ECONOMICS

12TH STD LESSON 2. NATIONAL INCOME

INTRODUCTION

 “ The concept of national ;income is an indispensable

preparation for tackling the great issues of unemployment,
inflation and growth” – Samuelson.
 The growth of an economy is measured by the rate at which its
real national income grows over time. National income is an
instrument of economic planning.
 Nobel laureate Simon Kuznets - first introduced the concept of
national income.
 National Income means the total money value of all final goods
and services produced in a country during a particular period
of time.

BASIC CONCEPT OF NATIONAL INCOME

Concepts used in measuring national income.
1. GDP 2. GNP 3. NNP 4. NNP at factor cost .5. Personal Income
6. Disposable
Income 7. Per capita Income 8. Real Income 9 GDP deflator.
1. Gross Domestic Product (GDP) -the total market value of
final goods and services produced within the country during
a year.
Calculated at market prices – called GDP at market prices.
GDP = C + I + G + (X – M)
C – consumption goods; I – Investment goods; G –
Government purchases; X – Exports; M – Imports.
a) Net Domestic Product (NDP) - the value of net output
of the economy during the year.
Depreciation -Some of the country’s capital equipment
wears out or becomes outdated each year during the
production process.
NDP = GDP - Depreciation
2. Gross National Product (GNP)-the total measure of the
flow of final goods and services at market value resulting
from current production in a country during a year, including
net income from abroad.
GNP = (C+I+G+(X-M)+(R-P))
C=Consumption, I=investment, G=govt.purchase, X-
M=export&import, R-P= money from abroad Indians &
money paid to foreigner as salary in india
 GNP= GDP+Net factor income from abroad
3. Net National Product (NNP)at market price
NNP - the value of the net output of the economy during the
year.
NNP is obtained by deducting the value of depreciation, or
replacement allowance of the capital assets from the GNP.
NNP = GNP-Depreciation
4. NNP at Factor cost
NNP - the market value of output.
NNP at factor cost - the total of income payment made to
factors of production.
NNP at factor cost = NNP at Market prices –indirect taxes +
subsidies
5. Personal Income
PI - the total income received by the individuals of a
country before payment of direct taxes in a year.
PI is never equal to the national income, bcoz it includes
transfer payments.
TP- not included in national income.
PI = National income –(social security contribution and
undistributed corporate profits)+transfer payments
6. Disposable Income (orDisposable personal income)
It is the individuals income after the payment of income tax.
This is the amount available for households for
consumption.
DI= personal income –direct tax
DI= consumption + saving (as the entire amt will not spend
for consumption)
7. Per Capita Income
The average income of a person of a country in a particular
year - Per Capita Income.
Per Capita Income= National Income/population
8. Real Income
Nominal income is national income expressed in terms of a
general price level at a particular year.
Real income – buying power of nominal income
National income does not indicate the real state of
economy.
National income at constant price= national income at
current price/(p1/p0)
P1 – price index during current yr, p0 – price index during
base yr
 9. GDP Deflator
GDP deflator –index of price changes of goods and services
included in GDP
GDP deflator = (Nominal GDP/Real GDP)*100

METHODS OF MEASURING NATIONAL INCOME

3 Methods
1. Production or value added method
2. Income method or factor earning method
3. Expenditure method
If all these done correctly, then
Output = Income = Expenditure

1. Product Method:
It measures the output of the country. Also called inventory
method
Using this, gross value of output obtained for entire yr. The
obtained value- GNP
To avoid double counting, final output should be taken into the
estimate GNP
In india, gross value of the farm output for 64 variety of
agriculture commodities,
1. The output of each crop measured by - the area sown x
average yield per hectare.
2. Total output of each commodity is valued at - market price.
3. Gross value of agricultural output - is aggregate value of
64commodies output
4. Net value of agri = Gross value – (deduction for cost of
seeds,manures,fertilizer, market charges,repair +
depreciation)
5. (same procedure for animal husbandry,forestry, fishery,
mining)
PRECAUTIONS
This method followed in underdeveloped countries.
Error in this method is large
In india, this method is applied to agri, mining and manufacturing,
including handicrafts.
1. Double counting to be avoided
2. Output used for self consumption should be added while
measuring national income.
 3. Second hand goods should not be included.

2. Income Method:
It approaches national income from distribution side.
National income is calculated by adding up all the incomes
generated in the course of producing national product.

Steps involved:
1. Factor incomes r 3.
i) Labour income - Wages & salary, fringe benefits, employer’s
contribution to social security.
ii) Capital income – Profit, interest, dividend and royalty
iii) Mixed income – Farming, sole proprietorship and other
professions.
2. Y= W+r+i+pi+(R-P)
w = wages, r = rent, i = interest, π = profits, R = Exports
and P = Imports

Precautions
1. Transfer payments not included
2. Second hand goods not included
3. Windfall gains like lotteries not included
4. Corporate profit tax not included bcoz it is already
included as a part of company profit
Items to be included:
1. Value of self occupied house or rent to be included
2. Services of owners or family labour should be included

3. THE EXPENDITURE MEHOD

The total expenditure incurred by the society in a particular
year is added together.
GNP = C+I+G+(X-M)
C - Private consumption expenditure
I - Private Investment Expenditure
G - Government expenditure
X-M = Net exports

Precautions
 1. Transfer payments not included
2. Second hand goods not included
3. Purchase of shares and bonds not included
4. Expenditure on intermediate goods not to be
incl(cotton,yarn)
5. Expenditure of final products to be included (labour
salary, machinery)

IMPORTANCE OF NATIONAL INCOME ANALYSIS

National income is of great importance for the economy of a
country.
the national income is regarded as accounts of the economy, which
are known as social accounts.

1. from the calculation of national income, we could find how

income is produced, how it is distributed, how much is spent,
saved or taxed.
2. To formulate the national policies such as monetary policy, fiscal
policy and other policies
3. To build economic models both in short - run and long - run.
4. To make international comparision
5. To know companies per captia income
6. To know the distribution of income for various factors of
production in the country.

DIFFICULTIES IN MEASURING NATIONAL INCOME

1. Transfer payment (pension etc) not included
2. Difficulties in accessing depreciation allowance (like
repair,accidental allowance)
3. Unpaid services like housewife services not included
(servant maid salary included)
4. Income from illegal activities (smuggling) not included
5. Production of self consumption and changing price
6. Capital gains (lotteries) not included
7. Statistical problem: national income estimates in our
country are not very accurate or adequate. There is at least
10 per cent margin of error, i.e., national income is
overestimated or underestimated by at least 10 per cent. So
the GDP estimates for India varies from 2 trillion US dollar to
5 trillion US dollar.
 National income in terms of US$
When Indian national income is expressed in terms of US$, the
former looks very low. If Purchasing Power Parity (PPP) method
is adopted India looks better