NATIONAL INCOME

Dr.N.Prakash
Department of Management Studies
Kongu Engineering College
 National Income
• National income is defined as the money value of all the final
goods and services produced in an economy during an
accounting period of time, generally one year.

Measures of National Income

• Gross Domestic Product (GDP)
• Gross National Product (GNP)
• Net Domestic Product (NDP)
• Net National Product (NNP)
• Gross Value Added
• Real and Nominal National Income
• Per Capita Income (PCI)
Concepts
• Personal Disposable Income (PDI)
 Gross Domestic Product
• Gross Domestic Product (GDP): GDP is the sum of money values
of all final goods and services produced within the domestic
territories of a country during an accounting year.

• GDP at market price: includes the final value of goods and

services also includes indirect taxes and excludes the subsidies
given by the government.

• GDP at factor cost is the money value of final goods and services
based on the cost involved in the process of production.

Gross Domestic Product at factor cost = GDP at Market Prices –

Indirect Taxes+ Subsidies
 Gross National Product

• Gross National Product (GNP): GNP is the aggregate final

output of citizens and businesses of an economy in a year.

• GNP may be defined as the sum of Gross Domestic Product and

Net Factor Income from Abroad (NFIA).
GNP = GDP + NFIA

• Net Factor Income from Abroad: difference between income

received from abroad for rendering factor services and income
paid towards services rendered by foreign nationals in the
domestic territory of a country.
 Net Domestic Product and Net National Product

While calculating GDP/GNP, we ignore depreciation of assets or

capital consumption.

• Net Domestic Product = GDP-Depreciation

• Net National Product (NNP) = GDP+NFIA–Depreciation (or)

=GNP–Depreciation
 Real and Nominal National Income
• National income estimated at the prevailing prices, is called
national income at current prices or Nominal National Income.

• National income measured on the basis of some fixed price, say

price prevailing at a particular point of time, or by taking a
base year, is known as national income at constant prices, or
Real National Income.

Nominal GDP
Real GDP =
GDP deflator

•GDP deflator is the ratio of nominal GDP in a year to real GDP of that year
•GDP deflator measures the change in prices between the base year and the
current year.
Real GDP and living standard
• Changes in nominal GDP can be due to:
• changes in prices
• changes in quantities of output produced

• Changes in real GDP can only be due to

• changes in quantities,
• real GDP is constructed using constant base-year prices.
• changes in real GDP measure changes in living standard.
India's GDP Overview for FY 2024–25

Real GDP (Constant Prices)

• Estimated Value: ₹187.95 lakh crore

• Growth Rate: 6.5% year-on-year

• Previous Year (2023–24): ₹176.51 lakh crore

• Growth Rate (2023–24): 9.2%

Nominal GDP (Current Prices)

• Estimated Value: ₹331.03 lakh crore

• Growth Rate: 9.9% year-on-year

• Previous Year (2023–24): ₹301.23 lakh crore

• Growth Rate (2023–24): 9.7%

 Per Capital Income
• The average income of the people of a country in a
particular year is called per capita income. In simple
words it is income per head of a country for a year.
National Income
Per Capita Income =
Total Population
• In the 2024-25 financial year, India's per capita income is
estimated to be around ₹235,108 (approximately $2,826) at
current prices. This represents a significant increase from the
₹215,936 in 2023-24. The per capita net national income (NNI)
is estimated to be ₹205,579, also higher than the ₹188,892 in
the previous year.
 Personal Disposable Income
• Personal income is the total income received by the individuals of
a country from all sources before direct taxes in one year.
• Personal Income = National Income
– Undistributed Corporate Profits
– Corporate Taxes
– Social Security Contributions
+ Transfer Payments
+ Interest on Public Debt
• Personal Disposable Income is the income which can be spent on
consumption by individuals and families.
• Personal Disposable Income
= Personal Income – Personal Taxes
 Gross Value Added
• GVA is a measure of total output and income in an area,
industry or sector of an economy.

• It is defined as the value of output less value of intermediate

consumption.

• GDPMP = GVA + Taxes on products – Subsidies on product

• GVA gives picture of the state of economic activity from the

producers (or) supply side perspective whereas, GDP gives
the picture of the state of economy from consumers (or)
demand side perspective.
 Methods of measuring national income
• From circular flow of money, we understood, Total Output =
Total Income= Total expenditure

O=Y=E
Hence there are three approaches to the measurement of GDP:
• Product (or Output) Method: National Income by Industry of
Origin
• Final Product Method
• Value Added Method

• Income Method or National Income by Distributive Shares

• Expenditure Method
 Product (or Output) Method
The market value of all the goods and services produced in the country
by all the firms across all industries are added up together.
Process :
• The economy is divided on basis of industries, such as
agriculture, fishing, mining and quarrying, large scale
manufacturing, small scale manufacturing, electricity,
gas, etc.
• The physical units of output are interpreted in money
terms
• The total values added up. (GDP at market price)
• The indirect taxes are subtracted and the subsidies are
added. (GDP at factor cost)
• Net value is calculated by subtracting depreciation from
 Limitations of Product Method
• Problem of Double Counting:
• unclear distinction between a final and an intermediate
product.
• Not Applicable to Tertiary Sector:
• This method is useful only when output can be measured
in physical terms
• Exclusion of Non Marketed Products
• National income is always measured in terms of money
but there are number of goods and services which are
produced but are difficult to be assessed in terms of
money. E.g. outcome of hobby or self consumption
• Self Consumption of Output
• Producer may consume a part of his production.
 Income Method
• The net income received by all citizens of a country in a particular
year, i.e. total of net rents, net wages, net interest and net profits.
(GDP at factor cost).

• It is the income earned by the factors of production of a country.

• Add the money sent by the citizens of the nation from abroad and
deduct the payments made to foreign nationals (individuals and
firms) (GNP at factor cost) or Gross National Income (GNI).
Process:
• Economy is divided on basis of income groups, such as
wage/salary earners, rent earners, profit earners etc.
• Income of all the groups is added, including income from abroad
• The income earned by foreigners and transfer payments made in
the year are subtracted.
GNI = Rent + Wage + Interest +Profit + Net Income from Abroad-
Transfer payments
 Limitations of Income Method

• Exclusion of non monetary income: Ignores the non-monetized

section of economic activities.
• Economic activities that contribute to national income, but
due to their non monetary nature, they go unrecorded. For
e.g. a farmer and family working in their own field.

• Exclusion of Non Marketed Services: People undertake a

particular activity that are difficult to ascertain in money value.
E.g. mother’s services to the family.
 Expenditure Method of Measuring National Income
The total expenditure incurred by the society in a
particular year is added together to get that year’s national
income.

Components of Expenditure:
• personal consumption expenditure
• net domestic investment
• government expenditure on goods and services, and
• net foreign investment
Limitations
• Ignores Barter System
• Ignores Own Consumption
• Affected by Inflation (National Income inflates during high
price rises and reduces during low price rises or deflation)
 Uses of National Income Data
• National income is the most dependable indicator of a
country’s economic health.
• Difference between GDP and GNP indicates the
contribution of net income earned abroad.
• Necessary for Economic planning: useful aid in judging
which sectors should be given more emphasis.
• A measure of economic welfare.
Higher aggregate production implies more and more
goods and services being available to people.
• Helps in determining the regional disparities, income
inequality and level of poverty in a country.
• Helps in comparing the situations of economic growth in
two different countries.
 Difficulties in Measurement of National Income
• Non monetized transactions: Exchange of goods and services which
have no monetary payments, like services rendered out of love,
courtesy or kindness are difficult to include in the computation of
national income.
• Unorganized sector: Contribution of unorganized sector are
unrecorded. It is very difficult to identify income of those who do not
pay income tax.
• Multiple sources of earnings: Part time activity goes unrecognized
and such income is not included in national income.
• Categorization of goods and services: In many cases categorization of
goods and services as intermediate and final product is not very
clear.
• Inadequate data: Lack of adequate and reliable data is a major hurdle
to the measurement of national income of underdeveloped countries.