NATIONAL

INCOME
 NATIONAL
INCOME
National income is the money value of all the final goods and services produced
by a country during a period of one year. National income consists of a collection
of different types of goods and services of different types.
Since these goods are measured in different physical units it is not possible to add
them together. Thus we cannot state national income is so many millions of
meters of cloth. Therefore, there is no way except to reduce them to a common
measure. This common measure is money
“National income measures the total value of goods & services produced within
the economy during the course of a year”
“The labour & capital of a country acting upon it’s natural resources produces
annually a certain amount of net aggregate of commodities , material and
immaterial including services of all kinds”
- Prof. Marshall
 Basic Concepts In National
1) Income
Gross domestic product
2) Gross domestic product at factor cost and Gross domestic product at market
price
3) Gross national product
4) Net domestic product
5) Net national Product
6) Net national product at factor cost or national income
 Gross Domestic
Product
Gross domestic product is the money value of all final goods and services
produced in the domestic territory of a country during an accounting year.
GDP can be estimated at current prices and at constant prices. If the domestic
product is estimated on the basis of the prevailing prices it is called gross
domestic product at current prices.
If GDP is measured on the basis of some fixed price, that is price prevailing at a
point of time or in some base year it is known as GDP at constant price or real
gross domestic product.
GDP = Consumption Expenditure + Investment Expenditure + Government
Expenditure
 GDP at Factor cost and GDP at
Market price
The contribution of each producing unit to the current flow of goods and services
is known as the net value added.
GDP at factor cost is estimated as the sum of net value added by the different
producing units and the consumption of fixed capital.
Conceptually, the value of GDP whether estimated at market price or factor cost
must be identical. This is because the final value of goods and services must be
equal to the cost involved in their production.
GDP F.C = GDP M.P – IT + S.
 Gross National
Gross national product isProduct
defined as the sum of the gross domestic product and net factor
incomes from abroad. Thus in order to estimate the gross national product of India we have to
add net factor income from abroad - income earned by non-resident in India to form the gross
domestic product of India.
“ GNP is defined as the total market value of all final goods and services produced in a country
in an year’s time ”
GNP = GDP + (X – M )
X=Income earned by nationals abroad &
M=Income earned by foreigners in the given country
In brief GNP = GDP + NFIA.
GDP VS.
GNP
 Net Domestic
While calculating GDPProduct
no provision is made for depreciation , allowance (also
called capital consumption allowance). In such a situation gross domestic
product will not reveal complete flow of goods and services through various
sectors.
A part of is therefore, set aside in the form of depreciation allowance. When
depreciation allowance is subtracted from gross domestic product we get net
domestic product.
NDP = GDP – Depreciation.
 Net National
Product
It can be derived by subtracting depreciation allowance from GNP. It can also be found out by
adding the net factor income from abroad to the net domestic product.
NNP = GNP – Depreciation
If the net factor income from abroad is positive then NNP will be more than NDP, If the net
factor income from abroad is negative then NNP will be less than NDP and it would be equal
when net factor income from abroad is zero.
NNP = NDP + NFIA
NNP = NDP + X -
M
NNP gives idea net increase in total production of the
country
 NNP at factor cost or National
Income
NNP at factor cost is the volume of commodities and services turned out during
an accounting year, counted without duplication. It can also be defined as the
net value added at factor cost in an economy during an accounting year.
NNP at factor cost or national income is defined as the sum of domestic factor
incomes and net factor income from abroad. If NNP figure is available at market
price we will subtract indirect taxes and add subsidies to the figure to get NNP at
factor cost or national income of the economy.
NNPFC (National Income) = NNPMP – IT + S
 NNP at FC =National Income = FID + NFIA
FID - factor income earned in the domestic territory of a country.
NFIA - Net Factor Income from Abroad.
NI at factor cost refers to all incomes earned by resource
owners (factors of production) for their contribution to the production of
different goods & services in a year
NI = NNP – Indirect Taxes + Subsidies
This concept throws light on the distribution side of national
output
 Personal Income And
PersonalDisposable
income national income Income
very commonly used in advanced countries. Personal
income may be defined as the current income of persons or households from all services.
Personal income is not a measure of production.
PI = NI – Corporate Income Taxes – Undistributed Profits – Social Security contributions +
Transfer Payments
All personal income is not at the disposal to be spent on consumption. Individuals have to
pay personal direct taxes to the government. They are free to spend only after the payment
of taxes.
DPI = Personal income – Personal Direct taxes.
DPI = Consumption + Saving
 Disposable Personal Outlay &
Real Income
The disposable personal income may be spent fully or individuals may save.
What remains after saving is called the personal outlay. Disposable income is
equal to consumption and savings
Disposable outlay = Disposable income – Savings.
Since national income does not reveal the real state of the economy, the
concepts of real income has been used. To find out the real income of the
economy, a base year is selected and the price level of that year is assumed to be
100.
Real income = Money Income × 100
Price Index
 Methods Of Measuring National
Income
The national income of a country can be measured in three alternative ways
Census of production method
As a flow of income, and
As a flow of
expenditure
Added to this, there is yet another method of estimating national income i.e.,
Value added method.
 Product
Method
This method is popular in U.S.A. and is called as Total Product method or Goods
Flow Method. In India, It is known as inventory or Product method. In this
method, the economy is classified in to three transaction sector like industrial,
services and foreign transaction sector where international payments
considered.
are
We calculate the money value of all final goods and services produced in an
economy during a year. The money value of these goods and services is
calculated at market price. The sum total is called the GDP at market price.
 Value Added
In order to value addedMethod
production should be calculated avoid double counting
at each stage of to arrive at GNP. The difference between the value of output and
input at each stage of production is called the value added. By summing such
value added for all industries in the economy, GNP can be found out.
Value added is defined as the difference between total value of output of a firm
and value of inputs bought from other firms.

GVA MP = Value of output – Intermediate Consumption Sales + change in

stock
– Intermediate Consumption
 Income
Method
We estimate the income earned by various factor services engaged in the process
of production. The sum of these Incomes provides us the Measure of gross
national income at factor cost.
GNP = wages and salaries + rent + interest + Dividends + undistributed corporate
profits + mixed incomes + direct taxes + indirect taxes + depreciation + net
income from abroad.
 Expenditure
Method
Prof. Samuelson calls this as “ Flow of Product Approach”. In India, it is known as
Outlay method. GNP is the sum of expenditure incurred on goods and services
during one year in a country.

GNP = C + I + G + (x – m)

We sum up the flow of expenditure in an economy to arrive at national income

estimates, If we add the value of expenditure on all these items we get the value
of gross national expenditure at market prices.
Question 4
Calculate the net value added at the maíket píice
of a fiím:

Items Amount

Sale 400
Change in stock -20
Depreciation 30
Net indirect taxes 40
Purchase of machinery 200
Purchase of an 250
intermediate product
Question 9
Calculate the Nominal income and píivate income fíom the
following data.
Contents ₹. (in crores)
Net current transfers from the rest of the world 10

Private final consumption expenditure 600

National debt interest 15

Net exports -20
Current transfers from the government 5

Net domestic product at factor cost accruing to the 25

government
Government final consumption expenditure 100

Net indirect tax 30

Net domestic capital formation 70

Net factor income from abroad 10

 Circular Flow Of National
Income
Lipsey defined the circular flow of income as “ the flow of payments from domestic households
to domestic again”. National firms income and back and expenditure flow in a circular manner.
economy, both commodities In any and factors of production are constantly being exchanged
for money.
Simple Economy
Two sector model = Y = C + I
Three Sector Model = Y = C + I + G
Four sector model = Y = C + I + G +(x – m)
The concept of circular flow shows clearly whether the economy is working efficiently
or
whether there is any disequilibrium in its working. It also helps in restoring equilibrium.
CIRCULAR FLOW IN 2 SECTOR
ECONOMY
2 Sector Model With
Savings
Circular Flow in 3 Sector
Economy
Circular Flow in 4 Sector
Economy
 Problems In Estimating
Simon Kuznets national income is not limited to the territorial boundaries of a country. We
National
must include Income
income of all the residents of a country even if they are abroad.
Income earned through illegal activities is not included
Services rendered free of charge are not included in GNP. By leaving out these service,
national income will work out to be less.
Transfer payments are not included in national income as they do not contribute to national
product.
Capital gains and losses are not included in GNP as they are not the result of current
economic
activities
In the calculation of national income leisure foregone in the process
of production is not included.
In UDC due to illiteracy, most producer do no keep regular accounts.
Another difficulty in the measurement of income in underdeveloped is lack of
adequate statistical national countries data.
 Importance Of National
Income
 Know the Production performance & achievements
 Indicates the living standards of the people
 Know whether a country is growing, stagnant or declining
 Shows the contribution made by various sectors to NI
 Know the purchasing power of money
 Importance Of measuring
National Income
Contains figures of consumption, savings ,investments , imports & exports
Know relative roles played by public & private sector
Helps central government to decide amount of grants-in-aids to different state
governments
Valuable guide to formulate economic policies
Reveals cyclic behaviour of an economy and also helps in forecasting
 Challenges in Measuring
National Income
Theoretical Or Conceptual Difficulties
Definition of the term “nation” in National Income
Choice of method for measuring the National Income
 Only goods & services having monetary value included
Stage at which National Income is estimated
Practical Or Statistical Difficulties
Non availability of data
Absence of trained personnel
Absence of proper records
Existence of non-monetized sector
Absence of occupational specialization
THANK YOU