incomes of all the
normal residents of a country during a year.

Domestic income by this method includes both income

accruing to private sector and income accruing to
Govt./Public sector.

a. Rent including imputed rent.

b. Wages and salaries included imputed value
c. Interest.
d. Compensation of employees
 METHODS OF MEASURING
NATIONAL INCOME
EXPENDITURE METHOD: in this method, final expenditure on all
the products at their market value, produced during a particular
period is measured for estimating domestic income.

Whatever is earned as income in an economy will be either

consumed or invested (saved), therefore final expenditure can
be divided in two parts :

Final consumption expenditure and

Final Investment expenditure.

That is why, this method is also called “ Consumption and

investment method”
 DIFFICULTIES IN MEASURING
NATIONAL INCOME

1. The out put of the non-monetized sector.

2. Non-availability of data about the income of small
producers or household enterprises

3. Absence of data on income distribution

4. Unreported illegal income
Measurement of national income
–Product method
 Estimation of goods & services produced in 3 sectors.

 The sum total of products produced in these three sectors

is the output of the nation.

 GNI- Money value of total goods & services + Income

from abroad.

 This method helps us to find out contributions of various

sectors to national income
 Primary Secondary Tertiary
Agriculture & allied Registered industries Communications
products
Forest Non registered Banking Insurance
industries
Fishing Electricity Public administration

Mining Trade Health

Manufacturing Education

Other services.
 Measurement of national income
–Product method
Under Product method, following categories of production are
added in order to find out GNP(NI)

(a) Product of agricultural sector –total value of food grains

produced by the farmers in the country during a year.

(b) Product of Industrial Sector – Total market value of all goods

produced in various industries like electronics, cement, steel etc. in a
country during a year.

(c) Products of trade: induces income resulting from various activities

which are connected to internal trade
 Measurement of national income
–Product method
(e) Service sector incomes: total value of the proceeds of the service
sector namely, the services of government servants, doctors,
lawyers, soldiers, singers, players etc.,

(f) Foreign trade: value of exports –income earned abroad –to be

added and the value of imports or payments made abroad
should be deducted.

(g) Indirect Taxes and Subsidies: indirect taxes which are included
in the price should be deducted to get exact market value of the
goods.
Subsidies given by Govt to certain products should be added to
calculate the exact value of the product
 Measurement of national income
–Expenditure method
National income – also calculated by adding up the
expenditure incurred for goods and services. Government as
well as individuals spend money for consumption and
production purposes.

The sum total of expenditure incurred in a country during a

year will be equal to national income.

GNI=Individual expenditure + Government Expenditure

 Measurement of national income
–Expenditure method
Expenditure approach – following categories of expenditure are added in
order to find out the GNP

(a) Personal Consumption expenditure : on durable goods & non –

durable goods produced in a country during a year.

Expenditure on services, such as transport , education and medical.

Expenditure on household.

(b) Government purchase of goods and services : goods such as paper,

stationery, machinery, equipment etc.,
Services: Govt. incurs expenditure on payment of salaries t Military
personnel, police and administration.
 Measurement of national income
–Income method
Expenditure made by the people in a country on goods and services
produced in a country during a year becomes the income of the various
Factors.

The factor income is grouped into following categories:

 Wages and salaries

 Income of Company business
 Rental incomes of persons
 Corporate profits
 Income from net interest
 SIGNIFICANCE OF NATIONAL
INCOME ESTIMATES
.
1.The national income of a country reveals the picture of the
economy.

Indicates rise in standard of living –reveals the improvement of

economic welfare

2. NI –reveals overall production in each year –reveal real growth

The economy- if growth is stagnant – measures can be adopted to
increase NI

3. NI shows the contribution made by different sectors of the economy.

4. NI estimates throws light on the three major aspects of the economy

namely , consumption, savings, and investment.

5. NI figures used to measure the economic welfare in different countries

 SIGNIFICANCE OF NATIONAL
INCOME ESTIMATES
.
6. From the NI estimates, we can also see the part
played by the government in the national
economy.

7. No, development planning is possible without

complete study of national income estimates.

8. NI estimates are very useful in formulating plans

for the development of agriculture, Industry, and
infrastructure etc.,
DIFFICULTIES IN THE MEASUREMENT OF
NATIONAL INCOME
Measurement of national income is not an easy
task.

1. Difficulty in defining the ‘Nation’ –NI

includes not only the income produced within
the country, but also income earned in other
countries.

2. Non –availability of a data about the income

of small producers or household enterprises.

3. The error of double counting- failure to

differentiate final and intermediate goods.
 DIFFICULTIES IN THE MEASUREMENT OF
NATIONAL INCOME

5. Unpaid services: services performed for love, kindness and

mercy and not for money have no money value
But have only economic value. These are excluded from NI
figures and leads to the under estimation of the NI.

6. Individuals do not keep correct account of their

consumption.

7. Illiteracy and ignorance.

8. Lack of proper criteria for measuring the value of services.

 DIFFICULTIES IN THE MEASUREMENT OF
NATIONAL INCOME
The services of housewives is not included in the NI
because is not sold in the market.

6. Income for illegal activities: black marketing, gambling,

smuggling etc., not included in the national income thus
reducing the real value of the national income.

7. The out put of non monetised setor: India- agriculture

based - considerable portion of the out put does not come
to the market for sale.

8. The non co-operation of the people: Major part of the

population are illiterate and hence may not co-operate in
providing the information is needed for the estimation of
NI.
TRENDS IN NATIONAL INCOME
NI & changes in the structure of national product analyzed over
the Past 50 years

1. Trends in Net National Product

2. Trends in distribution of NI by industrial origin
3. Trends in the share of Public sector
4. Urban & Rural break-up
5. Share of organized & unorganised sector in NDP
 TRENDS IN NATIONAL INCOME

1. Trends in Net National Product:

The increase in the production of goods & services indicates the

growth –more goods & services are available to people & also
index of total productive effort of the community

2. Trends in distribution of NI by industrial origin

1950-51 : Agriculture contributed to 48.6% of GDP & fell to

24.2% in 1997-98

Share of fishing in GDP remained constant throughout the five

Decades Share of forestery shows continues decline from 5% to
1.1%
 TRENDS IN NATIONAL INCOME

Share of secondary sector- include mining , mfrg, construction,

electricity, gas & water supply has shown steady increase from
16.1% of GDP to 27%.

Share of tertiary sector – includes trade & transport, communications

banking, insurance, real estate amd community & personal services
improved from 28.5 % to 46.6%
 TRENDS IN NATIONAL INCOME

3. Trends in the share of Public sector: share of the

govt.sector was 7.6% and rose to 23.3% - direct result
of expansion of economic activities.

4.Urban & Rural break-up: Urban rural disparity ratio in

percapita NDP was 2.45 in 1970 -71 & it declined to 2.39
 TRENDS IN NATIONAL INCOME

5. Share of organized & unorganised sector in NDP

Organised enterprises- either registered or come under

the purview of any of the acts and maintain annual
accounts and balance sheets.

Unorganised enterprises include all unincoraporated

enterprises and household industries which are regulated
by any one of the acts & do not maintain annual accounts
or balance sheets.

Share of Organised sector has risen

Share of unorgnised sector has fallen
IMPORTANT TRENDS IN NATIONAL NATIONAL
INCOME

The rate of growth of GDP since 1950 around 4.5 %.

1950 – 1980 : Growth rate hovered around a low of 3.5 %

Growth rate remain stuck at the low level for long.

1980-81 to 1991 -92:Break from this trend came in the 1980’s

with the growth rate going above 5%.

1992 -93 to 2001-02 : growth rate further accelerated to 6.5%

Thereafter the rise was rapid and large .

IMPORTANT TRENDS IN NATIONAL NATIONAL
INCOME

As for the sectoral contributions to the GDP all the three sectors
have added to the final outcome

However, differences in the contributions of different sectors over

Time.

1950 – 1980 : early low growth phase of three decades –

Agriculture was an important contributor, alongside industry and
service sector.

In the recent high growth phase since 1980, the service sector,
with the fastest growth, emerged as the largest contributor
followed by industry and agriculture.
CIRCULAR FLOW OF INCOME
Present day world- production is carried mainly for the purpose of
sale in the market.

To produce wide variety of goods the business firms combine

various factors of production and try to sell those goods in the
market.

In the economy, the sales made by the business firm generate flow
of money income which are used to make payments to the factors
of production for their services.
CIRCULAR FLOW OF INCOME
In a modern capitalist economy the process of production and
exchange generate two kinds of circular flows:
House holds supply various factors of production –demanded by
Business firms.
1. Business firms – pay rewards in cash for the factor services –
supplied by the house holds.

Consumption expenditure (money flow)

Households Firms

Payment to factor service(money flow)

CIRCULAR FLOW OF INCOME

In an economy Production processes & markets generates

two types of flows:

1. A supply of factor services by the household to the

production process of firms.
2. After production goods & services are sending to the
market by firms for selling to house hold.

Some types of flow which is circular in a nature takes place-

called real flow.

Another type of flow called- money flow- production firms

pay in cash for Consumption expenditure (money flow)
goods & services they get from house holds.

Money so received by HH will be spent on required goods &

services produced by firms.
Payment to factor service(money flow)
Circular flow of income
In every economy, irrespective of size of population,
this flow forever.

Circular flow of income in two sector model acts as a

base for measuring national income and expenditure.
SAVINGS
 The income received by households will have two channels:

 1. Consumption Expenditure
 2. Savings

 Y=C+S
 In a circular flow two situations can occur
 1. Withdrawl of money out of income(leakage)
 2. Introduction of income into circular flow(injection)

Leakage occurs because savings of the households ,tax paid to

government, payments for imports.
“injection’ – form of investment , govt. spending & exports.
 Consumption & Savings relationship

Relationship between savings & consumption –implies that every HH do not

spend all money received from firms towards consumption & a portion will be
saved.

Savings – impact on circular flow of money & income .

Both decline due to savings.

If HH keeps savings for liquidity purposes leakage occurs.

If savings is kept in a bank or any other financial institutions it becomes

productive.

Thus money withdrawn from circular flow will be coming back to the firms in
different circuit.

In this process another concept emerged “INVESTMENT” emerges

 INVESTMENTS
What is Investment?
“Investment” is a term referred to capital expenditure made by firms.

This expenditure will be in the form of capital goods like land, building, plant
machinery etc., without which firm cannot produce goods for households.

Investment comes from two sources viz., borrowings & retained earnings.
Investment will be an addition to circular flow of income.

S & I in any economy need not be necessarily equal as investment takes

place by firms and savings by the people.
S>I or I>S

Normally investment will be more than savings. There will be leakage in

circular flow of income due to savings.

This leakage will be neutralized by injection in the investment.

THE END