National Income

Analysis
 The study of National Income Analysis has greater
importance since the outbreak of the Great
Depression in 1930s by J.M. Keynes.
 The subject further gained importance as a result of
quest for rapid economic development in under-
developed countries.
 National income is generally defined as income of
the nation.
 In common parlance the aggregate income earned
by all people from all sources in one years time is
called as national income of a country.
 In other words, the total amount of income accruing
to a country from all kinds of economic activities in
a years time is known as national income.
 National income is explained in two different ways –
1. Monetary terms
2. Real terms
 Monetary terms – it may be explained as aggregate
money value of all goods and services produced by
the people in an economy during the course of a
year.
 Real terms – refers to the flow of goods and
services which become available to the people of a
nation for consumption purposes during the
accounting period, generally one year.
 The national income statistics are one of the important
measurement of economic development and trends in
the economy.
 They give us information about the progress and
performance of the economy.
 The study of national income help us to identified
 Standard of living of the people
 Income per head available
 Extent of economic growth and
 Vital importance to Planning Commission
 Largest Economies of World
Ranking Based on PPP Share of World Share of World
Countries GDP (%) based on GDP based on
Size of By GDP Per
PPP World = 100 Exchange Rate
GDP Capita
World = 100

1. 12 United States 17.1 22.1

2. 99 China 14.9 10.4
3. 127 India 6.4 2.7
4. 33 Japan 4.8 8.4
5. 24 Germany 3.7 5.2
6. 55 Russia 3.5 2.7
7. 80 Brazil 3.1 3.5
8. 30 France 2.6 4.0
9. 32 United Kingdom 2.4 3.5
10. 107 Indonesia 2.3 1.2
11. 34 Italy 2.3 3.1
12. 72 Mexico 2.1 1.7
GDP Per Capita Income of Selected Countries
of the World
Sl No. Name of the Countries GDP Per Capita
1. Switzerland 55,485
2. USA 45,863
3. Australia 37,492
4. Germany 38,292
5. Canada 37,520
6. Japan 37,432
7. France 34,140
8. Brazil 5,824
9. China 3,583
10 India 1,165
GDP (nominal) Per Capita of World
 GDP Per Capita Income In US$ at Constant Prices, 2000

Sl. No Reference year GDP Per capita

income
1 2004 740
2 2005 797
3 2006 863
4 2007 885
5 2008 947
6 2009 1,031
7 2012 1,086
8 2013 1,233
9 2014 1,165
 India’s Population Vs. World
Sl. No Countries Country’s share in World
Population (%)
1 China 19.4
2 India 17.5
3 USA 4.5
4 Indonesia 3.4
5 Brazil 2.8
6 Pakistan 2.7
7 Bangladesh 2.4
8 Nigeria 2.3
9 Russia Federation 2.0
10 Japan 1.9
11 Other Nations 41.1
Total 100
 HUMAN DEVELOPMENT INDEX (HDI) RANK 2015

Top 5 Countries Bottom 5 Countries

1. Norway (0.944) 188. Niger (0.348)
2. Australia (0.935) 187. Central African Rep (0.350)
3. Switzerland (0.930) 186. Eritrea (0.393)
4. Denmark (0.922) 185. Chad (0.392)
5. Netherland (0.921) 184. Burundi (0.348)

Very High HD – 0.944 to 0.802

High HD - 0.798 to 0.702 India (0.609) 130th
Medium HD - 0.698 to 0.555 out 188 countries
Low HD – 0.548 to 0.348
 Global Innovation Index

Rank Countries Score

1 Switzerland 64.8
2 United Kingdom 62.4
3 Sweden 62.3
4 Finland 60.7
5 Netherland 60.6
6 USA 60.1
7 Singapore 59.2
8 Denmark 57.5
9 Luxembourg 56.9
10 Hong kong 56.8
 Definitions of National Income
 Alfred Marshall – The labour and capital of the
country acting on its natural resources and produce
annually a certain net aggregate of commodities,
material and immaterial including services of all
kinds.
 National Income Committee (1951) measures the
value of commodities and services turned out during
given period of time without duplication.
 Simon Kuznets – national income as “the net output
of commodities and services flowing during the year
from the countries productive system in the hands of
the ultimate consumers”
 National Sample Survey (NSS) – national income as
“Money measures of the net aggregates of all
commodities and services accruing to the inhabitants
of a community during a specific period.
 In Short, national income is the value of goods and
service produced during a given period counted
without duplication.
 National Income – money measure or value of net
aggregate of goods and services becoming available
annually to the nation as a result of the economic
activities of the community at large consisting of –
 Households/individuals.
 Business firms and
 Social and Political Institutions
 National Income is the sum of all incomes in cash
and kind accruing to factors of production in a
given time. It is also the values of net outputs
arising in several sectors of the nation’s
production. It is also the sum total of all
consumer’s expenditure, govt expenditure on
goods and services and net expenditure on capital
goods.
 National income is expressed with reference to a
period of time, namely a year. This is because
National Income is a flow and not a stock i.e.,
income generated every year and at different
rates and their period is mentioned during which
income is generated. It measured and shown with
reference to a year as a annual flow.
 Significance of National Income Estimates
1. The national income of a country reveals the true
picture of the economy - standard of living of the
people and economic welfare of a nation.
2. The national income estimate reveals the overall
production in each year and thereby we can compare
the real growth of the economy.
3. Different concepts - National income per capita
income – economic welfare of the people.
4. National accounts of various periods – stagnation or
dynamic changes etc.
5. Contribution of different sectors of the economy.
6. National income estimate throws light on the
distribution side.
7. Consumption, savings and investment It measures
the economic welfare in different countries –
developed, developing and under developing.
8. Formulation of economic planning for different
sectors of the economy.
9. Formulating economic planning – five years plans
10. Research Scholars – National income data
pertaining to input & output, savings, investment,
consumption & employment.
11.Removing inequalities in income distribution –
taxation & public expenditure.
 GDP Growth Performance of FY 2015-16

SL Sector-wise growth %
No
1. Agriculture 17%
2. Industry 26%
3. Service 57%
4. GDP rank by Nominal 7th
5. GDP (PPP) 3rd
GDP Growth Rate (FY 2015-16) 7.5%
 Measurement of National Income

Product Method Income Method

Expenditure Method
 1. Product Method
 Under product method, production of all types of goods
is estimated and they are valued at market prices.
 The net production of all the industries in the country
are added up (primary, secondary and service sectors
 The economy of a country is divided into different
sectors such as – agriculture, manufacturing, trade,
transport, communication, mining, construction,
banking and insurance, electricity, gas and water supply
so on.
 There are two approaches to calculate NI –
1. Value added approach
2. Final goods approach
 According to value added approach, a summation
of the increase in value at each separate production
stage, which results in output in final form, gives
the value of GNP (NI).
 According to the final goods approaches only the
final values of goods and services are added
ignoring all intermediate transactions.
 Since the value of intermediate goods (raw-
materials, fuel etc) are included in the value of
final product, its value should not be considered.
So that double counting can be avoided.
 If the value of intermediate goods are also added,
then it would inflate the figure of national income.
 To avoid this, the value of only the final product
has been considered.
1. Product of agricultural sector – total value of food
grains produced by the farmers in the country during a
year.
2. Product of industrial sector – the total market value
of all goods produced in various industries like –
electronics, cement, steel etc in a country during a year.
3. Products of trade – various activities which are
connected to internal trade.
4. Service sector incomes – services of govt servants,
doctors, lawyers, teachers, soldiers, singers, players etc.
5. Foreign trade – value of export and import at the
international level.
6. Indirect Taxes and Subsidies – indirect taxes included
in the price of goods and services and subsidies given
by govt to certain products
 2. Income Method
 The expenditure made by the people of a country on
goods and services produced in a country during a year
becomes the income of the various factors, which are
collaborated in the production of these goods and
services.
 This method is also called Factor Income Method.
Factor Share Method. Income Distributed Method or
National Income by Distributive Shares Method.
 This method, we calculate national income from
distribution side. In other words, this method
measures the national income after it has been
distributed and appears as income earned or received
by individuals of the country.
  Wages and Salaries
 Income of company business
 Rental Incomes of persons
 Corporate Profits
 Income from net interest
 The wages and salaries received by the employees, both
govt and private sector firms during a year + provident
fund contribution.
 Income earning by Self-employed persons, rental
income earned by individuals on agricultural and non-
agricultural property, corporate profits earned by joint
stock company before the payment of taxes
GNP = {R+W+I+P} + {X - M} + {R - P }
GNP = Wages & salaries + Rents + Interests +
Dividends + Undistributed Corporate Profits +
Mixed incomes - Direct Taxes - Indirect Taxes
- Depreciation + Net income from abroad.
Service sectors
1. Transport, communication & storage.
2. Electricity, gas, & water supply.
3. Banking, finance, insurance & trade.
4. Real estate.
5. Public administration & defense
 3. Expenditure Method
 National income under this method by adding up all the
expenditure made on the goods and services during
the specific period.
 Expenditure approach method involves in calculating
the value of the final goods consumed.
 Most of the goods produced in a country are consumed.
But there are some goods which remain unsold.
 If unsold stocks are regarded as having been bought by
the producers who hold them as inventories, then the
monetary value of the total national production would
be equal to the national expenditure.
 Under this expenditure approach, the following
categories of expenditure are
1. Personal Consumption Expenditure (C)
2. Domestic Private Investment (I) – plant and
machinery
3. Net Export of Goods and Service (X – M)
Foreign Investment
4. Government Expenditure (G) – Money spend by
govt on purchase of G/S.
Y = {C+I+G} + {X -M} + {R - P }
GNP = Consumption expenditure + Investment expenditure+
Government expenditure + Net foreign investment
 1. Personal Consumption Expenditure
 This includes those expenditures made on
durable and non-durable goods produced in a
country during a year.
 This also includes the expenditure on services
such as transport, education and medical.
 Expenditures made on houses are treated as
investment rather than consumption
expenditure.
 Expenditure on household equipment such as
motor car, refrigerator, television etc is forms
of consumption expenditure.
 2. Gross Domestic Private Investment
 This includes private investment on capital goods
such as buildings, machinery, plant, equipment etc.
Such investments are made by business firms.
 Houses are also included in this category of
expenditure, because they are durable and that they
represent capital goods.
 If a business firm purchases a second hand
machinery, it is not investment.
 Purchase of existing shares and stocks also is not
investment for purposes of national income
accounting.
 3.Government purchase of goods & services
 The govt both at the centre and states purchase
from the market consumer goods such as
paper, stationary, machinery, equipment etc
for their enterprises.
 In addition, the govt incurs expenditure on
payment of salaries to military personnel,
police and administration etc.
 Govt also pays old age pension, unemployment
benefits etc. If the payments are not made for
currently produced services, they are not
included in GNP.
 4. Net Foreign Investment – import & export
 Arises from international transactions like imports
and exports.
 If there is positive surplus, it is added to GNP. If
there is negative deficit, it is deducted from GNP.
 It is thus clear that if the entire production of a
country is purchased at market prices, the amount
so spent will represent the gross national product
of a country.
 If the expenditures of the above four categories are
added, we get the GNP or NI.
 Component of National Income
1. Gross National Product (GNP)
2. Gross Domestic Product (GDP)
3. Net National Income at Market Prices
4. Net National Income at Factor Cost
5. Private Income
6. Personal Income
7. Disposable Personal Income
8. Per Capita Income
 1. Gross National Product (GNP)
 GNP is defined as the total market value of all final
goods and service produced by an economy during a
given year.
 This is the most comprehensive measure of national
income and the best known measure of business
activity.
 It includes all economic production in the economy
during a year – primary, secondary & tertiary sector.
 It including net income from abroad.
 GNP = Domestic product – imports + exports.
Three important point noted here –
1. Exclude Intermediate Product – only final
goods and services
2. Exclude services of housewives
3. Monetary measures
GNP = C + I + G + (X – M) + (R – P)
GNP = Gross National Product
C = Consumption Goods
I = Gross Investment
G = Government Services
X – M = Export & Imports
R = Income receipts from abroad,
P = Income paid abroad
 In the gross national product, the
depreciation or replacement value of the
used capital goods is not deducted.
 2. Gross Domestic Product (GDP)
 Gross Domestic Product is the
aggregate values of output of goods
and services produced in a country,
without adding net factor incomes
received from abroad.
 GDP is measured at Market prices.
 GDP = GNP – income received from
abroad.
 3. Net National Product
 Net National Product refers to the net value of
goods and services produced in a country
during the year.
 It includes final goods consists of both
consumption goods and capital goods –
Consumption goods – TV sets, washing
machines, refrigerators, cars and scooters etc.
Capital goods – building, machinery, tools
and equipment.
NNP = GNP – Depreciation
 NNP is also called National Income at Market
Prices.
 NNP is a better and a highly useful concept in
the study of growth of economies as it takes
into consideration of net increase in the total
production of the country.
 NNP is helpful in the analysis of long run
problems of maintaining and incresing the
supply of physical capital in the country.
 National income at market price – NI at
factor cost + taxes – subsidies + depreciation.
 4. National Income at factor cost
 Net national income at factor cost is popularly known
as national income.
 Net national income at factor cost is the total of all
incomes earned by owners of factors of production –
land, labour, capital & organisation.
 It measures the income accruing to the factors of
production for their contribution towards
producing current output.
 National income at factor cost – indirect taxes +
subsidies.
 4. Private Income
• Private income is income obtained by private
individuals or firms from any source – productive or
other wise and the retained income of corporations.
• The additions include transfer payments such as
pensions, unemployment allowances, sickness and
other social security benefits, gifts and remittances
from aboard.
• The deductions include – income from government
departments as well as surpluses from public
undertakings, and employees contribution to social
security schemes – provident funds, life insurance, etc.
• Private Income = NI (NNP at Factor Cost) + Transfer
Payments + Interest on Public Debt – Social Security –
Profits and Surpluses of Public Undertaking
 5. Personal Income
 This is the actual income received by the individuals and
households in the country from all sources.
 It denotes aggregate money payments received by the people by
way of wages, interest, profits and rents.
 Personal Income means the spendable income at current
prices.
 Its differs from private income in that it excludes undistributed
profits of companies, cooperatives and similar organisation.
 It denotes aggregate money payments received by the people by
way of wages, interest, profit and rents.
 Personal income = national income – social security
contribution - corporate income taxes and undistributed
corporate profits + transfer payments.
 6. Disposable Personal Income
 Disposable Income means the actual income which
can be spent on consumption by individuals and
families.
 The whole personal income is not available for the
consumers to spend on consumption.
 The reason is that, out of the income received, the
individuals have to pay personal income taxes.
 Thus Disposable Personal Income = Personal Income –
direct taxes.
 The whole of disposable income is not spent on
consumption and a part of it is saved – Y = C+S
 DPI = PI - Taxes
 7. Per Capita Income
 The average income of the people of a country in
particular year is called Per Capita Income.
 The per capita income indicates the changes in
economic progress in terms of goods and services
available per head of the population

Real National Income 2016

__________________________________
PC for 2016 =
Population in 2016
 Difficulties in the Measurement of
National Income

Conceptual Problems Practical Problems

Term Nation Non – monetised Sectors

Services of Housewives 1/3 of productive activities - RBI

Marxist Approach Self - consumption

Capitalist Countries Regional disparities

Classification of working
population
 There are a number of difficulties in the
measurement of national income.
 Broadly speaking, they are grouped into two ways
– conceptual/theoretical and practical difficulties.
1. Definition about National income
 National income includes not only the income
produced within the country, but also income
earned in other countries.
 Hence, the definition of nation goes beyond the
political boundaries.
 It is also includes the income generated from
aboard/other countries.
 2. Choice of method for measuring the NI
 A nation can adopt either any one method or a
combination of different methods to measure
the national income.
 NI not only included material aspects like
commodities/goods but also included services
rendered by banking, insurance, financial
companies etc.
 Marxist approach – material output
 Capitalistic economies – both material output
and non material output should be included.
3. Services rendered by Housewives – tailoring,
washing, cooking, cleaning house, teaching to
their children etc.
B. Practical problems
1. Non-availability of reliable data
 Inadequate, unreliable and incomplete
statistical data one of the major hindrance of
estimation of national income.
 Most of agricultural and small enterprises
sectors are in the unorganized sectors and most
of farmers, laborers & workers are illiterate,
ignorant not able to maintained data about their
economic activities.
 2. Existence of Barter system
 A well developed marketing system in the
economy would help in the computation
of national income.
 But in India, agricultural sector and
industrial sector particularly small and
tiny unit and ancillary industry are in the
unorganized sector and most of the
product do not reach the market for sale –
they are kept for self consumption only
 3. Double counting
 Double counting is also a major problem in the
calculation of national income.
 It refers to a commodity being included in national
income estimate more than once (intermediate
commodities).
 To solve this problem, only value of final goods and
services should be considered.
4. Lack of reliable information and data –
 Adequate, reliable and up-to-date data regarding
production, income and expenditure are generally not
available.
 4. Regional disparities
 Unequal development of region one of the
major hurdles to measurement of national
income.
 Some regions may have highly developed
others are backward in the country.
5. Absence of occupational specialization
 It makes calculation of national income
difficult.
 Many people work as part-time workers and as
such they do not give complete information
about all sources of their income.
 National Income and Manager
 Business Managers want to get an overview of how
total economic activities is faring, they turn to gross
domestic product or GDP.
 The broadest measure of economic activity.
 GDP is one of the most often cited economic indicators
by business managers.
 It recognisition that GDP growth is a summary of the
economic condition of a nation.
 Basically, increasing real GDP suggests an expanding
economy while, declining real GDP signifies recession
• Business entrepreneurs also changes of his business
policies as a result of changes in the economy.
• Marketing Managers – personal income taxes and
consumer spending.
• Advertising Agency Managers – advertising gear
their business plans to the expected sales of their
customers.
• Consumer Banking Managers – consumer banking
manager would be extremely interested in recent
income and expenditure trends (outdated banking with
modern banking business such as Credit Card, Debt
Card, ATM etc) – this leads to more demand for
consumer goods.
Financial Managers –
 A financial manager is sensitive to the implications
of the pace of economic activity on inflation and
interest rates.
 Changes in economic fluctuation results to
changing of Money Supply and interest rate for
example –
1. when Inflation increases – GDP increases – MS
increases – interest rate increases
2. Deflation/slowing growth – GDP falling – MS falls –
interest rate also falls.