National Income

Introduction:
❑ Meaning:
➢ National income means the total value of goods and services
produced annually in a country.
➢ The total amount of income accruing to a country from economic
activities in a year’s time. It includes payments made to all the
resources in the form of wages, interest, rent and profits.
❑ Definition:
➢ The net output of goods and services flowing during the year from
the country’s productive system in the hands of the ultimate
consumers.
Concepts of National Income
❑ Gross Domestic Product (GDP):
The total value of the output of final goods and services produced in
the domestic territory of a country during an accounting year.
❑ GDP at market price:
The market value of the output of final goods and services
❑GDP at factor cost:
Represents the total value of goods and services produced within a
country, measured at the cost of factors of production (land, Labor,
Capital etc.).
GDP at factor cost = Wages + Rent + Interest + Profits
GDP at factor cost = GDP at market price – Indirect Taxes + Subsidies
Concepts of National Income (contd.)
❑ Net Domestic Product (NDP) = GDP – depreciation
➢ NDP at market price = GDP at market price – depreciation
➢ NDP at factor cost = NDP at market price – depreciation
❑ Nominal GDP or GDP at current prices:
When GDP is measured on the basis of current market price
❑ Real GDP or GDP at constant prices:
When GDP is calculated on the basis of fixed prices in some year.
To find the real GDP, a base year is chosen when the general price
level is normal i.e. it is neither too high nor too low. The prices are
set to be 100 in the base year.
Concepts of National Income (contd.)
𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 (=100)
❑ Real GDP = GDP for the current year ×
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑖𝑛𝑑𝑒𝑥

➢ Suppose 2011-12 is the base year and GDP for 2024-25 is 6,00,000
crore and the price index for this year is 300.
➢ Real GDP for 2024-25 = Rs 6,00,000 X 100/300 = Rs 2,00,000
Concepts of National Income (contd.)
❑ GDP Deflator:
It an index of price changes of goods and services included in
GDP. It is calculated by dividing the nominal GDP in a given year
by the real GDP for the same year and multiplying it by 100.
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑜𝑟 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑖𝑐𝑒𝑠 𝐺𝐷𝑃
❑ 𝑮𝑫𝑷 𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓 = × 100
𝑅𝑒𝑎𝑙 𝑜𝑟 𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑝𝑟𝑖𝑐𝑒𝑠 𝐺𝐷𝑃
331.03 𝑙𝑎𝑘ℎ 𝑐𝑟𝑜𝑟𝑤𝑒
❑ 𝑮𝑫𝑷 𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓 𝒊𝒏 𝟐𝟎𝟐𝟒−𝟐𝟓 = × 100
187.95 𝑙𝑎𝑘ℎ 𝑐𝑟𝑜𝑟𝑒(𝑎𝑡 2011−12 𝑝𝑟𝑖𝑐𝑒𝑠)

= 135.9
Concepts of National Income (contd.)
❑ Gross national product (GNP):
The total value of final goods and services produced by a nation's
citizens, irrespective of geographical limits in a financial year, is
known as GNP.
Difference between GDP and GNP
GDP GNP
Value of goods and services produced within Value of goods and services produced by a
a nation's geographical boundaries in a nation's citizens, irrespective of geographical
financial year. limits in a financial year.
Measures only the domestic production. Measures only the national production.
Emphasizes the production that is obtained Emphasizes the production that is achieved
domestically. by the citizens living in different nations.
Highlights the strength of the country’s Emphasizes the production that is achieved
economy. by the citizens living in different nations.
Local-scale International scale
Goods and services that are being produced Goods and services that are produced by
outside the economy are excluded. foreigners living in the country are excluded.
Methods of Measuring NI
❑ Income Method:
Sum total of the remuneration paid in the form of money to the
factors of production in a year in a country.
GDP = wages & Salaries + Rent + Interest + Profit
GNP = wages & Salaries + Rent + Interest + Profit + Net Income
from abroad
Methods of Measuring NI (contd.)
❑ Expenditure method:
The expenditure incurred on goods and services during a year in a
country.
GDP = Consumption expenditure (C) + Investment in fixed capital (I),
Government expenditure (G) + (Export – Import)

GNP = GDP + Net income from abroad

Methods of Measuring NI (contd.)
❑ Production Method or Value-Added Method:
Money value of the final goods and services.
All the goods and services available may be final goods for one
industry and intermediate for others. So, to avoid duplication, the
value of intermediate products used in manufacturing final products
must be subtracted from the value of total output of each industry in
the economy. Thus, the difference between the value of material
outputs and inputs at each stage of production is called the value
added
Production Method/Value-Added Method
Industry Total output Intermediate inputs Value added
Agriculture 30 10 20
Manufacturing 70 45 25
Tertiary 55 25 30
Total 155 80 75
Limitations in measuring NI
❑ Problems in Income Method:
➢ Owner Occupied houses
➢ Self employed persons
➢ Goods meant for self consumption
➢ wages and salaries paid in kind
❑ Problems in Product Methods:
➢ Services of housewife
➢ Intermediate and final goods
➢ Secondhand goods and assets
Limitations in measuring NI
➢ Illegal activities
➢ Consumers’ service
➢ Capital gains
➢ Inventory changes
➢ Depreciation
➢ Price changes
❑ Problem is Expenditure Method:
➢ Government services
➢ Transfer payments
➢ Durable-use consumer goods
➢ Public expenditure
Importance of NI Analysis
❑ Comprehensive summary of the economy
National income estimates give us detailed data relating to a
country’s production, savings, investment, capital formation and
various other economic activities in a particular year. All these data
give us a comprehensive picture of the economic activities of the
people during that year.
❑ Assessment of the relative importance and progress of the
different sectors:
Give an idea of the relative importance of the different sectors
(namely, agriculture, industry, trade and commerce, services, etc.) in
the economy of the country.
Importance of NI Analysis
❑ National policies and programmes:
The government of a country is to frame its economic policies and
programmes on the basis of the estimates of the different
components of national income. The importance of these estimates
has increased considerably in developing countries in framing their
future development plans.
❑ Economic planning:
National income estimates constitute the pivot of economic planning
as the entire machinery of planning is based on “an appraisal of
existing resources and an accurate diagnosis of deficiencies”
furnished by the national income estimates. These estimates enable
the government to determine the allocation of the country’s resources
on the different heads of development.
Importance of NI Analysis
❑ Input-output analysis:
Use for studying the structure of the economy through the input-output analysis.
❑ Measurement of inflationary and deflationary gaps:
Use for measuring the inflationary or deflationary gaps found at any time in a
country.
❑ Per capita income:
Significant for a country’s per capita income which reflects the economic welfare
of the country. The higher the PCI, the higher the economic welfare of the
country.
❑ Distribution of Income
Enable to understand how income of the country is being distributed among
different sections of the society.
From the data pertaining to wages, rent, interest and profits, we learn the
disparities in the income of different sections of the society. Similarly, regional
distribution of income is revealed.
Circular Flow of Income
❑ The process whereby the national income and expenditure of an
economy flow in a circular manner continuously through time.
❑ The various components of national income and expenditure such as
saving, investment taxation government expenditure, exports,
imports etc. are shown on diagrams in the form of currents and
cross-currents in such a manner that national income equals national
expenditure.
Circular Flow of Income (contd.)
❑ A simple hypothetical economy where there are only two sectors, the
households and business.
❑ The household sector owns all the factors of production (land, labor
and capital). This sector receives income by selling the services of
these factors to the business sector.
❑ The business sector consists of producers who produce products and
sell them to the household sector/consumers.
Circular Flow of Income (contd.)
Circular Flow of Income (contd.)
❑ In an actual economy, “inflows” and “leakage” occur in the income
and expenditure flow. Such leakages are saving, and inflows or
injections are investment which equal each other.
❑ The circular flow of income and expenditure is altered by the
inclusion of saving and investment.
❑ Expenditure has now two alternative paths from household and
product markets
➢ Directly via consumption expenditure
➢ Indirectly via investment expenditure
Circular Flow of Income (contd.)
Circular Flow of Income (contd.)
❑ The financial/capital market coordinates the saving and investment
activities of the households and business firms.
❑ The households supply saving to the financial/capital market and the
firms, in turn, obtain investment funds from the financial market.