Ch 7 national income Different Concepts of National Income:

1. Gross Domestic Product (GDP) - It is the

market value of all final goods and services
The total income of the nation is called
produced within the domestic territory of
National Income. In real terms, national
country, during a period of one year.
income is the flow of goods and services
produced in an economy during a year. GDP = C + I + G + (X-M)

Features 2. Net Domestic Product (NDP) - It is the

net market value of all final goods and
1. Macro-Economic concept - income of the
services produced within the domestic
economy as a whole.
territory of a country, during a period of one
2. Flow Concept - shows flow of goods and year - NDP = GDP -Depreciation
services produced in the economy.
3. Gross National Product (GNP) - It means
3. Financial Year: 1st April to 31st March. the gross value of final goods and services
produced annually in a country which is
4. Money Value: always expressed in
estimated according to the price prevailing
monetary terms.
in the market
5. Value of only final Goods and Services:
GNP = C + I + G + (X-M) + (R-P)
to avoid double counting.
4. Net National Product (NNP) - It is the net
6. Net aggregate value: does not include
market value of all final goods and services
depreciation costs.
produced by the residents of a country,
7. Net income from abroad: It includes [X- during a period of one year.
M] and [R-P].
NNP = GNP – Depreciation
Circular Flow of National Income
Methods of Measurement of National
The circular flow of national income refers Income:
to the process whereby an economy’s
1) Output Method/Product Method - also
money receipts and payments flow in a
known as product method or inventory
circular manner continuously through time.
method
Product Flow and Money Flow.
NI = MV of Goods from Primary Sector + MV
of Goods from Secondary Sector + MV of
Services from Tertiary Sector.

a) Final Goods Approach/The Final Product

Approach - Value of all final goods and
services are included.
b) Value Added Approach/The Value 3) Expenditure Method - also known as
Added Method - Value added at each stage Outlay method
of the production process is included.
NI = C + I + G + (X-M) + (R-P)
Precautions:
Precautions:
1. Value of only final goods should be taken.
1. Expenditure on intermediate goods and
2. Goods used for self consumption should services – ignored
be taken.
2. Expenditure on repurchase of second
3. Indirect taxes – deducted / subsidies – hand goods – ignored
added
3. Expenditure on transfer payments –
4. Value of imports – deducted / value of ignored
exports – added
4. Expenditure on repurchase of shares,
5. Depreciation - deducted bonds, etc. – ignored

6. Changes in price level should be 5. Indirect taxes – deducted / subsidies –

considered added

7. Sale and purchase of second hand goods 6. Only expenditure on final goods and
– ignored services should be considered.

2) Income Method - also known as Factor Difficulties in the Measurement of National

Cost method NI = Income payments Income:
received by all citizens of a country in a year
A. Theoretical Difficulties or Conceptual
NI = R + W + I + P + MI + (X-M) Difficulties

Precautions: 1. Transfer Payments - Not included in

National Income.
1. Transfer payments – ignored
2. Illegal Income - Not included in National
2. Unpaid services – ignored
Income.
3. Income from sale of second hand goods –
3. Unpaid Services - Not included in
ignored
National Income.
4. Income from sale of shares and bonds –
4. Production for self-consumption - to be
ignored
included in national income – not
5. Value of goods kept for self consumption accounted.
should be taken
5. Income of Foreign Firms - Should be
included in National Income of the country
where the firm undertakes the production.

6. Valuation of Government Services: Real

value of these services is not known.

7. Changing Price Level - Difficult to

calculate proper values)

B. Practical Difficulties or Statistical

Difficulties

1. Problem of Double Counting;

Intermediate goods / final goods.

2. Existence of non-monetized sector: Not

accounted while counting National Income.

3. Inadequate and unreliable data:

Especially in rural areas.

4. Depreciation: No uniform, common or

accepted standard rates of depreciation.

5. Capital Gains and Losses: Not include in

National Income.

6. Illiteracy and Ignorance: Small producers

cannot keep accounts.

7. Difficulties in the classification of working

population: Income from various sources is
not accounted.

8. Valuation of inventories: Mistakes in

measurement of Inventories.