NATIONAL INCOME & RELATED AGGREGATES -2 (Online Mentoring – 9587443338)

Most Important thing to Remember: When National Income is calculated, the STARTING POINT is always the sum of Gross Market
Value of Goods and Services (GDP mp) produced during an accounting year i.e., MRP of all goods & services produced.

National Income Is a FLOW concept as it is measured for a period of time. There are Various VARIANTS of National Income.

“GROSS” means “Inclusive” of Depreciation..

“DOMESTIC” means produced by all units located within the Domestic territory (irrespective who produced them, NR or NOR)
“MARKET PRICE” means “Inclusive” of Indirect Taxes and “Exclusive” of Subsidy..
“PRODUCT” means only Final Goods and Services are included..

DOMESTIC INCOME (NDP fc)

(-) N F I A (+) DEPRECIATION

(-) N I T

NNP at MP GDP at FC

(-) DEPRECIATION (+) N I T

GNP at MP GDP at MP

(+) N I T (-) DEPRECIATION

GNP at FC NDP at MP

(+) DEPRECIATION (+) N F I A

(-) N I T

NATIONAL INCOME (NNPfc)

GROSS DOMESTIC PRODUCT at MARKET PRICE ( GDP mp) :

It refers to GROSS MARKET VALUE of all final Goods & Services produced within the DOMESTIC TERRITORY of a Country during a
period of One Year.

GROSS DOMESTIC PRODUCT at FACTOR COST ( GDPfc) :

It refers to GROSS MONEY VALUE of all Final Goods & Services produced within the DOMESTIC TERRITORY of a Country during a
period of One Year..

GDP fc = GDP mp – Net Indirect Taxes

NET DOMESTIC PRODUCT at MARKET PRICE ( NDP mp) :

It refers to NET MARKET VALUE of all the Final Goods and Services produced within the DOMESTIC TERRITORY of a country during a
period of One Year..

NDP mp = GDP mp - Depreciation

NET DOMESTIC PRODUCT at FACTOR COST ( NDP fc) :

It refers to NET MONEY VALUE of all Final Goods & Services produced within the DOMESTIC TERRITORY of a country during a period
of One Year..

NDP fc = GDP mp – NIT - Depreciation

GROSS NATIONAL PRODUCT at MARKET PRICE ( GNP mp) :

It refers to GROSS MARKET VALUE of all the Final Goods & Services produced by the NORMAL RESIDENTS of a country during a
period of One Year..
GNP mp = GDP mp + N F I A

If NFIA is Negative GDP mp > GNPmp AND If NFIA is Positive GNP mp > GDP mp.

GROSS NATIONAL PRODUCT at FACTOR COST ( GNPfc ):

It refers to GROSS MONEY VALUE of all Final Goods & Services produced by the NORMAL RESIDENTS of a country during a period of
one Year..
GNP fc = GNP mp – N I T

NET NATIONAL PRODUCT at MARKET PRICE ( NNP mp) :

It refers to NET MARKET VALUE of all the Final Goods & Services produced by the NORMAL RESIDENTS of a country during a period
of One year..

NNPmp = GNPmp – Depreciation

NET NATIONAL PRODUCT at FACTOR COST ( NNP fc) ( NATIONAL INCOME ) :

It refers to NET MONEY VALUE of all the Final Goods & Services produced by the NORMAL RESIDENTS of a country during a period
of One Year..
NNP fc = GNP mp – N I T - Depreciation
CONCLUSIONS TO CRAMM THE CONCEPT :
“G” Gross Means Inclusive of Depreciation AND “N” Net Means Exclusive of Depreciation
“N” National means Inclusive of NFIA AND “D” Domestic Means Exclusive of NFIA.
“MP” Market Price means Inclusive of NIT AND “FC” Factor Cost Means Exclusive of NIT

(-) Depreciation
GROSS NET
(+) Depreciation

(+) N F I A
Domestic National
(-) N F I A

Market (-) N I T Factor

Price Cost
(+) N I T

GDP mp GDP fc NDP mp NDP fc GNP mp GNP fc NNP mp NNP fc

GROSS (Includes Depreciation) NO NO NO NO

YES YES YES YES

NET (Excludes Depreciation) NO NO NO NO

YES YES YES YES

MARKET VALUE (Includes Indirect Taxes) NO NO NO NO

YES YES YES YES

MONEY VALUE (Excludes Indirect Taxes) NO NO NO NO

YES YES YES YES
DOMESTIC TERRITORY (DT) NO NO NO NO
YES YES YES
YES
ENTIRE WORLD (ODT) NO NO NO NO
YES YES YES
YES
RESIDENT OF THE COUNTRY
YES YES YES YES YES YES
YES YES
NON-RESIDENT OF THE COUNTRY NO NO NO NO
YES YES YES
YES
Now we start how to calculate the NATIONAL INCOME (NNP fc):

PRODUCTION = INCOME = EXPENDITURE

We Know that PRODUCTION = INCOME = EXPENDITURE, therefore we will learn three Methods of calculating the National Income..
Production gives rise to Income, income results in expenditure, which in turn, generates income again..
In India, the task of estimating National Income is entrusted with the CENTRAL STATISTICAL ORGANISATION (CSO)..

METHODS OF NATIONAL INCOME

VALUE ADDED METHOD INCOME METHOD EXPENDITURE METHOD

1) VALUE ADDED METHOD:

Value Added refers to the addition of value to the raw material (intermediate goods) by a firm, by virtue of its productive activities..

Question: ……..Is the contribution of an enterprise to the current flow of goods & services…

Value Added = Value of Output - Intermediate Consumption

VALUE OF OUTPUT: Value of Output refers to Market Value of all goods and services produced during a period of one year.

Measurement of Value of Output:

Value of Output = Sales (if Entire output is sold in same accounting Year)
Value of Output = Sales + Change in Stock (if Entire Output is Not Sold in same accounting
year) Change in Stock = Closing Stock – Opening Stock
Value of Output = (Quantity sold * Price) + Change in Stock
Value of Output = Domestic Sales + Exports

Example 1: Sales = Rs.5,000, Export = Rs.600 ..Value of Output = Rs.5,000 ( as export is included in sales & there is no Change in
stock)
Example 2: Domestic Sales = Rs.6,000, Exports = Rs.500..Value of Output = Rs.6,500 ( Domestic Sales +Exports)
Example 3: Sales = Rs.5000 , Opening Stock = Rs.500 ,Closing Stock = Rs.600 …Value of Output = Rs.5000 + (600-500) =Rs.5,100

INTERMEDIATE CONSUMPTION: Intermediate Consumption refers to the expenditure incurred by a production unit on purchasing
those goods and services from other production units, which are meant for resale or for using up completely during the same year.

Example 1: Intermediate Consumption = Rs.2,000, Imports = Rs.300 …Intermediate Consumption = Rs.2,000

Example 2 : Purchase of Raw Material from Domestic firm = Rs.3000, Imports = Rs.500 ..I Consumption = Rs.3,500
Example 3: Purchase of Raw Material = Rs.3000, Imports = Rs.500…..I Consumption = Rs.3,000

MIND YOU: By Using VALUE ADDED METHOD the resultant answer will be GDPmp from which we have to calculate the
National Income (NNP fc).
 GVAmp of Primary Sector
GVAmp of Secondary Sector
GVAmp of Tertiary Sector
Gross Domestic Product at Market Price
(GDPmp)
(-) Depreciation
(-) N I T
Domestic Income( NDPfc )
PRIMARY SECTOR: It includes production units exploiting natural
resources… Farming, Fishing, Mining, Animal Husbandry, Forestry etc..
SECONDARY SECTOR: It includes production units which are engaged
in transforming one good into another good..Manufacturing units
TERTIARY SECTOR: It includes production units engaged in producing
services. Ex. Transportation, Education, Finance etc.
SYNONYMS OF VALUE ADDED METHOD
 Industrial Origin Method
Product Method
Net Output Method
Commodity Service Method

(-) N F I A

NATIONAL INCOME ( NNPfc)

PRECAUTIONS OF VALUE ADDED METHOD: (CRAMMING- ISSGIC)

a) Intermediate Goods are not included in the National Income as there value is already included in the value of final goods.
b) Sale and Purchase of Second hand goods is not included as they are included in the year in which they are produced..
But , if any commission or brokerage on sale or purchase of such goods will be included in the national income as it is a
productive service ( factor service )
c) Production of Services for Self-Consumption are not included: for ex. Services of housewife, kitchen gardening etc. are not
included as their market value is difficult to measure .
d) Production of Goods for self-Consumption will be included as they contribute to the Current Output and value can be
estimated.
e) Apart from actual rent of houses occupied, the imputed value of owner – occupied houses should be included….As owner
occupied houses are National Assets..
f) Change in Stock (inventory) will be included: It is NET INCREASE in the stock of inventories will be included in the National
Income as it is a part of Capital Formation. (Closing Stock – Opening Stock).

PROBLEM OF DOUBLE COUNTING:

Double counting refers to counting of an output more than once while passing through various stages of production. (means
including the value of Intermediate Goods into the value of Final Goods & Services during the calculation of National Income)

In measuring the National Income, the value of ONLY FINAL GOODS and SERVICES is to be included.

Producer Value of Output (Rs.) Intermediate Value Added (Rs.)

Consumption(Rs.)
1. Farmer 600 0 600
2. Flour Mill 900 600 300
3. Baker 1,500 900 600
4. Shopkeeper 2,000 1,500 500
TOTAL 5,000 3,000 2,000
TO AVOID DOUBLE COUNTING:
Either, Value of Final Goods i.e., Sold by Shopkeeper (Rs.2,000) is taken to count National Income (FINAL OUTPUT METHOD)
OR, Value Addition of all the Producers is taken i.e., (Rs.600+Rs.300+Rs.600+Rs.500) = Rs.2,000 is taken (VALUE A. METHOD)

OTHERWISE, Problem of Double Counting will arise:

2) INCOME METHOD:

Also, called as DISTRIBUTED SHARE METHOD or FACTOR PAYMENT METHOD (SYNONYMS)

According, to this method , all the incomes that accrue to the factors of production by way of WAGES , PROFITS , RENT, INTERSEST
etc., are summed up to Obtain the National Income..

COMPONENTS OF FACTOR INCOME

COE RENT & ROYALTY INTEREST PROFIT

(Labour) (Land) (Capital) (Enterprise)

1. COMPENSATION OF EMPLOYEES (COE): COE refers to amount paid to employees by employer for rendering productive
services (CASH, KIND & SOCIAL SEC. SCHEME).

COMPENSATION OF EMPLOYEES

W & S in CASH W & S in KIND EMPLOYER’s Contribution to Social Security Schemes

Wages & Salaries in CASH: It includes all monetary benefits, like wages, salaries, Bonus, DA etc. in Cash.
EXCLUDED: Reimbursement of business expenses incurred by the employees.

Wages & Salaries in KIND: It includes all Non-Monetary benefits like Perquisites, free education facilities, free medical etc.
INCLUDED: An Imputed value of these benefits should be included in National Income.
EXCLUDED: Facilities provided by employer which is necessary for work is not taken. Ex. Uniform provided or Vehicles
provided.

EMPLOYER’s Contribution to Social Security Schemes: It includes contributions made by employer for the social security of
employees. Like Provident Fund, Labour welfare funds etc.
EXCLUDED: Employees Contribution to Social Security Schemes is not taken.

NOTE: If in the Question COE and all its components are given, we have to take the figure of COE only.
NOTE: If in the Question EMPLOYEES Contribution is given. It should not be counted. Only Employer’s
Contribution is counted.

2. RENT and ROYALTY: Rent is a part of National Income which arises from ownership of Land and Building..
It includes both ACTUAL RENT (received) and IMPUTED RENT (calculated on market rental value of the house)
 Royalty refers to income received for granting leasing rights of sub-soil assets. Ex. Owner of Marble Mine earn income by
giving rights of mining to the Contractors…

RENT: Actual Rent (Received) + Imputed Rent (Calculated on Market Rent Value of the house)

3. INTEREST: Interest refers to amount received for lending funds to a production unit..
It includes ACTUAL INTEREST as well as IMPUTED INTEREST (funds provided by the Entrepreneur)
Only Includes Interest on Loans taken for PRODUCTIVE PURPOSES (Loan taken by Entrepreneur to purchase TV for Video
Classes).
EXCLUDED:
Interest paid by Government on Public Debt and Interest paid by consumers as such interest is paid on Loans taken for
consumption purposes (loan taken by household to purchase the TV at Home).
Interest paid by one firm to another firm.

Actual Interest (Received) –

Imputed Interest (Funds provided by Entrepreneur) -
Interest on Loans for Productive Purposes -
Interest on Loans for Consumption Purposes-
Interest paid by Govt. on Public Debts -
Interest paid by One firm to another firm -

4. PROFIT: Profit is the reward to the entrepreneur for his contribution to the production of Goods & Services.
It is the residual income earned by Entrepreneur after paying all the other factors of production..

Profit = Corporate Tax + Dividend + Retained Earnings

NOTE: If in Question the figure of Profit & it’s all components is given, then only the single figure of Profit is to
be taken.

Corporate Tax: It is the Direct Tax paid by an enterprise to the Government on the profit earned. It is also known PROFIT TAX or
BUSINESS TAX.
Dividend: It is that part profit which is distributed among the shareholders. It is also known as DISTRIBUTED PROFITS.
Retained Earnings: It is UNDISTRIBUTED PROFIT or SAVINGS of PRIVATE SECTOR or RESERVES & SURPLUS. It is kept as a reserve to
Meet Contingencies.

OPERATING SURPLUS: It refers to sum total of Income from property (Rent + royalty + Interest) and Income from Entrepreneur ship
(profit).

OPERATING SURPLUS

Income from Property Income from Entrepreneurship

(Rent + Royalty + Interest) (Profit)

5. MIXED INCOME: It is the income generated by own-account workers (like farmers, barbers) and Unincorporated Enterprises
(retailers, small shopkeepers). It includes income arises from productive services of self – employed persons. Like Services
of Chartered Accountants, Doctors etc
 MIND YOU: By Using INCOME METHOD the resultant answer will be NDP fc from where we have to calculate the National
Income (NNP fc).

PRECAUTIONS OF INCOME METHOD: (CRAMMING – TIIWIP)

a) Transfer Incomes like Old age Pensions , Scholarships etc. are NOT included because they not earned by production..
b) Income from Sale of Second-hand goods is NOT counted But Brokerage on those transactions is counted..
c) Income from sale of shares, bonds and debentures will NOT be included as such transactions do not contribute to Current
flow of Goods & services. These are mere FINANCIAL ASSETS or PAPER CLAIMS.
d) Wind fall gains are NOT Included like Income from Lotteries, Horse Race etc.
e) Imputed value of Owner occupied Houses, Interest on Own Capital, Production for Self Consumption is INCLUDED.
f) Payments out of PAST SAVINGS are NOT INCLUDED as they do not add to the flow of goods and services.

3) EXPENDITURE METHOD :

Also called as “INCOME DISPOSAL METHOD”: It is the Sum Total of Final expenditures incurred by Households, Business firms,
Government, and Rest of the world.

COMPONENTS OF FINAL EXPENDITURE

Gross Domestic Capital

Private Final Government Final Consumption Net Exports
Formation
Consumption Expenditure (GFCE) (X- M)
(GDCF)
Expenditure (PFCE)

Inventory
Gross Fixed Capital Exports (X) Imports (M)
Investment
Formation (GFCF)
(Change in stock)

Gross Business Gross Residential Gross Public

Fixed Investment Construction Investment

PRIVATE FINAL CONSUMPTION EXPENDITURE: (PFCE)

It refers to expenditure on final goods and services incurred by the Individuals, Households and Non-Profit private institutions
serving society (like help age)
INCLUDES: Durable, Semi-Durable, Non-Durable goods and services..
EXCLUDES: RESIDENTIAL Houses constructed by households as they are National Assets (Investment Expenditure)
GOVERNMENT FINAL CONSUMPTION EXPENDITURE: (GFCE)
It refers to the expenditure incurred by General Government on various administrative services like Defense, Law and Order,
education etc.

GFCE = Intermediate consumption of government + COE paid by Government + Direct Purchases from abroad
for embassies and consulates located abroad – Sale of goods and services produced by general government..

GROSS DOMESTIC CAPITAL FORMATION (GDCF) or GROSS INVESTMENT: (GDCF)

It refers to the addition to capital stock of the Economy. (INVESTMENT EXPENDITURE by HOUSEHOLD, GOVT & FIRMS)
Gross Fixed Capital Formation: (GFCF) (FIXED ASSETS).
a) Gross Business Fixed Investment: It includes exp. On the purchase of new Plants, Machinery, Equipment etc.
b) Gross Residential Construction: It includes exp. On purchase or Construction of NEW HOUSES by households..
c) Gross Public Investment: It includes exp. On construction of Flyovers, roads, Bridges etc.
Inventory Investment (Change in Stock) (I I): It represents the goods produced but not used for current consumption. It is calculated
as the difference between the closing stock and the opening stock of the year. (CURRENT ASSETS).

NET EXPORTS: (X-M)

It refers to the difference between EXPORTS and IMPORTS of a country during a period of One Year…
Exports (X) refer to expenditure by Foreigners on purchase of Domestic Products.
Imports (M) refer to expenditure by residents on foreign products.
Example 1: Exports = Rs.900, Imports = Rs.600, NET EXPORTS = Rs.900 – Rs.600 = Rs.300
Example 2: Exports = Rs.900, Imports = Rs.1,000, NET EXPORTS = Rs.900- Rs.1,000 = Rs. -100 ( Imports )
Example 3: Net Exports = Rs.900, Imports = Rs.600, NET EXPORTS = Rs.900
Example 4: Net Imports = Rs.200, NET EXPORTS = Rs.-200
Example 5: Net Imports = Rs. – 350, NET EXPORTS = Rs. 350

PRECAUTIONS OF EXPENDITURE METHOD (CRAMMING – ETPPP)

1) Expenditure on Intermediate goods will NOT be included in the National Income as their value Is already included in the NI.
2) Transfer Payments are NOT included..
3) Purchase of SECOND HAND goods will NOT be included.
4) Purchase of Financial assets ( shares, debentures etc) are NOT included
5) Production for self-Consumption, Imputed value of Owner Occupied houses, free services from general government) will
be included.

MIND YOU: By Using EXPENDITURE METHOD the resultant answer will be GDPmp from where we have to calculate the
National Income (NNP fc).
 RECONCILIATION OF THREE METHODS

VALUE ADDED METHOD INCOME METHOD EXPENDITURE METHOD

GVA mp of Primary Sector Compensation of Employees PFCE

GVA mp of Secondary + Rent and Royalty + GFCE
Sector +Interest + GDCF
GVA mp of Tertiary Sector +Profit + Net Exports
+Mixed Income

Gross Domestic Product

Gross Domestic Product At Market Price (GDP mp)
at market Price Domestic Income ( NDPfc)
(GDP mp)
(-) Depreciation
(-) Depreciation (+) N F I A (-) N I T
(-) N I T
Domestic Income (NDPfc)
National Income ( NNPfc)
Domestic Income
(NDPfc)

(+) N F I A National Income (NNPfc)

National Income
(NNPfc)

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