Determination of National Income

CHAPTER - 1

DETERMINATION OF NATIONAL INCOME

UNIT-1: NATIONAL INCOME ACCOUNTING

CONCEPTS PARTICULARS NO. OF QUES

CONCEPT-1 DEFINATION OF NATIONAL INCOME 3

CONCEPT-2 THE CIRCULAR FLOW OF INCOME/ 1

METHODS FOR CALCULATION OF
NATIONAL INCOME

CONCEPT-3 PRACTICAL PROBLEMS 8

CONCEPT-4 THE SYSTEM OF REGIONAL ACCOUNTS 1

IN INDIA

CONCEPT-5 LIMITATIONS AND CHALLENGES OF 2

NATIONAL INCOME COMPUTATION

TOTAL 16

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1
 Determination of National Income

CHAPTER - 1

DETERMINATION OF NATIONAL INCOME

UNIT-1: NATIONAL INCOME ACCOUNTING

CONCEPT 1
DEFINATION OF NATIONAL INCOME

Q1 Define National Income. (**** STAR Q)

Or

Define National Income and explain the usefulness of National Income estimates.

Ans Meaning: National Income is defined as the net value of all economic goods and services
produced within the domestic territory of a country in an accounting year plus the net
factor income from abroad.

According to the Central Statistical Organisation (CSO) ”National income is the sum total
of factor incomes generated by the normal residents of a country in the form of wages,
rent, interest and profit in an accounting year’’.

In simple words, National income/product is the value of production by the normal residents
of a country (within or outside the domestic territory).

USEFULNESS AND SIGNIFICANCE OF NATIONAL INCOME ESTIMATES

(a) National income accounts provide a broader view of an economy. It indicates
the level of economic activity, and aggregate demand for goods and services
and overall economic development of a country.
(b) It enables businesses to forecast the future demand for their products.
(c) The estimates of national income show the composition and structure of
national income in terms of different sectors of the economy. Using this
information, the governments can fix various sector-specific development
targets for different sectors of the economy and formulate suitable
development plans and policies to increase growth rates.
(d) National income estimates throw light on income distribution and the
possible inequality in the distribution among different categories of income
earners.

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 Determination of National Income

(e) International comparisons in respect of incomes and living standards assist in

determining eligibility for loans. The national income data are also useful to
determine the share of nation’s contributions to various international bodies.
(f) National income statistics also provide a quantitative basis for
macroeconomic modeling and analysis, for assessing and choosing economic
policies and for objective statement as well as evaluation of governments’
economic policies.

Q2 What function does the UN System of National Accounts (SNA) serve?

(BAGHI TYPE Q)

Ans: System of National Accounts (SNA) The System of National Accounts (SNA) is the
internationally agreed standard set of recommendations on how to
compile measures of economic activity. The SNA describes a
coherent, consistent and integrated set of macroeconomic
accounts in the context of a set of internationally agreed concepts,
definitions, classifications and accounting rules.

SNA provides an overview of economic processes, recording how

production is distributed among consumers, businesses, government
and foreign nations. It shows how income originating in production,
modified by taxes and transfers, flows to these groups and how
they allocate these flows to consumption, saving and investment. Consequently, the national
accounts are one of the building blocks of macroeconomic statistics forming a basis for
economic analysis and policy formulation.

Q3 Describe the different concepts of National Income. CA STUDY (AOQ)

Ans: National income accounts have three sides -

i) Product side: It measures production based on concept of value added.
ii) Expenditure side: It looks at the final sales of goods and services.
iii) Income side: measures the distribution of the proceeds from sales to
different factors of production.

There are many different concepts of national income. Each has a specific meaning,
method of measurement and use.

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 Determination of National Income

GDPMP GDPFC

Nominal
GDP &
Real GDP GNPMP NDPFC

NDPMP GNPFC

National
NNPMP NNPFC Income

Per Capita
Personal Income
Income

Disposable
Income
CONCEPTS
OF
NATIONAL
INCOME

GROSS DOMESTIC PRODUCT (GDPMP)

 The term ‘gross’ means that GDPMP is gross of depreciation. ‘Domestic’ means
domestic territory or resident production units. ‘Product’ means final
products. ‘Market Price’ means that GDPMP is calculated at prices inclusive of
taxes and exclusive of subsidies.
 Gross domestic product (GDP) is a measure of the market value of all final
economic goods and service produced within the domestic territory of a
country during a given time period.
 Key points about GDPMP

(a) GDPMP is flow of goods and services produced during a year. It doesn’t
include goods produced in the previous year.

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 Determination of National Income

(b) GDPMP is always GDPMP at current prices.

(c) GDPMP isn’t value of output because it excludes value of intermediate
consumptions.
(d) GDPMP excludes transfer payments, capital gains, financial transactions and
income generated through illegal means.
(e) GDPMP is market value of final goods and services. Market Value = Price *
Quantity of final goods and services.
(f) GDPMP is confined to domestic territory of a country and therefore
excludes Net Factor Income from Abroad (NFIA)

GDPMP = Value of Output in the Domestic Territory – Value of Intermediate

Consumption

GDPMP= ∑ Value Added

NOMINAL GDP vs. REAL GDP

Gross Domestic Product or GDP refers to the economic value of goods and services
produced within the nation’s boundaries, in a particular financial year plus income earned by
foreign residents locally less income earned abroad by country’s residents. When the GDP is
estimated at current prices, it exhibits Nominal GDP, whereas Real GDP is when the
estimation is made at constant prices.

Both Nominal and real GDP are considered as a financial metric for evaluating country’s
economic growth and development. However, the confusion still exists that which one better
indicates the country’s progress than the other. Take a read of the following Table to know
the differences between nominal and real GDP and it may also help you to overcome your
confusion.

BASIS FOR NOMINAL GDP REAL GDP

COMPARISON
Meaning The aggregate market value of the Real GDP refers to the value of
economic output produced in a year economic output produced in a
within the boundaries of the given period, adjusted according to
country is known as Nominal GDP. the changes in the general price
level.
What is it? GDP without the effect of inflation. Inflation adjusted GDP

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 Determination of National Income

Expressed in Current year prices Base year prices or constant

prices.
Value Higher Generally, lower.
Uses Comparison of various quarters of Comparison of two or more
the given year can be made. financial year can be done easily.
Economic Cannot be analyzed easily. Good indicator of economic growth.
Growth

GROSS NATIONAL PRODUCT

Gross National Product (GNP) is a measure of the market value of all final economic
goods and services, gross of depreciation, produced within the domestic territory of
a country by normal residents during an accounting year including net factor
incomes from abroad. Gross National Product (GNP) is evaluated at market prices
and therefore it is in fact Gross National Product at market prices (GNPMP).

GNPMP = GDPMP + Net Factor Income from Abroad

GDP MP = GNPMP – Net Factor Income from Abroad

NFIA is the difference between the aggregate amount that a country's citizens and
companies earn abroad, and the aggregate amount that foreign citizens and overseas
companies earn in that country.
If Net Factor Income from Abroad is positive, then GNPMP would be greater than
GDPMP.

National = Domestic + Net Factor Income from Abroad

NET DOMESTIC PRODUCT AT MARKET PRICES (NDPMP )

NDPMP is defined as the market value of all final goods & services produced within
the domestic territory of a country by its normal residents and non-residents during
an accounting year less of depreciation. NDPMP can be calculated by the formula:

NDP MP = GDP MP – Depreciation

NDP MP = NNPMP – Net Factor Income from Abroad

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 Determination of National Income

NET NATIONAL PRODUCT AT MARKET PRICES (NNPMP)

NNPMP is defined as the market value of output of final goods and services produced
by normal residents within the domestic territory during an accounting year
excluding depreciation and including of a country including NFIA.

NNPMP = GNPMP – Depreciation

NNPMP = NDPMP + Net Factor Income from Abroad

NNPMP = GDPMP + Net Factor Income from Abroad – Depreciation

GROSS DOMESTIC PRODUCT AT FACTOR COST (GDPFC)

GDP at factor cost is defined as the sum of net values added by all producers in the
domestic territory of a country inclusive of depreciation during an accounting year.
GDPFC is measured by the following formulae:
GDPFC = GDPMP – Indirect Taxes + Subsidies
GDPFC = NDPFC – Depreciation
= Compensation of Employees – Operating Surplus + Mixed Income + Depreciation

NET DOMESTIC PRODUCT AT FACTOR COST (NDPFC)

Net Domestic Product at Factor Cost (NDPFC) is defined as the total factor
incomes earned by the factors of production. In other words, it is sum of domestic
factor incomes or domestic income net of depreciation. It is alternatively known as
Net Domestic Income.

NDPFC = NDPMP – Net Indirect Taxes

= Compensation of employees

+ Operating Surplus (rent + interest + profit)

+ Mixed Income of Self – employed

NDPFC = NDPMP – Net Indirect Taxes (Indirect Tax + Subsidies)

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 Determination of National Income

NET NATIONAL PRODUCT AT FACTOR COST (NNPFC) OR NATIONAL INCOME

National Income is defined as the factor income accruing to the normal residents of
the country during a year. It is the sum of domestic factor income and net factor
income from abroad. In other words, national income is the value of factor income
generated within the country plus factor income from abroad in an accounting year.

NNPFC = National Income = FID (factor income

earned in domestic territory) + NFIA.
NNPFC = NDPFC + NFIA

A few key features of National Income-

a) National Income reflects the value of final goods &
services only.
b) It is expressed in monetary terms.
c) It is a flow concept.
d) National Income isn’t the sum of individual personal
incomes. Personal incomes include transfer incomes.

PER CAPITA INCOME Per capita income (PCI) or average income measures
the average income earned per person in a given area (city, region, country, etc.) in a
specified year. It is calculated by dividing the area's total income by its total
population. It serves as an indicator of the standard of living of a country.

Note: Per Capita Income of India is Rs. 1, 12,835 as per Times of India Report as on
31st May, 2018.

PERSONAL INCOME Personal Income is the sum total of income actually received by
persons from all sources in the form of current transfer payments and factor
incomes.

PI = NI + income received but not earned – income earned but not received.
= NI – Income from domestic product accruing to public sector – corporate tax
– distributed profit less of retained earnings of foreign companies and
transfer incomes

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 Determination of National Income

DISPOSABLE PERSONAL INCOME (DI) DI is defined as the income remaining

with individuals after deduction of all taxes levied against their income and their
property by the government.

DI = PI-Personal Income Taxes

CONCEPT 2
THE CIRCULAR FLOW OF INCOME/ METHODS FOR CALCULATION OF
NATIONAL INCOME

Q4 Illustrate the circular flow of income. (SOORMA TYPE Q)

Or

Illustrate the circular flow of income and describe its relevance for measurement of
national income. CA STUDY (AOQ)

Ans: CIRCULAR FLOW OF INCOME

Production generates income; income gives rise to demand for goods & services;
and demand in turn gives rise to expenditure. Expenditure leads to further
production. The flow of production, income and expenditure represents three
related phases, namely-
a.) Phase I: Production of goods & services,
b.) Phase II: Distribution of factor income, and
c.) Phase III: Disposition of income.
The three phases goes on simultaneously. Each phase is the outcome of other. All
the three phases are interlinked in a circular manner.
Thus, the circular flow of income refers to the continuous circulation of production,
income generation and expenditure involving different sectors of the economy.

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 Determination of National Income

METHODS FOR CALCULATION OF NATIONAL INCOME There are 3

methods of measuring National Income-

 Value Added Method

 Income Method
 Expenditure Method

1) VALUE ADDED METHOD

 Product Method or Value Added Method is also called Industrial Origin

Method or Net Output Method.
 National income by value added method is the sum total of net value added at
factor cost across all producing units of the economy.
 This method of measurement shows the unduplicated contribution by each
industry to the total output.
Steps involved in Calculating National Income by Value Added Method

STEP 1 Identification & Classification of Producing Enterprises: Enterprises are

identified and classified into different sectors according to the nature of
their activities. All the producing enterprises are broadly classified into
three main sectors namely:
a) Primary sector (Agriculture)
b) Secondary sector (Manufacturing)
c) Tertiary sector or Service sector (Services)

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 Determination of National Income

STEP 2 Estimation of Gross Value Added (GAV):

GAV = Value of Input – Intermediate Consumption
= [Sales + Changes in stock] – Intermediate Consumption
STEP 3 Estimation of National Income: According to Value Added Method the
composition of National Income is as follows:
National income by Value Added = Sum total of net value added at factor cost
across all producing units of the economy.
-Gross value added by Primary sector within the domestic territory of a country
+Gross value added by Secondary sector within the domestic territory of a
country
+Gross value added by Tertiary sector within the domestic territory of a country
-Depreciation
-Net Indirect Tax
+NFIA

Advantages & Disadvantages of Value Added Method:

Advantages of Product method Disadvantages of Product method

This method reveals the relative importance In many Countries, figures of Production
of the different sectors of the economy by of only important industries are known.
showing their respective contribution to the So, this method can be employed only
national income. along with other methods to arrive at
National Income.
This method recognizes national income at Due to lack of appropriate data, there is
the initial stage i.e. Value the risk of double counting of
addition/production itself. intermediate consumption.
Most suited for primary sector (i.e.
Agriculture) where factor
Incomes/Consumption cannot be properly
ascertained.

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 Determination of National Income

2) INCOME METHOD

 Income Method is also called Factor Payment Method or Distributed Share

Method.
 National income is calculated by summation of factor incomes paid out by all
production units within the domestic territory of a country as wages and
salaries, rent, interest, and profit.
 It includes factor payments to both residents and non-residents.
 According to income method, the components of NI are given by the formula:
NI (or NNP FC) = Compensation of Employees + Operating Surplus + Mixed Income of
Self-employed + NFIA

Steps involved in Calculating National Income by Income Method

STEP 1 Identification & classification of producing enterprises which employs

factor inputs: It requires
a) Identifying the producing enterprise which employs factor inputs; and
b) Classifying producing units under 3 heads:
i) Primary Sector
ii) Secondary Sector
iii) Tertiary Sector
STEP 2 Classification of factor Income: Factor income are classified into the
following groups-
a) Compensation of Employees (Wages & Salaries in Cash, Compensation in
kind, and employers contribution)
b) Operating Surplus (rent, Interest, Royalty, Profit)
c) Mixed Income of Self-employed
d) NFIA
STEP 3 Estimation of National Income:
NI (or NNPFC) = Compensation of Employees + Operating Surplus + Mixed
Income of Self-employed + NFIA

Advantages & Disadvantages of Income Method:

Advantages of Income method Disadvantages of Income method

This method measures the national income There is a risk of omission Of vital data
after it has been distributed and appears as relating to Incomes of unorganized sector.
Income earned or received by Individuals of

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 Determination of National Income

the Country. It is more appropriate and easy

to measure National Income from this
approach.
This method indicates the distribution of This there is a risk of double counting, in
National Income among different Income relation to certain Incomes and also in
Groups. (Distributive Shares Method). Mixed Income of Self Employed.

Most suitable in economies with a greater

degree of compliance as to filing of Income
Tax Returns, Information called for by
Government etc

3) EXPENDITURE METHOD

 The Expenditure method is also called Income Disposal Approach or

Consumption/Investment Method.
 Expenditure method measures the final expenditure on GDP at market price during
an accounting year.
 According to Expenditure method, NI is the aggregate of all final expenditure in an
economy during a year, i.e.,
National Income = Final Consumption Expenditure + Final Investment Expenditure

Steps involved in Calculating National Income by Expenditure Method

STEP 1 Identification of economic units incurring final expenditure

There are 4 categories of economic units which incur final expenditure within
the domestic territory of a country. They are:
a) Household Sector
b) Producing Sector
c) Government Sector
d) Rest of the World Sector
STEP 2 Classification of Final Expenditure: The final expenditure is classified into
the following three categories –
1. Final Consumption Expenditure:
a) Private Final Consumption Expenditure: To measure private final
consumption expenditure, the volume of final sales of goods & services

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 Determination of National Income

to the consumer household and non-profit institutions serving

households is multiplied by retail prices.
b) General Government Consumption Expenditure: It is the estimated total
expenditure incurred by government for producing various services to
satisfy collective needs.
2. Gross Domestic Capital Formation: It includes final expenditure on
machinery and equipment and own account production of machinery and
equipments, expenditure on construction, expenditure on changes in
inventories, and expenditure on the acquisition of valuables such as, jewelry
and works of art.
3. Net Exports: It is the difference between exports & imports of a country
during one year.

STEP 3 Estimation of Final Expenditure: After classifying final expenditure into 3

components, it is estimated to arrive at National Income.

Advantages & Disadvantages of Expenditure Method:

Advantages of Product method Disadvantages of Product method

Most suited in situations where It is difficult to measure Capital Formation

consumption pattern and expenditure (both Domestic and Foreign) in many
data is easily available. situations.
Appropriate in Sectors like Construction, It may be easy to differentiate between
where this method is used. Final Consumption Expenditure and Capital
Formation in certain cases, leading to double
counting of the same expenditure.
Most suitable in cases where Commodity
Flow Data is captured, e.g. with
implementation of GST.

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 Determination of National Income

CONCEPT 3
PRACTICAL QUESTIONS ON COMPUTATION OF NATIONAL INCOME

Q5 Compute National income. (ALLADIN TYPE Q)

Particulars Amt. (in lakhs)

Imports (M) 200

Consumption (C) 650

Investment (I) 350

Government Purchases (G) 100

Export (X) 100

Ans: Computation of National Income (Y)-

Y = C + I + G + (X–M)
= [(650+ 350 + 100) + (200 - 100)]

= 1000

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 Determination of National Income

Q6 Calculate Gross Domestic Product at market Prices (GDPMP) and derive national income
from the following data (in Lakhs of Rupees). (FANNAY KHAN TYPE Q)

Particulars Amt. (in lakhs)

Inventory Investment 10000
Exports 2000
Indirect taxes 1000
Net factor income from abroad -500
Personal consumption expenditure 35000
Gross residential construction investment 3000
Depreciation 500
Imports 1000
Government purchases of goods and services 10000
Gross public investment 2000
Gross business fixed investment 3000

Ans: Computation of GDPMP and National Income-

GDPMP = Personal consumption expenditure + Gross Investment (Gross
business fixed investment + inventory investment) + Gross residential
construction investment + Gross public investment + Government purchases
of goods and services + Net Exports (Exports - imports)
GNPMP = GDPMP + Net factor income from abroad
GNPMP – Indirect Taxes = GNPFC
GNPFC – Depreciation = NNPFC (National Income)
GDPMp=

Particulars Amt. (in lakhs)

Personal consumption expenditure 35000

+ Gross Investment

Which includes gross business fixed investment 3000

Gross residential construction investment 3000

Gross public investment 2000

Inventory investment 1000 9000

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 Determination of National Income

+ Government purchases of goods and services

10000

+ Net exports (X-M) 1000

GDPMp 55000

+ Net Factor Income From Abroad -500

GNPMP 54500

-Indirect Taxes 1000

GNPFC 53500

-Depreciation 500

NNPFC (National Income) 53000

Q7 Find GDPMP and GNPMP from the following data (in Crores of Rs) using income method.
Show that it is the same as that obtained by expenditure method. CA STUDY (AOQ)

Particulars Amt. (in Crore)

Personal Consumption 73140
Depreciation 8000
Wages 65080
Indirect Business Taxes 10000
Domestic Investment 10600
Government Expenditures 14820
Rental Income 21960
Corporate Profits 340
Exports 6820
Net Factor Income from Abroad 13460
Mixed Income 400
interest 8060
Imports 14080

Ans: Income Method

GDPMP = Employee compensation (wages and salaries + employers' contribution
towards social security schemes) + profits + rent + interest + mixed income +
depreciation + net indirect taxes (Indirect taxes - subsidies)
GDPMP = 65080 + 340 + 10600 + 8060 + 6820 + 10000 + 8000 = 108900
GNPMP = GDPMP + NFIA = 108900 + 400 = 109300

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 Determination of National Income

Expenditure Method

Y = C + I + G + (X–M)
Y = 73140 + 1482 + 2196 + (1346 - 1408)
Y = (7314 + 1482 + 2196) – 62

Y = 109300

GNPMP = GDPMP + NFIA

= 108900 + 400= 109300

Q8 From, the following data calculate the Gross National Product at Market Price using
Value Added method. CA STUDY (AOQ)

Particulars Amt. (Rs. in Cr.)

Value of output in primary sector 1000
Value of output in tertiary sector 1400
Intermediate consumption in secondary 800
sector
Value of output in secondary sector 1800
Intermediate consumption in tertiary 600
sector
Intermediate consumption in primary 500
sector
Value of output in secondary sector 1800
Intermediate consumption in secondary 600
sector

Ans GDPMP = (Value of output in primary sector-intermediate consumption of primary

sector) + (value of output in secondary sector-intermediate consumption of
secondary sector) + (value of output in tertiary sector – intermediate consumption
of tertiary sector)
Particulars Amt. (Rs. in Cr.)
1000
Value of output in primary sector

-Intermediate consumption of primary sector 500

+ Value of output in secondary sector 1800

- Intermediate consumption in secondary sector 600

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 Determination of National Income

+Value of output in tertiary sector 1400

- Intermediate consumption of tertiary sector 600

GDPMP 2500

In the given question NFIA is not given, hence GNP MP = GDPMP.

Q9 From the following data, compute the Gross National Product at Market Price (GNPMP)
using value added method: CA INTER (MAY 2018)

Particulars
Rs (in crores)

Value of output in Secondary Sector 1000

Intermediate consumption in Primary Sector 300

Value of output in Tertiary Sector 3000

Intermediate consumption in Secondary 400

Sector

Net Factor income from abroad (-) 100

Value of output in Primary Sector 800

Intermediate consumption in Tertiary 900

Sector

Ans Calculation of GNPMP:

Particulars Amt. (Rs. in Cr.)

1000
Value of output in secondary sector

-Intermediate consumption of secondary sector 400

+ Value of output in tertiary sector 3000

- Intermediate consumption in tertiary sector 900

+Value of output in primary sector 800

- Intermediate consumption of primary sector 300

GDPMP 3200

+NFIA (100)

GNPMP 3100

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 Determination of National Income

Q10 From the following data, calculate Personal Income and Personal Disposable Income.

Particulars Amt. (Rs. in Cr.)

Net Domestic Product at factor cost

8000
Net Factor Income from abroad
200
Undisbursed Profit
1000
Corporate Tax
500
Interest Received by Households
1500
Interest Paid by Households
1200
Transfer Income
300
Personal Tax
500

Ans CALCULATION OF PERSONAL INCOME & PERSONAL DISPOSABLE INCOME

Personal Income= NDP FC + NFIA + Transfer Income - Undisbursed profit -

Corporate Tax - Net Interest paid by households (paid-received)

= 8000+200+300-1000-500-(300)

= 7300 crores

Personal Disposable Income= Personal Income - Personal Payments

= 7300-500 = 6800 crores

Q11 In a single day Raju, the barber, collects Rs 500 from haircuts; over this day, his
equipment depreciates in value by Rs 50. Of the remaining Rs 450, Raju pays sales tax
worth Rs 30, takes home Rs 200 and retains Rs 220 for improvement and buying of
new equipment. He further pays Rs 20 as income tax from his income. Based on this
information, complete Raju's contribution to the following measures of income (a) Gross
Domestic Product (b) NNP at market price (c) NNP at factor cost (d) Personal income
(e) Personal disposable income. (CA STUDY)

Ans Given, Indirect tax = 30; Personal tax = 20; Depreciation = 50 and Retained earnings=220
(a) GDPMP= Rs.500 [Barber collects from haircut]
(b) NNPMP= GDPMP – Depreciation = 500-50= 450.
(c) NNPFC= NNP – Indirect Tax = 450 – 30=420.
(d) Personal income= NNPFC - Retained earnings= 420-220=200.
(e) Personal disposable income = PI – Income tax= 200-20=180.

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 Determination of National Income

Q12 On the basis of the following data about an economy which consists of only two firms,
find out:
a) Value Added by Firm A and B.
b) Gross Domestic Product at Factor Cost (3 STAR Q)

Items (Rs. In Lakh)

Sales by Firm A 100
Purchases from Firm B by the Firm A 40
Purchases from Firm A by the Firm B 60
Sales by Firm B 200
Closing Stock of Firm A 20
Closing Stock of Firm B 35
Opening Stock of Firm A 25
Opening Stock of Firm B 45
Indirect Taxes paid by both Firms 30

Ans
a) Value Added by Firm A= Sales by Firm A- Purchases from Firm B + Change in Stock
(Closing-Opening Stock)
= 100-40+ (20-25) = 55 lakhs
Value Added by firm B= Sales by Firm A- Purchases from Firm B + Change in Stock (Closing-
Opening Stock)
= 200-60+ (35-45) =130 lakhs

b) GDPFC= Value Added by Firm A + Value Added by Firm B- Indirect taxes

=55+130-30= 155 lakhs.

Q13 Given the following data and using income method calculate: (a) Net Domestic Income,
(b) Gross Domestic Income, (c) Net National Income, (d) Net National Product at
Market Price.

Items (Rs. In Lakh)

Indirect taxes 9000
Subsidies 1800
Depreciation 1700
Mixed income of self-employed 28000
Operating surplus 10000
NFIA (300)
Compensation to employees 24000

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 Determination of National Income

Ans
a) Net Domestic Income = Mixed income of self-employed+ Operating surplus+
Compensation to employees
= 28000+10000+24000= 62000 lakhs
b) Gross Domestic Income = Net Domestic Income + Depreciation
= 62000+1700= 63700 lakhs
c) Net National Income = Net Domestic Income + NFIA
= 62000 + (300) = 61700 lakhs
d) NNPMP = Net National Income + Indirect taxes – Subsidies
= 61700+9000-1800= 68900 lakhs

CONCEPT 4
THE SYSTEM OF REGIONAL ACCOUNTS IN INDIA

Q14 Write notes on the system of Regional Accounts in India. (CA STUDY)

Ans Regional Accounts provide an integrated data base on the innumerable transactions taking
place in the regional economy and help decision making at the regional level.

i. All the states and union territories of India compute state income estimates and
district level estimates. State Income or Net State Domestic Product (NSDP)
is a measure in monetary terms of the volume of all goods and services produced
in the state within a given period of time (generally a year) accounted without
duplication.
ii. Per Capita State Income is obtained by dividing the NSDP (State Income) by
the mid year projected population of the state.
iii. The state level estimates are prepared by the State Income Units of the
respective State Directorates of Economics and Statistics (DESs). The Central
Statistical Organization assists the States in the preparation of these estimates
by rendering advice on conceptual and methodological problems.
iv. In the preparation of state income estimates, certain activities such as railways,
communications, banking and insurance and central government administration ,
that cut across state boundaries, and thus their economic contribution cannot be
assigned to anyone state directly and are known as the ‘Supra-regional sectors’ of
the economy.

ेक अ ा काय पहले अस व नजर आता है

If you try, you risk failure. If you don’t, you ensure it
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 Determination of National Income

CONCEPT 5
LIMITATIONS AND CHALLENGES OF NATIONAL INCOME COMPUTATION

Q15 Explain the limitations & challenges of National Income computation ?

CA STUDY (AOQ)

Ans Difficulties related to measurement of National Income:

(a) Lack of an agreed definition of national income

(b) Accurate distinction between final goods and intermediate goods
(c) Services of durable goods
(d) Difficulty of incorporating distribution of income
(e) Valuation of a new good at constant prices.
(f) Inadequacy of data and lack of reliability of available data,
(g) Presence of non-monetized sector
(h) Absence of recording of incomes due to illiteracy and ignorance
(i) Accurate estimation of consumption of fixed capital

Q16 Write short notes on- (Imp. Q)

a) Net Factor Income from Abroad

b) Factor Income
c) Final Goods
d) Intermediate Goods

Ans Net Factor Income from Abroad: Net factor income from abroad is the difference
between the factor income earned from abroad by normal residents of a country (say, India)
and the factor income earned by non-residents (foreigners) in the domestic territory of
that country (i.e., India).

Factor Income: Factor income is income received from the factors of production – land,
labor, and capital. Factor income on the use of land is called rent, income generated from
labor is called wages and income generated from capital is called profit. The factor income
of all normal residents of a country is referred to as the national income, and factor income
and current transfers together are referred to as private income.

Final Goods: Final good is any commodity that is produced or consumed by the consumer to
satisfy current wants or needs. Consumer goods are ultimately consumed, rather than used

If you try, you risk failure. If you don’t, you ensure it

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 Determination of National Income

in the production of another good. For example, a microwave oven or a bicycle that is sold to
a consumer is a final good or consumer good.

Intermediate Goods: Intermediate goods or producer goods or semi-finished products are

goods which are under process goods, such as partly finished goods, used as inputs in the
production of other goods including final goods. A firm may make and then use intermediate
goods, or make and then sell, or buy then use them. In the production process, intermediate
goods either become part of the final product, or are changed beyond recognition in the
process. This means Intermediate goods are sold among industries for resale.

If you try, you risk failure. If you don’t, you ensure it

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