Measurement of National Income

Submitted by-
Sarthak
B.A.LLB.
Roll number- 232073
Semester- 3rd {B}

Submitted to-
Dr. Pooja
(Associate Professor)

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 Acknowledgement
I would like to express my profound gratitude to Dr. Pooja,
for their contributions to the completion of my project titled
Measurement of National Income.

I would like to express my special thanks to our mentor Dr.

Pooja for her time and efforts she provided throughout the
semester. Your useful advice and suggestions were really
helpful to me during the project’s completion. In this aspect,
I am eternally grateful to you.

I would like to acknowledge that this project was completed

entirely by me and not by someone else.

SARTHAK
{B.ALL.B}
3rd SEMESTER
SECTION-B

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Introduction-:
The National Income Of Any Country Means The Entire Value Of The
Commodities And Services Produced By Any Country Throughout Its
Financial Year. It Is, Therefore, The Outcome Of All Economic
Activities That Are Taking Place In Any Country For One Year. It Is
Valued In Terms Of Money. In Other Words, Any Country's National
Income Is The Total Earnings Acquired Through Several Economic
Activities In One Year. It Comprises Wages, Interest, Rent And Profit
Obtained Through Various Factors Of Production Like Labor, Capital,
Land And Entrepreneurship Of A Nation. It Is Beneficial In
Determining The Progress Of The Country.

National Income Accounts (Nias) Are Fundamental Aggregate

Statistics In Macroeconomic Analysis. The Ground-Breaking
Development Of National Income And Systems Of Nias Was One Of
The Most Far-Reaching Innovations In Applied Economics In The
Early Twentieth Century. Nias Provide A Quantitative Basis For
Choosing And Assessing Economic Policies As Well As Making
Possible Quantitative Macroeconomic Modeling And Analysis. Nias
Cannot Substitute For Policymakers’ Judgment Or Allow Them To
Evade Policy Decisions, But They Do Provide A Basis For The
Objective Statement And Assessment Of Economic Policies.

Combined With Population Data, National Income Accounts Can

Provide A Measure Of Well-Being Through Per Capita Income And Its
Growth Over Time. Also, Nias, Combined With Labor Force Data, Can
Be Used To Assess The Level And Growth Rate Of Productivity,
Although The Utility Of Such Calculations Is Limited By Nias’
Omission Of Home Production, Underground Activity, And Illegal
Production. Combined With Financial And Monetary Data, Nias
Provide A Guide To Inflation Policy. Nias Provide The Basis For
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Evaluating Government Policy And Can Rationalize Political
Challenges To Incumbents By People Who Are Dissatisfied With
Measurable Aspects Of The Government’s Policies. In Emerging
And Transition Economies, Implementing A Dependable And Accurate
System Of Nias Is A Crucial Step In Developing Economic Policy.

National Income Refers To The Monetary Value Over A Period Of

Time Of The Output Flow Of Goods And Services Produced In An
Economy.

The Uses Of National Income Statistics:

Measuring The Level And Rate Of Growth Of National Income (Y) Is
Essential To Keep Track Of:

 The Rate Of Economic Growth

 Changes To Living Standards

Changes To The Distribution Of Income B/W Groups

What Is National Income?



The Value Of The Commodities And Services A Nation Produces In A

Fiscal Year Is Referred To As National Income. As A Result, It
Represents The Sum Of All Economic Activity Carried Out In A Nation
Over The Course Of A Year And Is Measured In Monetary Terms. The
Terms National Dividend, National Production, And National
Expenditure Are Sometimes Used Interchangeably With The
Ambiguous Concept Of National Income.

The Equation To Calculate National Income Is As Follows:

National Income = C + I + G + (X -M)

Where,

o C Stands For Consumption.

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 o I Stand For Total Investment Expenditure

o G Stands For The Expense Made By The Government

o X Stands For Exports And

o M Stands For Imports.

The Positions Of X And M Are Interchangeable Depending On

Whether The Trades Are Trade Surplus Or Deficit.

Circular Flow Of Income

The Circular Flow Of Income Is A Model Of The Economy In Which
Major Exchanges Are Represented As Flows Of Money, Goods,
Services, Etc. Among The Economic Agents. As Per This
Model, Money And Goods & Services Flow In The Opposite Direction
But Move In A Closed Circuit.

Production, Consumption, And Investment Are Important Economic

Activities Of An Economy. In Carrying Out These Economic Activities,

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People Make Transactions Between Different Sectors Of The
Economy. Because Of These Transactions, Income And Expenditure
Move In A Circular Form. This Is Called The Circular Flow Of Income.

Gross Domestic Product

The Total Value Of Output In An Economy Is The Gross Domestic
Product (Gdp) And Is Used To Measure Economic Activity Changes.
Gdp Encompasses The Production Of Foreign-Owned Enterprises
Located In A Country Following The Foreign Direct Investment.
There Are Three Different Ways To Calculate Gdp That Should All Add
Up To The Same Amount: The National Output Is Equal To National
Expenditure (Aggregate Demand) Which In Turn Is Equal To National
Income.
The Equation For Gdp Using This Approach Is
Gdp = C(Household Spending) + I(Capital Investment Spending) +
G(Government Spending) + (X(Exports Of Goods And Services)-
M(Imports Of Goods And Services)

The Three Different Ways To Measure Gdp Are - Product Method,

Income Method, And Expenditure Method.

Domestic/ Economic Territory

It Refers To The Geographical Territory Administered By The
Government Of India Within Which The Person, Goods, And Capital
Can Circulate Freely.
Note: Foreign Embassies Located In India Are Not A Part Of
Domestic/Economic Territory. However, Indian Embassies Located
Abroad Are A Part Of Domestic/Economic Territory.

Market Price (Mp)

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 Market Price (Mp) Refers To The Price That A Consumer Pays
For The Product While Purchasing It From The Seller.


In Other Words, It Is The Price At Which A Product Is Sold In The

Market.


Market Price (Mp) Includes Indirect Taxes (As They Are Added
To The Selling Price) And Excludes Subsidies Received (As They


Are Deducted From The Selling Price).

Factor Cost (Fc)

Factor Cost (Fc) Refers To The Cost Of Factors Of Production
That Are Incurred By A Firm When Producing Goods And


Services.
In Other Words, It Is The Cost Of Producing A Good Or Service.
Factor Cost (Fc) Excludes Indirect Taxes (Since They Are Not


Related To The Production Process) But Includes Subsidies



Received (As These Are Direct Inputs Into The Production).

Factor Cost (Fc) = Market Price – Indirect Taxes + Subsidy

Nominal Price Or Current Price

The Market Price Of Any Good Or Service In The Current Year Is
Called The Nominal Price Or Current Price. Since Inflation Is Included
In The Current Market Price, The Nominal Price Or Current Price
Changes As Per The Current Level Of Inflation.

Base Price Or Constant Price

In Order To Compare The National Income Of Various Years, It Is
Calculated With Reference To A Particular Year. This Reference Year
Is Called The Base Year, And The Market Price Of Any Good Or
Service In The Base Year Is Called The Base Price Or Constant Price.

Depreciation
Depreciation, Also Known As The Consumption Of Fixed Capital,
Refers To The Loss In Value Of Fixed Assets Due To Wear And Tear,
Accidental Damages, And Obsolescence.

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Methods Of Computing National Income
(Ni)
National Income (Gdp Or Gnp) Can Be Calculated By 3
Methods: Income Method, Expenditure Method, And Production
Method.

Income Method
Under This Method, Ni Is Obtained By Summing Up The Incomes Of
All Individuals In An Economy.
Individuals Earn Incomes By Contributing Their Own Services And
The Services Of Their Property Such As Land And Capital To The
National Production.
Thus,
Net National Income = Employee Compensation + Operating Surplus
(W + R + P + I) + Net Income + Net Factor Income From Abroad
Where,
W Stands For Wage And Salaries.
R Stands For Income From Rental Sources.
o

P Stands For Profit.

o

I Stand For Mixed Income.

o
o

The Income Method Of National Income Calculation Is Used At

The Distribution Level. The National Income Is Estimated Using
o

This Method As A Flow Of Factor Incomes.

Labor, Capital, Land And Entrepreneurship Are The Four
Important Production Components.
o

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 Labor Is Compensated With Wages And Salaries. Capital Is
Compensated With Interest. The Land Is Compensated With
o

Rent, And Entrepreneurship Is Compensated With Profit.

Moreover, Certain Self-Employed Individuals, Such As Doctors,
Lawyers And Accountants, Use Their Labor And Capital. The
o

Earnings Of Such People Are Classified As Mixed-Income.

The Net Domestic Product (Ndp) At Factor Costs Is The Sum Of
These Factor Incomes.
o

Product Or Value Added Method

This Is Also Called “Output Method”.
Under This Method, Ni Is Computed By Adding The Values Of Output
Produced Or Services Rendered By The Different Sectors Of The
Economy During The Year.
It Is To Be Noted That While Computing The Values Of Output
Figures, Only The Value Added By Each Firm In The Production
Process Is Taken Into Account. Thus, This Method Makes Use Of
The Concept Of Value-Added.
National Income = Gross National Product – Cost Of Capital –
Depreciation – Indirect Taxes
In This Case, The National Income Is Estimated At The
Production Level. The National Income Is Estimated Using This
o

Method As A Flow Of Goods And Services.

We Determine The Fiscal Value Of All Final Goods And Services
Produced In A Country’s Economy Annually. “Final Goods”
o

Refers To Commodities Consumed Immediately Rather Than

Being Engaged In A Subsequent Manufacturing Process.
Intermediate Goods Are Those Goods That Are Made Use Of In
The Manufacturing Process.
o

Since The Value Of Intermediate Products Is Already Included In

The Value Of Final Goods, We Do Not Have To Consider The
o

Value Of Intermediate Goods In National Income; If Taken Into

Account, The Value Of The Goods Would Be Counted Twice.

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 To Avoid Duplication In Counting, We Can Use The Value-Added
Approach, Which Computes The Value-Addition (I.E., The Value
o

Of The Final Product Plus The Value Of The Intermediate

Product) At Every Production Stage And Then Adds Them
Together To Get The Gross Domestic Product.
The Total Is The Gdp At Market Prices, Considering That The
Monetary Value Is Measured At Market Prices.
o

Expenditure Method
It Is Also Called ‘Total Outlay Method’.
This Method Assumes That The Income Earned By An Individual Is
Either Spent On Consumer Goods/Services Or Saved And Invested.
Thus,
National Income = National Product = National Expenditure
The Expenditure Method Can Determine National Income During
The Disposition Phase. The National Income Is Calculated Using
o

The Expenditure Method As A Flow Of Expenditure.

The Gross Domestic Product (Gdp) Is The Sum Of All The Private
Consumption Expenditures.
o

The Factors Such As Government Consumption Expenditure,

Gross Capital Formation (Public And Private) And Net Exports
o

Must Be Considered Here.

Major Objectives Of Measuring National Income
To Compute The Economic Advancement Of A Country.
To Compare The Economic Growth Of Several Countries.
o

To Measure The Contribution Of Different Sectors To The

o

Country’s Economic Growth.

o

To Analyze The Issues Experienced By The Economy.

To Assist The Government In Planning And Implementing Various
o

Projects.
o

To Determine The Limitations And Benefits Of Various Economic

Activities Like Production, Consumption And Distribution.
o

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Advantages Of Measuring National
Income
Measuring National Income Provides A Comprehensive Snapshot
Of A Country's Economic Health.
o

It Helps In Assessing The Population's Overall Standard Of Living

And Well-Being.
o

National Income Data Aids In Formulating Effective Economic

Policies And Development Plans.
o

It Assists In Comparing The Economic Performance Of Different

Regions And Periods.
o

The Data Is Crucial For Monitoring Economic Growth, Stability,

And Progress.
o

It Offers Insights Into Income Distribution And Inequality Within

The Country.
o

Investors And Businesses Use This Information To Make

Informed Decisions.
o

International Comparisons Of National Income Help In Assessing

India's Global Economic Position.
o

It Serves As A Valuable Tool For Fiscal And Monetary Policy

Formulation.
o

Accurate National Income Measurements Are Essential For

International Trade And Investment Decisions.
o

Problems In Measuring National Income

The Estimation Of The National Income Poses The Following Types Of
Difficulties.

Conceptual Difficulties
It Is Challenging To Compute The Value Of Some Items, Such As
Services Rendered For Free And Commodities To Be Sold But
o

Utilized For Self-Consumption.

At Times, It Becomes Difficult To Distinguish Between Primary,
Intermediate And Final Goods.
o

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 What Price Should Be Chosen To Decide On The Fiscal Value Of
A National Product Is Always A Difficult Question.
o

Whether To Incorporate The Earnings Of Foreign Companies In

The National Income Is Always A Question Since They Send Out
o

A Major Portion Of Their Income Outside India.

Statistical Difficulties
In Case Of Changes In The Level Of Prices, We Need To Use The
Index Numbers That Have Their Inherent Limitations.
o

Statistical Findings Are Only Sometimes Precise As They Are

Based On Sample Surveys. Also, All The Necessary Information
o

Is Only Sometimes Available.

Different Countries Adopt Different Methods Of Estimating
National Income. Thus, It Is Not Readily Comparable.
o

N India, National Income Is Estimated Using Various Factors, And The

Central Statistical Office Publishes It.

Macroeconomic Concept
Macroeconomics Explores How An Economy Functions And Focuses
On Aggregate Measures. Since National Income Is An Aggregate
Term, It Can Be Considered A Macroeconomic Concept.

Flow Concept
National Income Is Measured Over A Particular Period. National
Income Has An Element Of Time Linked To It. Therefore, It Is A Flow
Concept.

The Monetary Value Of Commodities

National Income Is The Entire Market Value Of All The Final Goods
And Services In Terms Of The Money Generated Within The National
Territory During An Accounting Year, So National Income Is The
Money Valuation Of Goods.

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Incorporates The Value Of Final Commodities And
Services
National Income Covers Only The Value Of Ultimate Goods. The Value
Of Intermediate Goods Is Not Contained In The Assessment Of
National Income. This Is To Ward Off The Issue Of Double Counting.

Net Aggregate Value

National Income Is A Net Aggregate Value Since It Comprises The
Goods And Services Generated By The Firms Throughout An
Accounting Year. It Does Not Involve Depreciation Or Consumption Of
The Fixed Capital.

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