National Income

GDP (Gross Domestic Product)

Definition: It is the monetary value of final goods and services produced in domestic territory of a
given financial year.

Intermediate Goods and Services

Intermediate Goods: products that are used to produce a final good or finished product. These
goods are also called semi-finished products because they are used as inputs to become part of the
finished product.
Intermediate Services: - services that assist in the production or distribution of goods.
NOTE: Intermediate goods and services are not included in GDP to avoid double counting.
Final Goods and Services

Domestic Territory
1. Territorial Boundary: E.g. A textile factory in Gujarat produces garments. The value of these
garments is included in India’s GDP.
2. Territorial Waters: E.g. An oil rig operating 12 nautical miles off the coast of Tamil Nadu extracts
crude oil. The value of the oil produced is included in India's GDP.
3. Embassies and Consulates: E.g. The Indian embassy in London employs Indian staff, generating
economic activity. The salaries and services produced are included in India's GDP.
4. Oil Vessels, Ships, Aircraft, and Military Establishment- E.g. Transporting crude oil, Indian ship to
other nation, India’s aircraft to other nation and military establishment in Bhutan.
Financial Year
1 April to 31 March as a financial year in India

Nominal GDP
• Nominal GDP measures the value of all finished goods and services produced within a domestic
territory of India in a specific time period, using current prices.
• It does not account for inflation or deflation.
Real GDP
• Real GDP measures the value of all finished goods and services produced within a domestic
territory of India in a specific time period by using base year, adjusted for changes in the price
level or inflation.
• It provides a more accurate reflection of an economy's size and how it's growing over time.

About Base Year

Note:
• India uses 2011-12 as the base year for calculating its GDP and other economic indicators.
• India's Central Statistics Office (CSO) updates the base year periodically to reflect changes
in the economy and improve the accuracy of economic data.

Criteria for Base Year:

• Normal Year
• Latest Year
• Data should be available for that year
Potential GDP
• Refers to the maximum possible output a country can achieve using its available capital and
labor efficiently.
• Assumes stable inflation and the absence of major economic disruptions.
 GDP Gap
• Represents the difference between a country's Potential GDP and its Actual GDP.
• A positive GDP gap occurs when Actual GDP is lower than Potential GDP, indicating an
underperforming economy.
• A negative GDP gap arises when Actual GDP exceeds Potential GDP, often leading to
inflationary pressures.

GDP at factor cost and GDP at market price

GDP at Factor Cost
• It measures the total value of goods and services produced within a country, excluding the
impact of taxes and subsidies.
Formula: GDP at Factor Cost=GDP at Market Price−Indirect Taxes + Subsidies
Note: Indirect Tax - Such as VAT and excise duty

GDP at Market Price

• It measures the total value of goods and services produced within a country, including the
impact of taxes and subsidies.
• Formula: GDP at Market Price=GDP at Factor Cost + Indirect Taxes−Subsidies

Methods of Calculating GDP (Gross Domestic Product)

1. Production (Output) / GVA Method
This method calculates GDP by summing the value of goods and services produced in an economy
during a given period.
Formula:
GDP = Gross Value of Output (GVO)−Value of Intermediate Consumption
• Gross Value of Output (GVO): The total monetary value of all goods and services produced.
• Intermediate Consumption: The cost of inputs or raw materials used in production.
Used in: Measuring the contribution of various sectors (agriculture, industry, and services) to GDP.
The calculation of GDP involves summing up the value added by all firms in the economy.
Formula for Value Added:
Value Added=Value of Output−Value of Intermediate Goods
Value Added (GVA) at Factor Cost.
To arrive at GDP at Current Market Price:
GDP at Current Market Price=GVA at Factor Cost+Indirect Taxes−Subsidies
• Value of Output: The total production value of goods and services.
• Intermediate Goods: The value of inputs used in production.
• GVA: Represents the economic contribution of all sectors at factor cost.
• Indirect Taxes: Taxes imposed on goods and services, such as GST.
• Subsidies: Financial support provided by the government to reduce production costs.

2. Income Method
This method calculates GDP by summing all the incomes earned by individuals and firms in the
economy.
Formula:
GDP = Wages + Rent + Interest + Profits + Mixed Income +
Taxes on Production and Imports−Subsidies
• Wages: Compensation to employees.
• Rent: Income from property or land.
• Interest: Earnings from investments.
• Profits: Income of businesses.
• Mixed Income: Earnings of self-employed individuals.
Used in: Understanding income distribution among various economic agents.
3. Expenditure Method
This method calculates GDP by summing all expenditures made in the economy.
Formula:
GDP= C + I + G + (X−M)
 • C (Consumption): Expenditure by households on goods and services.
• I (Investment): Expenditure on capital goods (machinery, infrastructure, etc.).
• G (Government Spending): Expenditure by the government on public services.
• X (Exports): Value of goods and services sold abroad.
• M (Imports): Value of goods and services purchased from abroad.
Used in: Analyzing demand-side components of the economy.

UPSC 2000
In an open economy, the Gross Domestic Product (Y) of the economy is defined as:
(C, I, G, X, M stand for Consumption, Investment, Government Expenditure, Total Exports, and Total
Imports respectively.)
A. Y=C+I+G+X
B. Y=I+G−X+M
C. Y=C+I+G+(X−M)
D. Y=C−G+I+(X−M)

UPSC 2018
Increase in absolute and per capita real GNP does not connote a higher level of economic
development, if:
A. Industrial output fails to keep pace with agricultural output
B. Agricultural output fails to keep pace with industrial output
C. Poverty and unemployment increase
D. Imports grow faster than exports

GDP Deflator
• The GDP deflator, also known as the implicit price deflator, is a measure of the level of prices of
all new, domestically produced, final goods and services in an economy.
• It is a broad index of inflation within an economy, reflecting the changes in the average price
level of all the goods and services included in the GDP.
• The GDP deflator is calculated by the Ministry of Statistics and Programme Implementation
(MOSPI).
GDP Deflator Formula
This means the GDP deflator is 150, indicating that the aggregate level of prices increased by 50%
from the base year to the current year.

Gross National Product (GNP)

• It is monetary value of all final goods and services produced by the residents of a country in a
given period, irrespective of location, typically one year,
Depreciation
• Depreciation is reduction in value physical assets due to
o Lapse of time
o Wear and tear
o Obsolete technology
Net Domestic Product (NDP)
Net Domestic Product (NDP) is the total value of all final goods and services produced within a
country’s domestic territory during a given period, minus the depreciation of capital assets.
Formula:
NDP= GDP − Depreciation

Net National Product

Net National Product represents the total market value of all final goods and services produced by a
country’s residents within a given period after accounting for depreciation
Formula:
NNP=Gross National Product (GNP)−Depreciation
Net National Product at Factor Cost (NNP at FC):
Also known as National Income (NI)
NNP at FC= NNP at Market Price − Indirect Taxes + Subsidies

Private Income
Private Income refers to the total income received by households and private businesses within an
economy. It includes all earnings such as wages, salaries, profits, rents, interest, and dividends, but
excludes government transfers like subsidies or social security benefits.
Formula 1
Private Income = Income from Domestic Product Accruing to Private Sector + Net Factor Income
from Abroad + Transfer Incomes
Formula 2
Private Income = National Income - Net Indirect Taxes + Transfer Payments
Formula 3
Private Income = National Income - Government Income + Transfer Payments
NI- include both Govt. Income and Private Income (1. Earned 2. Unearned(Transfer payment))

Personal Income
It is the total income received by households before the payment of personal taxes and other
deductions. It includes wages, salaries, interest, dividends, and other sources of income.
Personal Income = Private Income - Corporate Income Tax - Retained Earnings - Social Security
Contributions.
Note: Retained Earnings (reinvestment in the business or to pay off debt)
Note: Social Security Contributions (pensions, unemployment insurance, healthcare, and disability
benefits)

Personal Disposable Income

Personal Disposable Income refers to the income remaining with an individual or household after
the deduction of all taxes levied against their income. It is the amount available for spending or
saving.
Formula:
Personal Disposable Income = Personal Income - Taxes

Gross National Disposable Income

• The total income available to a country's residents for spending or saving, including national
income, net direct taxes, net current transfers from abroad, and depreciation.
• It reflects the overall economic well-being of a nation.
• Gross National Disposable Income = Net National Disposable Income + Depreciation

Net National Disposable Income

• The total income available to a country's residents after accounting for net direct taxes and net
current transfers from abroad, excluding depreciation.
• It represents the income available for consumption and saving.
• Net National Disposable Income = National Income + Net Direct Taxes + Net Current Transfers
from the Rest of the World

Per Capita Income

Per Capita Income refers to the average income earned by each individual in a specific region or
country during a given period, typically a year. It is used to measure the economic standard of living
or prosperity of a population.
Formula:
Per Capita Income = Total National Income / Total Population

UPSC 2013
The national income of a country for a given period is equal to:
A. Total value of goods and services produced by the nationals
B. The sum of total consumption and investment expenditure
 C. The sum of personal income earned by all individuals
D. The monetary value of final goods and services produced
Answer D
The correct answer is the money value of final goods and services produced.
National Income is the total monetary value of goods and services produced within the territory of
the country in a given period of time.
National Income = C + I + G + (X - M)
Here:
• C stands for Consumption
• I stands for Total Investment
• G stands for Total Government Expenditure
• X stands for Export
• M stands for Import
UPSC 2001
Which of the following correctly defines National Income?
A. Gross National Product (GNP) at market prices minus depreciation
B. Gross National Product (GNP) at market prices minus depreciation plus net factor income from
abroad
C. Gross National Product (GNP) at market prices minus depreciation and indirect taxes plus subsidies
D. Gross National Product (GNP) at market prices minus net factor income from abroad

UPSC 2001
The most appropriate measure of economic growth is its:
A. Gross Domestic Product of a country
B. Net Domestic Product
C. Net National Product
D. Per Capita Real Income

National Statistical Office (NSO)

• Established: 2019 (merger of CSO and NSSO).
• Function: Apex statistical agency under the Ministry of Statistics and Programme Implementation
(MoSPI).
• Objective: Collection, analysis, and dissemination of statistical data for informed policymaking.
Shape of Economic Recovery

1. Z-shaped recovery:
It is an optimistic scenario where the economy rebounds swiftly after a crash, surpassing the
previous loss before stabilizing at the normal growth trend. The disruption is brief, impacting
people's ability to spend more than their income.

2. V-shaped recovery:
This is a positive scenario where the economy rapidly recovers the lost ground and returns to its
normal growth trend. Incomes and jobs are not permanently lost, and economic growth quickly
bounces back to its previous path.
3. U-shaped recovery:
In this scenario, the economy falls and stays at a low growth rate for some time before gradually
recovering. Many jobs are lost, and people rely on their savings. If the recovery takes longer, it forms
an "elongated U" shape.

4. W-shaped recovery:
This is a risky scenario where the economy declines, recovers, then falls again before eventually
recovering, creating a W-shaped pattern. The second dip can be caused by events like a pandemic's

second wave.

5. L-shaped recovery:
In this scenario, the economy never recovers to its previous GDP level, even after many years. It
indicates a permanent loss in the economy’s production capacity.

Capital Output Ratio (COR)

UPSC 2018
Despite being a high saving economy, capital formation may not result in significant increase in
output due to:
A. weak administrative machinery
B. Illiteracy
C. high population density
D. high capital-output ratio

Q: Do you agree that the Indian economy has recently experienced a V-shaped recovery? Give
reasons in support of your answer. (250 words) (2021, 15 Marks)
Q: Define potential GDP and explain its determinants. What are the factors that have been inhibiting
India from realizing its potential GDP? (150 words) (2020, 10 marks)