National Income

BCA SIXTH Semester

 Literal Meanings: The aggregate of goods and services produced in a year in the
country is called National Product. NI is the total income that is earned in the
geographical boundary of a nation and from abroad.
Marshall defines NI from the side of the total product. According to Marshall “The labour and
capital of a country acting on its natural resources produced annually a certain net aggregate
commodity, material and immaterial including services of all kinds. This is the true net annual
income, the revenue of the country, or the national dividend”. According to this definition, the
sum of goods and services produced during a year in a country is NI.
Features:
1. NI is the return of factors of production.
2. All goods and services are included in NI.
3. NI is annually calculated.
4. NI is the sum of the net production of goods and services.
5. Material and immaterial goods and services are included in NI
Drawbacks of Marshall’s Definition
1. Possibility of double counting.
2. No inclusion of non- marketable goods and services.
3. Difficult to measure the National output because there are innumerable goods and services
produced in a country.
According to Pigou “The national dividend is that part of the objective income of
the community, including, of course, income derived from abroad which can be
measured in money.”
Features
1.Only monetary income is included in National Income.
2. Income derived from abroad is also included in NI.
3. It is precise, convenient, and workable definition as compared to that given by
Marshall.
Drawbacks
1. Not applicable to underdeveloped countries.
2. Not applicable to that sector where barter exchange is always existence.
3. The concept of objective income is not clear i.e. gross or net.
According to Fisher “The true national income is that part of annual net produce
which is directly consumed during that year.”

Features
1. NI is the part of annual net produce.
2. NI is determined not by its annual production but by its annual consumption.

Drawbacks
• 1) Difficult to measure consumption in terms of money
• 2) Difficult to estimate the lifetime of the product.
• 3) The difficulty of ownership change.
Different concept of National Income
Gross Domestic Product:- The market value of all final goods and services produced
within the geographical boundary of a nation during a year is called Gross Domestic
Product (GDP). GDP is the product of the total final product (Q) and its market price (P).
GDP=Price (P) ×Quantity (Q)
Or, GDP=P×Q
Or, GDP= + + +………………..+ .
Or, GDP=
Where, i= 1, 2, 3, 4…………………n
In terms of expenditure, GDP can be expressed as:
GDP=C+I+G+(X-M)
All intermediate goods and services are excluded from the measurement of GDP. GDP
includes three types of final goods and services. They are:
1. Consumer’s goods and services which are used to satisfy the immediate wants of people.
2. Capital goods are used for fixed capital formation, residential construction, and industry.
3. Goods and services produced by the government.
 Features of GDP
 GDP is the monetary value of all final goods and services produces within the domestic boundary.
 GDP only includes final goods and services produces in the country.
 The values of intermediate goods are excluded to avoid double counting.
 The value of final goods and services is calculated at the current market price.
 GDP only includes those goods and services which have market value.
 A transfer payment is not included in GDP because it cannot contribute to production. Like Pension,
unemployment allowance, old age allowance etc.
 Illegal product is not included in GDP.
 GDP does not include capital gains.
There are two types of the concept of GDP. They are:
 GDP at MP:- GDP is the market value of all final goods and services produced in the nation during a
year. When GDP is measured in terms of the current market price is called GDP at market price.
GDP at MP=𝑃 𝑄 + 𝑃 𝑄 +𝑃 𝑄 +………………+𝑃 𝑄
 GDP at Factor Cost (GDP at FC):- If GDP is measured as the sum of price paid to all factors of
production in form of wages, interest, rent, and profit for their contribution in production, it is known as
the GDP at FC. To calculate GDP at FC, we have to deduct the net indirect taxes from GDP at MP.
GDP at FC=GDP at MP- Net Indirect Tax.
We know,
Net Indirect Tax= Indirect Tax- Subsidy
Net Domestic Product (NDP): -
NDP can be calculated by subtracting depreciation from GDP. In other words, GDP minus
depreciation is called NDP. Depreciation means wear and tear of fixed capital assets or
decrease in value of fixed capital assets. It is also known as the capital consumption
allowance.
NDP=GDP-Depreciation.
NDP can be obtained by subtracting net foreign income from Net National Product
(NNP).i.e.
NDP=NNP- Net Foreign Income
NDP at MP and NDP at FC
NDP measured at actual market price is called NDP at market price whereas NDP measured
as the sum of price paid to all factors of production in the form of wages, interest, rent, and
profit for their contribution in the process of production is called NDP at factor price.
NDP at MP= GDP at MP-Depreciation
Similarly,
NDP at FC= NDP at MP-Net Indirect Tax
 Gross National Product (GNP)
Gross National Product (GNP)is the monetary value of all final goods and services produced
during a year by domestically owned resources or factors of production. GNP measures the
aggregative economic activities if the citizens of a country during a year. It is the income
earned by the citizens of a nation. GNP includes the income that residents of a nation earn in
abroad and excludes the income within a country that is owned by foreigners. We can express
as:
GNP=GDP+NFIA
Or, GNP=GDP+ (Receipt-Payment)
The NFIA is the net difference between factor income paid to the foreigners from our country
and the factor income earned by our residence from the foreign countries.
Features of GNP
 It is calculated in monetary terms.
 It only includes the final goods and services.
 The intermediate goods are excluded to avoid the problem of double counting.
 It does not include capital gain and transfer payment.
 It only includes marketable goods and services.
 It includes income earned by the resident of a country within a country and abroad.
 The illegal product and income are not included in GNP.
GNP at Market Price and GNP at Factor price

a) GNP at MP:- It is the monetary value of all final goods and services produced
within the geographical boundary of a nation plus net foreign income from
abroad. i.e.
GNP at MP =GDP at MP+NFI
a) GNP at FC: -If GDP is measured as the sum of price paid to all factors of
production in form of rent, wages, interest, and profit for their contribution in the
process of production, it is known as GDP at FC. In the other sense, GNP at FC is
calculated by deducting net indirect tax from GNP at market price.
GNP at FC=GNP at MP-Net Indirect Tax
Difference between GDP and GNP

GDP GNP
1. GDP is the monetary value of all final Products 1. GNP is the market value of final goods and
produced within the geographical territory of a services produced by the citizens within the
country. country and abroad.
2. It is a broad concept than GDP.
2. It is a narrow concept than GNP. 3. GNP includes NFIA.

3. GDP does not include NFIA 4. It is a national concept because it is

concerned with the normal residents of a
4. It is a territorial concept because it is related to country.
the domestic territory of a country.
5. GNP is focused on who owns the production
regardless of where the production takes place.
5. GDP is focused on output rather than who 6. If the value of NFIA is positive, the value of
produced it i.e. nationality of the citizens. GNP will be more than GDP and vice versa.
i.e. GNP=GDP+NFIA
6. If the value of NFIA is positive then GDP will be
less than GNP and vice versa.
Net National Product (NNP)
Net National Product (NNP)
The net production of goods and services of a country during a year is called Net National Product
(NNP). NNP is calculated by deducting depreciation or capital consumption allowances (CCA) from
GNP. The amount left after deducting depreciation from GNP is called NNP.
NNP=GNP- depreciation
NNP at Market Price and NNP at Factor Price
a) NNP at MP: - NNP measured at the current market price is called NNP at market price.
NNP at MP= GNP at MP-Depreciation.
Or, NNP at MP=GDP at mp + NFIA- Depreciation

NNP at FC:- The NNP is measured as the sum of price paid to all factors of production in the form
of wages, interest, rent, and profit for their contribution in the process of production is called NNP at
FC. To calculate NNP at FC, we deduct net indirect taxes from NNP at MP.
NNP at FC=NNP at MP-Net Indirect Taxes
We know,
Net Indirect Tax= Indirect Taxes –Subsidies.
National Income (NI)
National Income is the total sum of earning of all factors of production in the form of
wages, rent, interest, profit, plus net foreign income from abroad. NI means the sum of all
income earned by domestically owned factors of production. NI is the total income earned
by factors of production owned by a country’s citizens.
NI=NNP at market price + Subsidies- Indirect Taxes.
By product method, NI is calculated as:
GDP at MP=
GNP at MP=GDP+NFIA
NNP at MP=GNP at MP – Depreciation.
NNP at FC= NNP at MP- Indirect Taxes + subsidy
NI=NNP at FC.
Personal Income (PI)
The total income received by all individuals and households of a country from all possible resources
before payment of direct taxes during a year is called Personal Income. Personal Income is the total
money income received by individuals and households of a country from all possible resources
before direct tax. Personal Income is obtained by subtracting that part of National Income which is
earned but not received by the persons and adding the income of transfer payment.
Personal Income = National Income - Undistributed corporate profit – corporate income tax
- Social security contribution + Interest Income from government and private sector + Transfer
payment.
PI = NI – UCP - CIT – SSC + II + TP
Disposable Income (DI)
It is also known as disposable personal income. The income left after the payment of direct taxes
from personal income is called Disposable Income. I.e. Disposable Income = PI- Direct Tax
It is the actual income that can be spent on consumption by individuals. So it is called the purchasing
power of households. The total disposable income is not spent only on consumption because a part of
it is saved i.e. DI = C+S
Per Capita Income (PCI)
Per Capita Income is the average income of the people of a country in a particular year. PCI can be calculated by
dividing NI by the total population of a country.
Per Capita Income =
Per Capita Income is usually expressed in terms of commonly used international currency. It is usually measured
in the American dollar. PCI is also calculated from GDP and GNP. If per capita income is calculated from GDP,
it is known as GDP per capita. Similarly, if per capita income is calculated from GNP, it is known as GNP per
capita.
GDP per capita =

GNP per capita =

PCI is widely accepted as the best indicator of economic development. The argument is that the main objective
of economic development is to raise the living standard of people. This is possible only by an increase in the PCI
of people. WDB has divided the stage of development based on PCI as shown below.
Per capita income Classification
(in us dollar)
1. Below 1036 Ultra-poor
2. 1036 to 4045 Lower Middle Income
3. 4046 to 12535 Upper Middle Income
4. Above 12535 High
Real Income

Real Income is the NI expressed in terms of the general price level of the particular
year taken as the base. Real income removes the illusion of monetary income.
Suppose in 2057, the total production of tea was 200 kg and the market price was
Rs. 120 per kg. In this case, the monetary income was 200×120= Rs.24000. But in
2067, the production of tea was decreased in 180 kg but the price was increased in
Rs.180 per kg. In this case, the monetary income equals to Rs. 180×180=32400. In
this analysis, the monetary income shows that output is increasing but the condition
is the opposite. Such type of controversy can be removed by using the concept of
Real Income.
Nominal GDP, real GDP and GDP Deflector
Nominal GDP
It is defined as the GDP calculated at the current market price. Any change in nominal GDP
reflects the combined effect of change in quantity and change in price. Nominal GDP is
sensitive to the change in the average price level in the market. Nominal GDP includes all
of the changes in market prices that have occurred during the current year due to inflation
and deflation.
GDP at MP= 𝒊 𝒊
Where, i = 1, 2, 3, 4…………….n
Real GDP: -
It is also called constant price GDP. When the current price GDP is adjusted for inflation is
called real GDP. Real GDP is a measure of the value of output in terms of base year price.
Real GDP is termed as ‘inflation corrected GDP’ or GDP in base-year prices. Real GDP is
defined as the GDP calculated at the market prices of any base year.
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷
Real GDP = × 100
𝑮𝑫𝑷 𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓
 GDP Deflator:

The GDP Deflator is a price index measuring changes in the overall prices of produced
final goods and services within the geographical territory of a country. GDP deflator
measures relative changes in current level prices in comparison to the price level in the
base year. In other words, it is the ratio of nominal GDP in a given year to real GDP of
that year. It is calculated by dividing nominal GDP by real GDP and multiplying it by
100. We can write as:
GDP Deflator = × 100
The GDP deflator can help to provide a more accurate picture of the GDP in the
country. It is also used to measure the change in the price of final goods and services
or the rate of inflation in the country.
Rate of inflation = × 100
Numerical Examples:

Calculate the value of GDP deflator and the rate of inflation from the given
information.
Year Nominal GDP Real GDP

2069 470 208

2070 542 209
2071 618 220
2072 719 233
2073 843 250
Solution:
GDP deflator for 2069 = × 100

= × 100 =225.96 and so on.

Rate of Inflation for 2070 = × 100

. .
= .
× 100
=14.77% and so on.
Similarly, we can calculate GDP deflator and rate of inflation as given below:

Year GDP deflator Rate of inflation

2069 × 100 =225.96 _

2070 14.77
× 100=259.33

2071 × 100=280.91 8.32

2072
× 100=308.58
9.85

2073 × 100=337.20 9.27

Potential GDP
The Potential GDP is the output that the economy would produce if all factors of
production were fully employed. It is the full employment level of GDP. According
to Samuelson “Potential GDP represents the maximum sustainable level of output
that the economy can produce. ” Potential GDP or output is not the maximum
output the economy can produce but the output would be produced if all markets i.e.
labour, capital, and product were in equilibrium. Potential GDP indicates that level
in which no unemployment of resources.
The country’s potential output is viewed as being determined by the economy’s
productive capacity, which depends upon the quality and quantity of available inputs
and technological efficiency. This means that potential GDP is determined by the
supply of factors.
• Economic Survey of Nepal:-
https://mof.gov.np/uploads/document/file/Economic_Survey_2076-77.pdf
Methods of National Income Accounting

Factors of production produce goods and services. Production of goods and services gives rise to
income, income gives rise to the demand for goods and services’ demand gives rise to expenditure
and expenditure gives rise to further production. Thus, there is a circular flow of production, income,
and expenditure. Based on these three flows, National Income can be calculated by three methods.
They are:
1) Product Method
Product Method measures NI from the side of the product. It includes all final goods and services
produced in the economy during a year. In this method, the economy is divided into primary,
secondary, and tertiary sectors. The total monetary value of the total product of every sector is
calculated and summed up to find GDP at MP. Thereafter GNP at MP is calculated by adding NFIA
to GDP at MP. There are two methods under it. They are:
a) Final Product Method
The Final Product Method includes the market value of final goods and services produced in the
country during a year. In this method, only final goods and services and their current or final prices
are included. We know,
GDP =∑ 𝑃 𝑄
S.N. Production Sector Amount
1. Agriculture, forest and livestock XXX
2. Industry and Trade XXX
3. Transport and communication XXX
4. Health and education XXX
5. Public administration and defense XXX
6. Banking and financial institutions XXX
7. Irrigation, electricity and water Supply XXX
8. Constriction industry XXX
9. Mineral Industry XXX
10. Others XXX
GROSS DOMESTIC PRODUCT XXXXXX
Net factor income from abord +XXX
GROSS NATIONAL PRODUCT XXXXXX
Depreciation -XXX
Net National Product XXXXXXX
Net Indirect Tax (Indirect Tax – Subsidies) +XXX
Net National Product at FC= National Product XXXXXXXXX
The main steps of this method are:
Find the GDP by adding the market value of final goods and services produced
within the country.
Find GNP by adding net foreign income from abroad (NFIA) to GDP.
Find NNP by subtracting depreciation from GNP.
Find NI by adding subsidies and subtracting indirect tax from NNP.

• Mathematically, GDP = + +………………+

GNP at mp = GDP+NFIA
NNP at mp = GNP- Depreciation
NI = NNP at mp + Subsidies-Indirect Tax = NNP at factor cost
B. Value Added Method
The value-added method estimates NI and output by considering the values of both
intermediate and final products simultaneously. Value-added means the addition to
the value of raw materials and inputs during the process of production. In other
words, value-added is the value that a producing firm adds to the intermediate inputs
to get the final product.
Value Added= Value of output-Cost of intermediate goods.
Or, Value added= Sale- Cost Price.
In this method, GDP is calculated by adding total value added by different
producing units of a country. A sample of the measure of value added is given
below:
Contd…..

S.No Producer Goods Market Cost Value

price Added
1 Farmer Wheat 500 0 500
2 Miller Flour 800 500 300
3 Baker Bread 1200 800 400
4 Hotel owner Roast 1500 1200 300

Total value 4000 2600 1500

Added
The main steps of this method are:

 Find the total value added by subtracting the price of intermediate

goods from the final product.
 Find GDP by adding the gross value added of all sectors of the
economy.
 Find GNP by adding Net foreign income from abroad to GDP.
 Find NNP by subtracting depreciation from GNP.
 Find NI by adding subsidies and subtracting indirect tax from NNP.
Contd…
S.No Production Sector Value
Added
1 Primary Sector xxx
2 Secondary Sector xxx
3 Tertiary Sector xxx
Gross Domestic Product (GDP) xxx
Net foreign Income (+)xxx
Gross National Product (GNP) xxx
Depreciation (-)xxx
Net National Product (NNP) xxx
Subsidies (+)xxx
Indirect Tax (-)xxx
National Income (NI) XXXXX
Income Method
In this method, National Income is measured from the total sum of rewards received
by all factors of production in an economy in a year. In short, NI is measured from
the side of factor income. Income method is the method that measures NI from the
side of payment made of wages, interest, rent, and profit to the primary factor of
production. Therefore, it is called the factor payment method. The main steps are:
Divide the factor income like rent, interest, wages, and profit.
Find Gross Domestic Income (GDI) by adding all factors income during a year.
Find Gross National Income (GNI) by adding net foreign income to GDI.
Find Net National Income (NNI) by subtracting depreciation from GNI.
Find National Income (NI) by adding subsidies and subtracting indirect tax from
NNI.
The calculation of National Income
by Income Method: A hypothetical table
Income Headings Amount (Rs. in Million)
1. Wages and Salaries 10,000
2. Rental Income 5,000
3. Interest Income 7,000
4. Profit (Undistributed Profit + Dividend + Corporate Income Tax) 4000
5. Mixed Income of the self-Employed 2,000
6. Net Indirect Taxes (Indirect Taxes – Subsidies) 500
7. Depreciation 2,000

Gross Domestic Income (GDI/GDP) 30,500

Plus NFIA + 1,500
Gross National Income (GNI/GNP) 32,000
Less Depreciation (CCA) - 2000
Net National Income (NNI/NNP) 30,000
Less Net Indirect Taxes - 500
Net National Income in Factor cost = National Income 29,000
The following incomes are not included in the income method:
The following incomes are not included in the income method:
a) Amount received from the sale of second-hand goods.
b) Amount received from the sale of bonds or stock.
c) Amount received from transfer payment.
d) Income from illegal activities.
• In short,
• GDI= Wages +Interest+ Rent +Profit +Depreciation +Net Indirect Taxes
• GNI=GDI+NFIA
• NNI=GNI-Depreciation
• NI=NNI- Net indirect taxes
• NI=NNI at factor cost.
 Expenditure Method
In this method, NI is measured from the side of expenditure. According to this
method, NI is calculated by adding all the expenditure in final goods and services
made by the four sectors of the economy i.e. household, business, government, and
foreign sector. It only includes final expenditure. The final expenditure means the
expenditure made on the final product. The main steps of this method are:
1) Divide the final expenditure on consumption (C), investment (I), government
expenditure (G) and net export (X-M)
2) Find Gross Domestic Expenditure (GDE) by adding consumption, investment,
government expenditure, and net export.
3) Find Gross National Expenditure (GNE) by adding net foreign income from abroad
to GDE.
4) Find Net National Expenditure (NNE) by subtracting Depreciation from GNE.
5) Find National Expenditure (NE) by adding subsidies and indirect tax from NNE.
Measurement of National Income by Expenditure Method
Expenditure Headings Amount (Rs. In Millions)

Private Consumption Expenditure (c) 10,000

Durables (3000)
Non-durables (3000)
Services (4000)
Gross Domestic Private Investment - Expenditure (I) 5,000

Government Expenditure (G) 15,000

Net Exports (X-M) -2,000

Gross Domestic Expenditure (GDE/GDP) 28,000

Plus NFIA 5,000
Gross National Expenditure (GNE/GNP) 33,000
Less Depreciation (CCA) -2,000
Net National Expenditure (NNE/NNP) 31,000
Net Indirect Tax -1,000
National Income 30,000
In Short
GDE=C+I+G+(X-M)
GNE=GNP=GNE=GDE+NFIA
NNE=GNE-Depreciation
NE=NI=NNE-Net indirect tax
It must exclude expenditures on previously produced goods.
It must also exclude all expenditures for the purchase of used assets.
It must exclude purchase of financial assets, such as stock and bonds; they are
merely a pieces of paper.
It must exclude the transfer payments.
Expenditures on intermediate goods, such as fertilizers and seed by farmers
should be excluded.