Unit 4(3rd
Topic)
National Income
Dr. Anand Gupta
Meaning of National Income
National income is the sum total of total of factor incomes
earned by normal residents of a country during the
period of one year.
In simple way national income is the final outcome of all
economic activities of a nation valued in terms of
money.
Central Statistical Organization “National income is the
sum total of factor income earned by the normal
residents of a country in the form of wages, rent, interest
and profit in an accounting year”.
Economic activity include all human activities which
create goods and services that can be valued at market
price.
Short Formula to learn N.I.
Concepts
1) GDPMP
Market Price= Factor Cost+ Net
GNGN Indirect Taxes
2) GNPMP
2321
DNDN 3) NNPMP National Product= Domestic
1232 Product+ Net Factor Income
4) NDPMP from abroad
5) NDPFC Gross=Net + Depreciation
6) GDPFC
7) GNPFC
8) NNPFC
National Income Concepts
1GDP at Market Price = Market Value of final goods and services produced within
the domestic territory of a country in an accounting year
2. GNP at Market Price = GDP at Market Price + Net Factor Income from abroad
3. NNP at Market Price = GNP at Market Price – Depreciation
4. NDP at Market Price = NNP at Market Price – Net factor income from abroad
5. NDP at Factor Cost = NDP at market price- Indirect taxes + subsidies
6. GDP at Factor Cost = NDP at factor cost + Depreciation
7. GNP at Factor Cost = GDP at factor cost + Net Factor Income from abroad
8. NNP at Factor Cost/N.I = GNP at factor cost – Depreciation
9. Private Income = Income from domestic product accruing to private
sector + Net factor income from abroad + current
transfer from government + current transfer from rest of the
world(Net) + Interest on national debt
10. Personal income = Private Income – corporate profit tax – Undistributed
profits or corporate savings
11. Personal disposable income = Personal income – Direct personal taxes –
Miscellaneous fees and fine paid by the
households
Methods of Measurement of National
Income
A. Product method/ Value added
method
B. Income Method
C. Expenditure Method
A. Product method/ Value added method
This is basically the production method. According to this
method the sum of net value of goods and services
produced at market price is found.
Steps involved in this Method
Step-I Identification and Classification of Productive enterprises
(1) Primary sector ( agriculture and allied Activities
(2) Secondary sector ( Manufacturing)
(3) Tertiary Sector (Services)
Step-II Estimation of Gross Value added
Gross Value Added = Value of Production –
Intermediate
consumption
Step-III Estimation of National Income
Product method/ Value added method
Gross value added in the primary sector at market price +
Gross value added in the Secondary sector at market price +
Gross value added in the Tertiary sector at market price
Gross Domestic Product at Market Price
-Depreciation
Net Domestic Product at Market Price
-Net Indirect Taxes
Net domestic Product at Factor Cost
+Net Income from Abroad
National Income (NNP at factor cost)
Items not to be included in National
Income
Second hands goods, Intermediate goods, Transfer payments,
financial transactions, Illegal activities, Black money, services
for self consumption, Leisure time activities, services rendered
by house wife etc.
Problems regarding Product Method
1. Difficult to difference between intermediate and final goods
and it dependent upon use of product.
2. Difficulty in calculating depreciation cost
3. Difficulty regarding valuation of product.
4. Difficulty regarding valuation of self-consumption goods
5. Difficulty due to barter system.
6. Statistical Difficulties (Farmers and some small
business firm do not keep proper accounts
B. Income Method
This method measures the national income after it has been distributed and
appears as income earned or received by individual of country.
Steps involved in income Method
Step-I Identification and Classification of Producing enterprises
Step-II Classification of Factor Income
(1) Compensation of Employee: Wages and Salaries in cash, Payment in
Kind, Employees contribution to social Securities schemes, Pension on
retirement
(2) Operating Surplus: Includes income from capital and entrepreneurship
(3) Mixed Income: Income of self employed person using their labour, land,
capital, entrepreneurship to produce goods and services.
(4) Net Factor income earned from abroad
Step-III Estimation of National Income
Income Method
Compensation of Employees + Operating
Surplus + Mixed income of self employed
Net Domestic Income
+Net Income from Abroad
National Income (NNP at factor cost)
Precautions of income method
Income from sale of second hands goods, Transfer payments,
income from illegal sources, sale and purchase of bond and
shares, income from windfall (lottery) gains.
Imputed value of goods for self-consumption and imputed rent of
owner-occupied houses included in national income.
Difficulties regarding Income Method
1. Different views regarding components of income.
2. Difficulty in allocation of mixed income.
3. In LDS’s small business including shopkeepers do not
keep record of income.
4. Practical difficulty due to change in value of stock in proper
evaluation of factor income.
C. Expenditure Method
This method measures final expenditure on gross domestic product at
market price during an accounting year.
Classification of Final expenditure Method
1.Private Final Consumption Expenditure: Expenditure on final
goods and services by individuals, household, non-profit private
institution.
2.Govt. Final Consumption Expenditure: Expenditure on final goods
and services by government.
3. Investment Expenditure: Fixed Investment, Inventory Investment
4. Net Export
Expenditure Method
Private Final Consumption Expenditure + Govt. Final Consumption
Expenditure + Investment Expenditure + Net Export
Gross Domestic Product at Market Price
-Depreciation
Net Domestic Product at market price
-Net Indirect taxes
Net Domestic Product at factor cost
+Net Factor Income from abroad
National Income (NNP at factor cost)
Precautions while using expenditure
method
1. Expenditure on second hand goods not included
2. Govt. transfer payment not included
3. Avoid the error of double counting
4. Intermediate expenditure is not included
5. Expenditure on shares and bonds not included.
Difficulties in Calculating on National Income
1. Difficulty in defining the nation
2. Non-marketed services
3. Non-availability of proper statistical data
4. How to avoid double counting
5. Identification of transfer payments
6. Self-consumed production
7. Multiple occupation
8. Incorrect Statics
Stocks and Flows
Meaning of stock: A stock is a quantity measured at a particular point of time.
Meaning of flow: A flow is a quantity measured over a specified period of time.
END
