NATIONAL INCOME
-Prof. Rashmi Fattepur
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NATIONAL INCOME
“National income is the aggregate money value of
all final goods and services produced in an
economy in an accounting year”
The growth rate of an economy is measured
primarily by the rate at which the real national
income is growing.
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GROSS NATIONAL PRODUCT (GNP)
The GNP is defined as the value of all goods and
services produced during a specific period,usually
one year,plus incomes earned abroad by the
nationals.
GNP = GDP + Net Factor Income From Abroad
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NET FACTOR INCOME FROM ABROAD
It is the difference between factor incomes such
as wages, rent,interest and profits received from
abroad by the normal residents of India for
rendering services in another country minus(-)
such factor incomes earned by nonresidents for
rendering services in the domestic territory
during a given period.
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GROSS DOMESTIC PRODUCT (GDP)
The GDP is defined as the market value of all
final goods and services produced in the domestic
economy during a period of one year,plus income
earned locally by the foreigners minus income
earned abroad by the nationals.
GDP= GNP – Net Factor Income From Abroad
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NET NATIONAL PRODUCT (NNP)
NNP is the money value of all currently produced
final goods and services by the nationally owned
resources,obtained by excluding depreciation
from the value of GNP
NNP = GNP - Depreciation
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MEASUREMENT OF NATIONAL INCOME
National Income aggregates can be measured in
3 different ways:
Production or Value added method
Income Method
Expenditure Method
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PRODUCTION METHOD
According to this approach , National Income aggregates
are measured as the sum of values added from various
production sectors in a given period. It involves the
following steps.
a)Classifying the production units into 3 sectors
1.Primary sector: The primary sector produces goods and
services by the direct exploitation of natural resources. It
includes agriculture,fishing,forestry,logging,quarring,etc
2.Secondary sector:it consist of all activities that transforms
one commodity into another through an industrial process.
This sector includes manufacturing, construction works,
electricity generation,gas and water supply, etc
3.Tertiary sector : it consists of all activities producing non-
tangible products called services. This sector incluudes
transport & communication, trade, banking, insurance,,etc 8
PRODUCTION METHOD (CONTD..)
b) Estimating the value of Net domestic product at
factor cost :for this purpose,the net value added at
factor cost in each producing unit is calculated first,
then the total value of these in each sector is
calculated. Finally, net domestic product at factor
cfost is obtained by adding up the net value added at
factor costs in the 3 producing sectors .
c) Estimating Net factor income from abroad:it is the
difference between factor income earned by normal
residents from abroad and factor income earned by
non resident from the domestic territory.
d) Estimating national income
NI = Net domestic product at factor cost + Net
factor income from abroad 9
INCOME METHOD
Under this method, national income is obtained
by summing up the incomes of all individuals of
the country. This method involves:
a) Classifying the producing units as
1. Primary Sector
2. Secondary Sector &
3. Tertiary Sector
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INCOME METHOD (CONTD..)
b) Classifying factor income :
Compensation to employees: wages, salaries
Operating surplus: rent , intrest, profit
Mixed income of the self employed: factor
incomes earned by people for rendering factor
services
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CONT….
c) Estimating the value of Domestic Factor Income:
Factor income paid out by each production unit is measured.
Factor income generated by each sector is calculated
The value of domestic factor income is estimated as,
Factor income generated in the primary sector + Factor
income generated in the secondary sector + Factor
income generated in the tertiary sector
d) Estimating the net factor income from abroad
e) Estimating national income
NI = DFI + NFI from abroad 12
EXPENDITURE METHOD
Under this method, national income is measured as the
sum of all final expenditure.
The sum of final expenditure given us the value of GDP
at market prices.
GDPm = C + I + G + (X-M)
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CONT….
This method involves the following steps:
a)Estimating the values of the components of
final expenditure
C = Consumption Expenditure:It refers to the expenditure
on the purchase of goods and services by households and
nonprofit institutions during a given period.This includes
the purchase of durable goods, non durable goods and
services.
I = Investment expenditure:it refers to the expenditure
on the purchase of capital goods during a given period.
G = Gov.t purchases of goods and services
X-M = Net exports
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The sum of these values gives the GDPm.
EXPENDITURE METHOD (CONTD..)
b) Adding the net factor income from abroad to the value
of GDPm
GDPm + Net factor income from abroad = GNPm
c)Deducting the values of depreciation and Net indirect
taxes from the value of GNPm
GNPm –(Depreciation + Net indirect taxes) = NNPf
NNPf = National Income
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