Eco ch1 Unit 1

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CHAPTER 1: UNIT-I: NATIONAL INCOME ACCOUNTING
Introduction
National Income accounting by the Nobel prize-winning economists Simon Kuznets and Richard Stone, is a measure
to study National Income.
Question 1:
Define National Income.
Answer:
Ø National Income is defined as the net value of
• all economic goods and services produced
• within the domestic territory of a country
• in an Accounting Year
• plus the Net Factor Income from Abroad (NFYA).
Ø According to Central Statistical Organization (CSO),

• “National Income is the sum total of factor incomes generated
• By the normal residents of a country
• In the form of wages, rent, interest and profit
• In an accounting year.
Question 2:
Explain the usefulness and significance of National Income estimates.
Answer:
National income accounts are extremely useful, for following:
(i) Evaluating the Short-Run Performance:
• Provide a comprehensive, conceptual and accounting framework for analyzing and evaluating the
short-run performance of an economy.
• The level of national income indicates the level of economic activity and economic development.
(ii) Determines Present and Future Demand:

• The distribution pattern of National Income determines the pattern of demand for goods and
services, and
• Enables businesses to forecast the future demand for their products.
(iii) Measure of Economic Welfare
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• Economic welfare demand on the magnitude and distribution of national income, size of per capita
income and the growth of these over time.
(iv) Possible to Make Temporal and Spatial Comparisons:

• National Income shows the composition and structure of national income in terms of different
sectors of the economy, the periodical variations in them and the broad sectoral shifts in an
economy over time.
• The governments can fix various sector-specific development targets for different sectors.
(v) Evaluation of governments’ Economic Policies:

• National income statistics also provide a quantitative basis for macroeconomic modeling and
analysis.
• These figures often influence popular and political judgments about the relative success of
economic programmes.
(vi) Study of Inequality:

• National income estimates throw light on income distribution and the possible inequality in the
distribution among different categories of income earners.
(vii) International Comparisons:

• International comparisons in respect of incomes and living standards assist in determining eligibility
for loans, and/or other funds or conditions on which such loans, and/or funds are made available.
(viii) Economic Forecasting:

• National income or a relevant component of it is an indispensable variable considered in economic
forecasting and to make projections about the future development trends of the economy.
Question 3:
What is UN System of National Accounts (SNA)?
Answer:
UN System of National Accounts (SNA) developed by United Nations to provide a comprehensive conceptual and
accounting framework for compiling and reporting macroeconomic statistics for analyzing and evaluating the
performance of an economy.
Question 4:
Explain three sides of NIA.
Answer:
National income accounts have three sides: a product side, an expenditure side and an income side:
(i) Product Side:

The product side measures production based on concept of value added.
(ii) Expenditure Side:

The expenditure side looks at the final sales of goods and services.
(iii) Income Side:

The income side measures the distribution of the proceeds from sales to different factors of production.
National income is the sum total of all the incomes accruing over a specified period to the residents of a country
and consists of wages, salaries, profits, rent and interest.
Question 5:
Explain the Gross Domestic Product (GDPMP).
Answer:
• Gross domestic product (GDP) is a measure of the market value of all final economic goods and services,
gross of depreciation, produced within the domestic territory of a country during a given time period.
• It is the sum total of ‘value added’ by all producing units in the domestic territory and includes value
added by current production by foreign residents or foreign-owned firms.
• The term ‘gross’ implies that GDP is measured ‘gross’ of depreciation.
• ‘Domestic’ means domestic territory or resident production units.
• GDP excludes transfer payments, financial transactions and non- reported output generated through
illegal transactions such as narcotics and gambling (these are also known as ‘bads’ as opposed to goods
which GDP accounts for).
GDPMP = Value of Output in the Domestic Territory – Value of International Consumption
GDPMP = Σ Value Added
Ø Important Points:
(i) Only Final Goods and Services:

• The value of only final goods and services or only the value added by the production process would
be included in GDP.
• By ‘value added’ we mean the difference between value of output and purchase of intermediate
goods.
(ii) Intermediate Consumption:

• Intermediate consumption consists of the value of the goods and services consumed as inputs by a
process of production, excluding fixed assets whose consumption is recorded as consumption of
fixed capital.
• Intermediate goods used to produce other goods rather than being sold to final purchasers are not
counted as it would involve double counting.
• The intermediate goods or services may be either transformed or used up by the production
process.
(iii) Production Boundary:

• Gross Domestic Product (GDP) is a measure of production activity.
• GDP covers all production activities recognized by SNA called the ‘production boundary’.
• The production boundary covers production of almost all goods and services classified in the
National Industrial Classification (NIC).
• Production of agriculture, forestry and fishing which are used for own consumption of producers is
also included in the production boundary.
• Gross Domestic Product (GDP) of any nation represents the sum total of gross value added (GVA).
(iv) Economic Activities:

• Economic Activities and Non-Economic Activities include all human activities which create goods and
services that are exchanged in a market and valued at market price.
• Non-economic activities are those which produce goods and services, but since these are not
exchanged in a market transaction they do not command any market value; for e.g. hobbies,
housekeeping and child rearing services of home makers and services of family members that are
done out of love and affection.
(v) ‘Flow’ Concept:

• National income is a ‘flow’ measure of output per time period—for example, per year—and includes
only those goods and services produced in the current period.
• The value of market transactions such as exchange of goods which already exist or are previously
produced, do not enter into the calculation of national income.
• The value of assets such as stocks and bonds which are exchanged during the pertinent period are
not included in national income.
• However, the value of services that accompany the sale and purchase (e.g. fees paid to real estate
agents and lawyers) represent current production and, therefore, is included in national income.
(vi) Inventory Investment:

• The net change in inventories of final goods awaiting sale or of materials used in the production
which may be positive or negative.
• Additions to inventory stocks of final goods and materials belong to GDP because they are currently
produced output.
Question 6:
Explain Nominal GDP v/s Real GDP, i.e. GDP at current and constant prices.
Answer:

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Question 7:
Explain Gross National Product (GNP).
Answer:
• Gross National Product (GNP) is a measure of the market value of all final economic goods and services,
gross of depreciation, produced within the domestic territory of a country by normal residents during an
accounting year including net factor incomes from abroad.
• Gross National Product (GNP) is evaluated at market prices.
GNPMP = GDPMP + Net Factor Income from Abroad
GDPMP = GNPMP – Net Factor Income from Abroad
• Note:
NFIA is the difference between the aggregate amount that a country's citizens and companies earn
abroad, and the aggregate amount that foreign citizens and overseas companies earn in that country.
• If Net Factor Income from Abroad is positive, then GNPMP would be greater than GDPMP.

National = Domestic + Net Factor Income from Abroad
Question 8:
Explain Net Domestic Product at market prices (NDPMP).
Answer:
Net domestic product at market prices (NDP MP) is a measure of the market value of all final economic goods and
services, produced within the domestic territory of a country by its normal residents and non residents during an
accounting year less depreciation.
NDPMP = GDPMP –Depreciation
NDPMP = NNPMP – Net Factor Income from Abroad
Gross = Net + Depreciation

OR
Net = Gross – Depreciation
Question 9:
Explain Net National Product at Market Prices (NNPMP).
Answer:
Net National Product at Market Prices (NNP MP) is a measure of the market value of all final economic goods and
services, produced by normal residents within the domestic territory of a country including Net Factor Income
from Abroad during an accounting year excluding depreciation.
NNPMP = GNPMP – Depreciation

NNPMP = NDPMP + Net Factor Income from Abroad
NNPMP = GDPMP + Net Factor Income from Abroad – Depreciation

Question 10:
Explain Gross Domestic Product at Factor Cost (GDPFC).
Answer:
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Question 11:
Explain Net Indirect Tax.
Answer:
Ø Indirect Taxes:
The market value of the goods and services will include indirect taxes which are:
• Product Taxes:
Product taxes like excise duties, customs, sales tax, service tax etc., levied by the government on goods
and services, and
• Taxes on Production:
Taxes on production, such as, factory license fee, taxes to be paid to the local authorities, pollution tax
etc. which are unrelated to the quantum of production.
Ø Subsidy:
• The government gives subsidy to many goods and services. The market price will be lower by the amount
of subsidies on products and production which the government pays to the producer.
• For example if the factor cost of a unit of good X is Rs.50/, indirect taxes amount to ` 15/per unit
and the government gives a subsidy of ` 10/per unit, then market price will be Rs.55/-
Market Price = Factor Cost + Net Indirect Taxes

= Factor Cost + Indirect Taxes – Subsidies

Factor Cost = Market Price – Net Indirect Taxes

= Market Price – Indirect Taxes + Subsidies
Question 12:
Explain Net Domestic Product at Factor Cost (NDPFC).
Answer:
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Question 13:
Explain Net National Product at Factor Cost (NNPFC) or National Income.
Answer:
• National Income is defined as the factor income accruing to the normal residents of the country during a
year.
• It is the sum of domestic factor income and net factor income from abroad.
• National income is the value of factor income generated within the country plus factor income from abroad
in an accounting year.
NNPFC = National Income = FID (factor income earned in domestic territory) + NFIA.
• If NFIA is positive, then national income will be greater than domestic factor incomes.
Question 14:
Explain Per Capita Income.

Answer:
• The GDP per capita is a measure of a country's economic output per person.
• It is obtained by dividing the country’s gross domestic product, adjusted by inflation, by the total
population. It serves as an indicator of the standard of living of a country.
Question 15:
Explain Personal Income.
Answer:
• Personal Income is the income received by the household sector including Non-Profit Institutions Serving
Households.
• Personal income is a measure of actual current income receipts of persons from all sources which may or
may not be earned from productive activities during a given period of time.
• In other words, it is the income ‘actually paid out’ to the household sector, but not necessarily earned.
• Examples of this include transfer payments such as social security benefits, unemployment compensation,
welfare payments etc.
• Individuals also contribute income which they do not actually receive; for example, undistributed corporate
profits and the contribution of employers to social security.
PI = NI + income received but not earned – income earned but not received
• Note:
National income is not the sum of personal incomes because personal income includes transfer payments (
eg. pension) which are excluded from national income.
Question 16:
Explain Personal Disposable Income.
Answer:
• Amount of the money in the hands of the individuals that is available for their consumption or savings.
• Disposable personal income is derived from personal income by subtracting the direct taxes paid by
individuals and other compulsory payments made to the government.
DI = PI – Personal Income Taxes

Question 17:
Explain Measurement of National Income in India.
Answer:
• National Accounts Statistics (NAS) in India are compiled by National Accounts Division in the Central
Statistics Office, Ministry of Statistics and Programme Implementation.
• Annual as well as quarterly estimates are published.
• As per the mandate of the Fiscal Responsibility and Budget Management Act 2003, the Ministry of
Finance uses the GDP numbers (at current prices) to determine the fiscal targets.
• Now, the base year has revised from 2004-05 to 2011-12.
Question 18:
Explain the Circular Flow of Income.
Answer:
Circular flow of income refers to the continuous circulation of production, income generation and expenditure
involving different sectors of the economy.
There are three different interlinked phases in a circular flow of income, namely: production, distribution and
disposition as can be seen from the following figure:
Circular Flow of Income
Production of Goods
and Services
Disposition Distribution as factor

Consumption/ incomes (rent, wages,
Investment interest, profit)
Ø Production Phase:
In the production phase, firms produce goods and services with the help of factor services.
Ø Income/ Distribution Phase:

In the income or distribution phase, the flow of factor incomes in the form of rent, wages, interest and
profits from firms to the households occurs.
Ø Expenditure/ Disposition Phase:

In the expenditure or disposition phase, the income received by different factors of production is spent on
consumption goods and services and investment goods.
Question 19:
Explain the Data Requirements and Outcomes of Different Methods of National Income Calculation.
Answer:
Method Data Required What is measured

Phase of Output: Value The sum of net values added by all the Contribution of production units
added method (Product producing enterprises of the country
Method)
Phase of income : Income Total factor incomes generated in the Relative contribution of factor owners
Method production of goods and services
Phase of disposition: Sum of expenditures of the three Flow of consumption and investment
Expenditure method spending units in the economy, namely, expenditures
government, consumer households, and
producing enterprises
Corresponding to the three phases, there are three methods of measuring national income. They are: Value Added
Method (alternatively known as Product Method); Income Method; and Expenditure Method.
Question 20:
Explain the Value Added Method or Product Method.
Answer:
• also called Industrial Origin Method or Net Output Method.
• National income by value added method is the sum total of net value added at factor cost across all
producing units of the economy.
• measures the contribution of each producing enterprise in the domestic territory of the country in an
accounting year
• shows the unduplicated contribution by each industry to the total output
Step 1:
• Identifying the producing enterprises and classifying them into different sectors according to the nature
of their activities
• three main sectors namely:
(i) Primary sector,
(ii) Secondary sector, and
(iii) Tertiary sector or service sector

Step 2:
Estimating the gross value added (GVA MP) by each producing enterprise
Gross value added (GVA MP) = Value of output – Intermediate consumption

= (Sales + change in stock) – Intermediate consumption
Step 3:
Estimation of National income
∑ (GVA MP) – Depreciation = Net value added (NVA MP)
• Adding the net value-added by all the units in one sub-sector, we get the net value added by the sub-
sector.
• We subtract net indirect taxes and add net factor income from abroad to get national income.
Net value added (NVA MP) – Net Indirect taxes = Net Domestic Product (NVA FC)
Net Domestic Product (NVA FC) + (NFIA) = National Income (NNP FC)
Ø Note:
The values of the following items are also included:
(i) Own account production of fixed assets by government, enterprises and households.
(ii) Production for self- consumption, and
(iii) Imputed rent of owner occupied houses.
Question 21:
Explain Income Method.
Answer:
• Under Factor Income Method, also called Factor Payment Method or Distributed Share Method, national
income is calculated by summation of factor incomes paid out by all production units within the domestic
territory of a country as wages and salaries, rent, interest, and profit.
• It includes factor payments to both residents and non- residents.

• Thus,
NDP FC = Sum of factor incomes paid out by all production units within the domestic territory of a
Country
NNP FC or National Income = Compensation of employees + Operating Surplus (rent + interest+

profit) + Mixed Income of Self- employed + Net Factor Income from Abroad
Ø Note:
• Only incomes earned by owners of primary factors of production are included in national income.
• Transfer incomes are excluded from national income.
• Labour income includes, apart from wages and salaries, bonus, commission, employers’ contribution to
provident fund and compensations in kind.
• Normally, it is difficult to separate labour income from capital income because in many instances people
provide both labour and capital services.
Question 22:
Explain Expenditure Method.
Answer:
In the expenditure approach, also called Income Disposal Approach, national income is the aggregate final
expenditure in an economy during an accounting year. In the expenditure approach to measuring GDP, we add up the
value of the goods and services purchased by each type of final user mentioned below.
1. Final Expenditure Method
a) Private Final Consumption Expenditure (PFCE):

• The volume of final sales of goods and services to consumer households and nonprofit
institutions serving households acquired for consumption (not for use in production) are
multiplied by market prices.
b) Government Final Consumption Expenditure (GFCE):

• Since the collective services provided by the governments such as defense, education,
healthcare etc. are not sold in the market, the only way they can be valued in money terms
is by adding up the money spent by the government in the production of these services.
• This total expenditure is treated as consumption expenditure of the government.
2. Gross Domestic Capital Formation

• Gross domestic fixed capital formation includes final expenditure on machinery and equipment and own
account production of machinery and equipments, expenditure on construction, expenditure on changes
in inventories, and expenditure on the acquisition of valuables such as, jewelry and works of art.
3. Net Exports
• Net exports are the difference between exports and imports of a country during the accounting year. It
can be positive or negative.
Step 1:
We first find the sum of final consumption expenditure, gross domestic capital formation and net
exports. The resulting figure is gross domestic product at market price (GDPMP).
Step 2:
We add the net factor income from abroad and obtain Gross National Product at market price (GNPMP).
Step 3:
Subtracting indirect taxes from GNPMP, we get Gross National Product at factor cost (GNPFC).
Step 4:
National income or NNP FC is obtained by subtracting depreciation from Gross national product at factor
cost (GNPFC).
Question 23:
Why do we use three methods to calculate National Income?
Answer:
• All the three methods of national income computation should arrive at the same figure. When
national income of a country is measured separately using these methods, we get a three
dimensional view of the economy.
• Each method of measuring GDP is subject to measurement errors and each method provides a
check on the accuracy of the other methods. By calculating total output in several different ways
and then trying to resolve the differences.
• We will be able to arrive at a more accurate measure than would be possible with one method
alone.
• Different ways of measuring total output give us different insights into the structure of our
economy.
• Income method may be most suitable for developed economies where people properly file their
income tax returns.

• While the growing facility in the use of the commodity flow method of estimating expenditures,
an increasing proportion of the national income is being estimated by expenditure method.
• As a matter of fact, countries like India are unable to estimate their national income wholly by
one method. Thus, in agricultural sector, net value added is estimated by the income method and
in the construction sector net value added is estimated by the expenditure method.
Question 24:
Explain the system of regional accounts in India.
Answer:
The system is as explained below:
• Regional accounts provide an integrated database on the innumerable transactions taking place in the
regional economy and help decision making at the regional level.
• All the states and union territories of India compute state income estimates and district level estimates.
State income or Net State Domestic Product (NSDP) is a measure n monetary terms of the volume of all
goods and services produced in the state within a given period of time.
• Per Capital State Income is obtained by dividing the NSDP (State Income) by the midyear projected
population of the state.
• The state level estimates are prepared by the State Income Units of the respective State Directorates of
Economics and Statistics (DESs).
Question 25:
What are Supra-regional sectors?
Answer:
The Supra-regional sectors are explained as below:
• Certain activities such as railways, communications, banking and insurance and central government
administration, that cut across state boundaries, and thus their economic contribution cannot be assigned
to any one state directly and are known as the 'Supra-regional sectors' of the economy.
• The estimates for these supra regional activities are compiled for the economy as a whole and allocated to
the states on the basis of relevant indicators.
Question 26:
Explain the limitations and challenges of National Income computation.
Answer:
The limitations are explained as below:
GDP measures ignores the following -

a) Inadequate measure of welfare - Countries may have significantly different income distributions and,
consequently, different levels of overall well-being for the same level of per capital income.
b) Ignores Qualitative data - Quality improvements in systems and processes due to technological as well as
managerial innovations which reflect true growth in output from year to year.
c) Doesn't count hidden transactions - Productions hidden from government authorities, either because those
engaged in it are evading taxes or because it is illegal (drugs, gambling etc).
d) Doesn't count non - market production - Nonmarket production and Non-economic contributors to well-
being for example: health of a country’s citizens, education levels, political participation, or other social and
political factors that may significantly affect well-being levels are ignored.
e) Economic bads are not accounted for - Economic ’bads’ for example: crime, pollution, traffic congestion etc
which make us worse off are not considered in GDP.
f) Volunteer work excluded - The volunteer work and services rendered without remuneration undertaken in
the economy, even though such work can contribute to social well-being as much as paid work.
g) Things that contribute to economic welfare - Many things that contribute to our economic welfare such as,
leisure time, fairness, gender equality, security of community feeling etc.,
h) Better off or preventing worse off -
• The distinction between production that makes us better off and production that only prevents us from
becoming worse off, for e.g. defense expenditures such as on police protection.
• Increased expenditure on police due to increase in crimes may increase GDP but these expenses only
prevent us from becoming worse off.
• No reflection is made in national income of the negative impacts of higher crime rates.
Question 27:
Explain conceptual difficulties in measurement of GDP?
Answer:
There are many conceptual difficulties related to measurement which are difficult to resolve, such as:
a) lack of an agreed definition of national income,
b) accurate distinction between final goods and intermediate goods,
c) issue of transfer payments,
d) services of durable goods,
e) difficulty of incorporating distribution of income
f) valuation of a new good at constant prices, and
g) valuation of government services.
Question 28:
What are the other challenges in estimation of National Income / GDP.
Answer:
Other challenges relate to:

a) Inadequacy of data and lack of reliability of available data,

b) presence of non-monetized sector,
c) production for self-consumption,
d) absence of recording of incomes due to illiteracy and ignorance,
e) lack of proper occupational classification, and
f) accurate estimation of consumption of fixed capital
Question 29:
What is meant by Domestic Territory?
Answer:
In layman's language, domestic territory means the political frontiers of a country. In addition to political
frontiers, domestic territory also includes:
1. Ships and aircrafts owned and operated by normal residents between two or more countries.
2. Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of a country in the
international waters where they have exclusive rights of operation.
3. Embassies, consulates and military establishments of a country located abroad.
Domestic territory doesn't include -

1. Embassies, consulates and military establishments of a foreign country.
2. International organizations like UNO, WHO, etc. located within geographical boundaries of a country.
Question 30:
What is meant by Normal Residents?
Answer:
Normal resident of a country refers to an individual or an institution who ordinarily resides in the country and
whose centre of economic interest also lies in that country.
Following are not included under the category of normal residents:

• Foreign tourist and visitors
• Foreign staff of embassies, officials, diplomats and members of the armed forces
• International organizations like UNO, WHO etc.
• Employees of international organizations are considered as residents of the countries to which they belong.
• Crew members of foreign vessels, commercial travelers and seasonal workers.
Question 31:
Differentiate between :
1. Factor Income and Transfer Income.
2. Final Goods and Intermediate Goods

3. Consumption Goods and Capital Goods

4. Domestic Income (NDPFC) and National Income (NNPFC)
5. Depreciation and capital loss
6. Personal Income and Private Income
7. Personal Income and National Income
Answer:
Factor Income and Transfer Income
Basis Factor Transfer Income
Meaning It refers to income received by It refers to income received without
factors of production for rendering rendering any productive service in
factor services in the production return.
process.
Nature It is included in both National Income It is neither included in National
and Domestic Income. Income nor in Domestic Income.
Concept It is an earning concept. It is a receipt concept.
Final Goods and Intermediate Goods

Basis Final Goods Intermediate Goods
Meaning Final goods refer to those goods Intermediate goods refer to those
which are used either for goods which are used either for
consumption or for investment. resale or for further production in
the same year.
Nature They are included in both national and They are neither included in national
domestic income. income nor in domestic income.
Value addition They are ready for use by their final They are not ready for use, i.e. some
users i.e. no value has to be added to value has to be added to the
the final goods intermediate goods.
Production boundary They have crossed the production They are still within the production
boundary. boundary.
Example Milk purchased by households for Milk used in dairy shop for resale,
consumption, car purchased as an coal used in factory for further
investment. production.
Consumption Goods and Capital Goods

Basis Consumption Goods Capital Goods
Satisfaction of human These goods satisfy human wants Such goods satisfy human wanted
wants directly. So, such goods have direct indirectly. So, such goods have
demand. derived demand.
Production capacity They do not promote production They help in raising production
capacity. capacity.
Expected life Most of the consumption goods Capital goods generally have an
(except durable goods) have limited expected life of more than one year.

expected life.
Domestic Income and National Income

Basis Domestic Income National Income
Nature of concept It is a territorial concept as it It is a national concept as it includes
includes the value of final goods and the value of final goods and services
services produced within domestic produced in the entire world.
territory of a country.
Category of Producers It considers all producers within the It considers all producers who are
domestic territory of the country. normal residents of the country.
NFIA It does not include NFIA It includes NFIA
Depreciation and Capital Loss

Basis Depreciation Capital Loss
Meaning It refers to fall in the value of fixed It refers to loss in value of the fixed
assets due to normal wear and tear, assets due to unforeseen
passage of time or expected obsolescence, natural calamities,
obsolescence. thefts, accidents, etc.
Provision for loss Provision is made for replacement of No such provision is made in case of
assets as it is an expected loss. capital loss as it is an unexpected
loss.
Production process It does not hamper the production It hampers the production process.
process.
Personal Income and Private Income

Basis Personal Income Private Income
Meaning It refers to income actually received It refers to the income which accrues
by households from all sources. to private sector from all sources.
Concept It is a narrower concept as it is a It is a broader concept as it includes
part of private income. personal income.
Formula Personal Income = Private income - Private income = Personal income +
Corporate tax - Retained earnings Corporate tax + Retained earnings
Personal Income and National Income

Basis Personal Income Private Income
Meaning It is the sum total of all incomes that
are actually received by households
from all the sources.
Nature of Income It includes both factor incomes as It includes only the factor incomes.
well as transfer incomes.
Public sector income It does not include income earned by It includes income earned by public
public sector. sector.

Domestic Income (NDPFC)
Income from Domestic Product Income from Domestic Product

accruing to Private Sector accruing to Public Sector
Income from Property and

Savings of Non-Departmental
Entrepreneurship accruing to
Enterprises
Government Administrative
Question 32: Departments
What does private income refer to?
Answer:
Private income refers to the income which accrues to private sector from all the sources within and outside the
country.
Private Income includes:
Factor Income earned: Transfer Income received:
within Domestic from Rest of the

within Domestic from Rest of the
territory World (ROW)
territory World (ROW)
Income from Interest on Net current

Domestic product Net Factor Income National Debt + transfers from
accruing to private from Abroad (NFIA) Current transfers ROW (d)
sector (a) (b) from Government
(c )

Private Income = a + b + c + d
GDPMP
Less: Depreciation
Less: Net Indirect Taxes
=
Domestic Income (NDPFC)
Less: Income from Property and Entrepreneurship accruing to Government Income from Domestic Product
Administrative Departments accruing to Public Sector
Less: Saving of Non-Departmental Enterprises
=
Income from Domestic Product accruing to Private Sector Factor income earned
Add: Net Factor Income from Abroad (NFIA)
Add: National Debt Interest Transfer income received
Add: Current transfers from Government
Add: Net current transfers from ROW
=
PRIVATE INCOME
Question 33:
What is the meaning of Personal Disposable Income?
Answer:
Personal Disposable Income (PDY) refers to that part of personal income which is actually available at the disposal
of households.
Personal Disposable Income = Personal Income - Personal Taxes - Miscellaneous receipts of government

NATIONAL INCOME
(+) income from property and entrepreneurship accruing (-) income from property and entrepreneurship accruing
to government administrative departments to government administrative departments
(+) savings of non - departmental enterprises (-) savings of non - departmental enterprises
(-) current transfers from government (+) current transfers from government
(-) national debt interest (+) national debt interest
(-) net current transfers from the rest of the world (+) net current transfers from the rest of the world
PRIVATE INCOME PRIVATE INCOME
(+) Corporate tax (-) Corporate tax

(+) Retained earnings (-) Retained earnings
PERSONAL INCOME PERSONAL INCOME
(+) Personal tax (-) Personal tax

(+) Misc. receipts of the (-) Misc. receipts of the
Government Government
PERSONAL DISPOSABLE INCOME
Question 34:
Explain Net Indirect Tax (NIT).
Answer:
The Net Indirect Tax is explained as follows:
(i) Indirect Taxes - Indirect taxes refers to those taxes which are imposed by the government on production
and sale of goods and services. For example - Goods and Services Tax (GST).
(ii) Subsidies - Subsidies are the 'economic assistance' given by the government to the firms and households,
with a motive of general welfare.

Question 35:
Explain National Disposable Income (Net and Gross).
Answer:
National Disposable Income (NDY) refers to the income which is available to the whole country for disposal.
National Disposable Income = National Income + Net indirect taxes + Net current transfers from rest of the world
National Disposable Income (NDY) = National Consumption Expenditure + National Savings
Gross National Disposable Income

When depreciation is added to the net National Disposable Income, we get Gross National Disposable Income.
Gross National Disposable Income = Net National Disposable Income + Depreciation
National Income
(+) Net Indirect Taxes
(+) Net Current Transfers from rest of the world
Net National Disposable Income
(+) Depreciation
Gross National Disposable Income
Question 36:
Give formulae for determination of Nominal GDP and Real GDP.
Answer:
The formulae are as follows:
Nominal GDP and Real GDP can be determined in the following manner:
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷
Real GDP = x 100
𝑷𝒓𝒊𝒄𝒆 𝑰𝒏𝒅𝒆𝒙
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷 𝒙 𝑷𝒓𝒊𝒄𝒆 𝑰𝒏𝒅𝒆𝒙

Nominal GDP =
𝟏𝟎𝟎

Question 37:
Explain GDP Deflator (or Price Index).
Answer:
The concept is explained as follows:
GDP deflator measures the average level of prices of all the goods and services that make up GDP.
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷
GDP Deflator (or Price Index) = x 100
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷
Question 38:
Explain Net Factor Income from Abroad (NFIA).
Answer:
The concept is explained as follows:
It refers to the difference between factor income received from rest of the world and factor income paid to rest
of the world.
NFIA = Factor income earned from abroad - Factor income paid abroad
The components of NFIA are as follows:

1. Net Compensation to Employees - It refers to difference between income from work received by resident
workers living or employed abroad for less than one year and similar payments made to non - resident
workers staying or employed within the domestic territory of the country for less than one year.
2. Net income from property and entrepreneurship - It refers to difference between income from property
and entrepreneurship (in the form of rent, interest and dividend) received by residents of the country and
similar payments made to non - residents.
3. Net retained earnings - It refers to difference between retained earnings of resident companies located
abroad and retained earnings of non - resident companies located within the domestic territory of the
country.

Ø Practical Problems:
Question 1: [Study Material]

Compute national income
Consumption 750
Investment 250
Government purchases 100
Exports 100
Imports 200

Calculate Gross Domestic Product at market Prices (GDPMP) and derive national income from the following data (in
Crores of Rupees)
Inventory Investment 100
Exports 200
Indirect taxes 100
Net factor income from abroad - 50
Personal consumption expenditure 3500
Gross residential construction 300
investment
Depreciation 50
Imports 100
Government purchases of goods and 1000
services
Gross public investment 200
Gross business fixed investment 300

Find GDPMP and GNPMP from the following data (in Crores of Rs) using income method. Show that it is the same as
that obtained by expenditure method.
Personal Consumption 7,314
Depreciation 800
Wages 6,508
Indirect Business Taxes 1,000
Interest 1,060
Domestic Investment 1,442
Government Expenditures 2,196
Rental Income 34
Corporate Profits 682
Exports 1,346
Net Factor Income from Abroad 40
Mixed Income 806
Imports 1,408


From, the following data calculate the Gross National Product at Market Price using Value Added method
(₹ in crores)
Value of output in primary sector 500
Net factor income from abroad - 20
Value of output in tertiary sector 700
Intermediate consumption in 400
secondary sector
Value of output in secondary sector 900
Government Transfer Payments 600
tertiary sector
primary sector
Question 5:
From the following data about a firm ‘X’ for the year 2000-01, calculate the net value added at market price during
that year:
Particulars ₹ in crores
i. Sales 90
ii. Closing stock 25
iii. Opening stock 15
iv. Indirect taxes 10
v. Depreciation 20
vi. Intermediate consumption 40
vii. Purchase of raw materials 15
viii. Rent 5
Question 6:
From the following data relating to a firm, calculate its net value added at factor cost:
i. Subsidy 40
ii. Sales 800
iii. Depreciation 30
iv. Exports 100
v. Closing Stock 20
vi. Opening stock 50
vii. Intermediate purchases 500
viii. Purchase of machinery for own use 200
ix. Import of raw material 60

Question 7:
Calculate ‘intermediate consumption’ from the following data:
i. Value of output 200
ii. Net value added at factor cost 80
iii. Goods and Services Tax (GST)* 15
iv. Subsidy 5
v. Depreciation 20
Question 8:
Firm A buys from X inputs worth ₹ 500 crores and sells to firm B goods worth ₹ 1,000 crores and to firm C goods
worth ₹ 700 crores. Firm B buys from Y inputs worth ₹ 200 crores and sells to firm C goods worth ₹ 1,500 crores
and finished goods worth ₹ 2,000 crores to households. Firm C buys from Z inputs worth ₹ 150 crores and sells
finished goods worth ₹ 4,150 crores to households. Calculate value added by firms A, B and C and GDPMP.
Question 9:
In an economy, industry P sells output to Q. Q sells output to R for ₹ 600. Q’s value added is ½ of P’s value added.
Assuming P’s value of inputs are 0, calculate how much P sells to Q.
Question 10:
Calculate the operating surplus
i. Sales 4,000
ii. Compensation of employees 800
iii. Intermediate consumption 600
iv. Rent 400
v. Interest 300
vi. Net indirect taxes 500
vii. Consumption of fixed capital 200
viii. Mixed income 400
Question 11:
Calculate National Income by Income and Expenditure method
i. Compensation of employees 250
ii. Imports 20
iii. Mixed income of self employed 50
iv. Gross fixed capital formation 120
v. Private final consumption expenditure 550
vi. Consumption of fixed capital 10
vii. Net factor income from abroad 20
viii. Indirect taxes 100

ix. Change in stock 20

x. Subsidies 20
xi. Rent 100
xii. Interest 200
xiii. Profits 50
xiv. Exports 10
xv. Government final consumption expenditure 60
Question 12:
Calculate national income by Income and Expenditure method from the following data:
i. Salaries & wages in cash 1,997
ii. Transfer payments by government 25
iii. Rent 132
iv. Indirect taxes 200
v. Subsidies 89
vi. Compensation of workers in kind 95
vii. Depreciation 81
viii. Net increase in factor income from rest of the 52
world
ix. Interest 92
x. Government expenditure on goods & services 574
xi. Personal consumption expenditure on goods & 1,805
services
xii. Corporate profit tax 10
xiii. Income of the self employed 264
xiv. Undistributed corporate profit 26
xv. Dividends 201
xvi. Export of goods and services 900
xvii. Addition to stock 7
xviii. Social security contributions by employer 54
xix. Import of goods and services 323
xx. Gross fixed investment 100
Question 13:
From the following data, calculate Gross National Product at Market Prices by (a) Income method and (b)
Expenditure method
i. Government final consumption expenditure 250
ii. Change in stocks 65
iii. Net domestic capital formation 150
iv. Interest 90
v. Profits 210

vi. Corporation tax 50

vii. Rent 100
viii. Factor income from abroad 20
ix. Indirect taxes 55
x. Factor income to abroad 40
xi. Exports 60
xii. Subsidies 25
xiii. Imports 80
xiv. Consumption of fixed capital 20
xv. Private final consumption expenditure 500
xvi. Compensation of employees 450
xvii. Value of rent for free accommodation to 40
employees
Question 14:
Calculate (a) National Income by Expenditure Method; and (b) National Income by Income Method.
i. Government final consumption expenditure 500
ii. Change in stock 350
iii. Consumption of fixed capital 50
iv. Exports of goods and services 200
v. Private final consumption expenditure 900
vi. Gross fixed capital formation 800
vii. Subsidies 50
viii. Imports of goods and services 350
ix. Net property and entrepreneurship income from (-) 60
rest of the world
x. Indirect taxes 200
xi. Saving of the private corporate sector 30
xii. Net compensation of employees from rest of the (-) 10
world
xiii. Operating surplus 550
xiv. Compensation of employees 800
xv. Corporate tax 20
xvi. Mixed income of self employed 850
Question 15:
Calculate ‘private income’ from the following data:
Particulars ₹ In crores
(i) National debt interest 30
(ii) Gross national product at market price 400
(iii) Current transfers from government 20
(iv) Net indirect taxes 40

(v) Net current transfers from the rest of the world (-) 10
(vi) Net domestic product at factor cost accruing to government 50
(vii) Consumption of fixed capital 70
Question 16:
Calculate ‘value of output’ from the following data:
(i) Net value added at factor cost 100
(ii) Intermediate consumption 75
(iii) Goods and Service Tax (GST) 20
(iv) Subsidy 5
(v) Depreciation 10
Question 17:
Calculate ‘intermediate consumption’ from the following data:
(i) Value of output 200
(ii) Net value added at factor cost 80
(iii) Goods and Service Tax (GST) 15
(iv) Subsidy 5
(v) Depreciation 20
Question 18:
Calculate ‘net domestic product at factor cost’ and ‘gross national disposable income’ from the following data:
(i) Net current transfers from abroad (-) 5
(ii) Private final consumption expenditure 250
(iii) Net factor income from abroad 15
(iv) Government final consumption expenditure 50
(v) Consumption of fixed capital 25
(vi) Net exports (-) 10
(vii) Subsidies 10
(viii) Net domestic capital formation 30
(ix) Indirect tax 20

Question 19:
Calculate “Gross national product at factor cost” from the following data by
(a) Income method, and (b) expenditure method:
(i) Private final consumption expenditure 1,000
(ii) Net domestic capital formation 200
(iii) Profits 400
(iv) Consumption of employees 800
(v) Rent 250
(vi) Government final consumption expenditure 500
(viii) Interest 150
(ix) Net current transfers from rest of the world (-) 80
(x) Net factor income from abroad (-) 10
(xi) Net exports (-) 20
(xii) Net indirect taxes 80
Question 20:
Find out: (a) national income, and (b) Gross National disposable income:
(i) Factor income from abroad 15
(iii) Consumption of fixed capital 50
(v) Net current transfers to abroad (-) 5
(vi) Net domestic fixed capital information 110
(vii) Net factor income to abroad 10
(viii) Net imports (-) 20
(ix) Net indirect tax 70
(x) Change in stocks (-) 10
Question 21:
Find out: (a) Gross National Product at Market Price, and (b) Net Current Transfers from abroad.
(i) Net indirect tax 35
(iii) Net national disposable income 750
(iv) Closing stock 10
(v) Government final consumption expenditure 150
(vi) Net domestic fixed capital information 100

(vii) Net factor income to abroad (-) 15

(viii) Net imports 20
(ix) Opening stock 10
(x) Consumption of fixed capital 50
Question 22:
Calculate “sales” from the following data:
(i) Net value added at factor cost 560
(ii) Depreciation 60
(iii) Change in stock (-) 30
(iv) Intermediate cost 1,000
(v) Exports 200
(vi) Indirect taxes 60
Question 23:
Calculate ‘national income and gross national disposable income’ from the following data:
(i) Net current transfers to abroad (-) 15
(iii) Subsidies 20
(v) Indirect tax 120
(vi) Net imports 20
(viii) Net change in stocks (-) 10
(ix) Net factor income to abroad 5
(x) Net domestic capital formation 110
Question 24:
Calculate (a) Operating Surplus, and (b) Domestic Income:
(i) Compensation of employees 2,000
(ii) Rent and interest 800
(iii) Indirect taxes 120
(iv) Corporation tax 460
(vi) Subsidies 20
(vii) Dividend 940

(viii) Undistributed profits 300

(x) Mixed income 200
Question 25:
Calculate National Income from the following data:
(i) Current transfers by government 15
(ii) Private Final consumption expenditure 400
(iii) Net indirect taxes 60
(iv) Government Final consumption expenditure 100
(v) Net factor income from abroad (-) 10
(vi) Net domestic capital formation 80
(viii) Net exports 40
Question 26:
Calculate gross national product at market price from the following data:
(i) Net factor income from abroad (-) 25
(ii) Profits 70
(iii) Consumption of fixed capital 30
(iv) Rent 40
(v) Indirect tax 20
(vi) Interest 100
(vii) Loyalty 10
(viii) Compensation of employees 600
(ix) Subsidy 5
Question 27:
Calculate national income from the following data:
(i) Subsidy 5
(ii) Net exports (-) 20
(iii) Private final consumption expenditure 400
(iv) Net factor income to abroad 10
(v) Government Final Consumption expenditure 100
(vi) Indirect tax 30
(vii) Net domestic capital formation 50

(viii) Change in stocks 7
Question 28:
From the following data calculate gross national product at factor cost by (a) income method, and (b) expenditure
method:
(i) Private final consumption expenditure 1,000
(ii) Net domestic capital formation 200
(iii) Profits 400
(iv) Compensation of employees 800
(v) Rent 250
(vi) Government Final Consumption expenditure 500
(viii) Interest 150
(ix) Net current transfers from rest of the world (-) 80
(x) Net factor income from abroad (-) 10
(xi) Net exports (-) 20
(xii) Net indirect taxes 80
Question 29:
From the following data, calculate: (a) gross domestic product at factor cost and (b) factor income to abroad
(i) Compensation of employees 800
(ii) Profits 200
(iii) Dividends 50
(iv) Gross national product at market price 1,400
(v) Rent 150
(vi) Interest 100
(vii) Gross domestic capital formation 300
(viii) Net fixed capital formation 200
(ix) Change in stock 50
(x) Factor income from abroad 60
(xi) Net indirect taxes 120
Question 30:
Calculate gross value added at factor cost
(i) Units of output sold (units) 1,000
(ii) Price per unit of output 30
(iii) Depreciation 1,000

(iv) Intermediate cost 12,000

(v) Closing stock 3,000
(vi) Opening stock 2,000
(vii) Goods and Service Tax (GST) 6,000
Question 31:
From the following data, calculate: (i) value of output, (ii) net value added at factor cost, (iii) prove that income
generated is equal to net value added at factor cost.
(i) Increase in unsold stock 600
(ii) Sales 10,625
(iii) Purchase of raw materials 2,625
(iv) Indirect taxes 1,200
(v) Subsidies 400
(vi) Operating surplus 3,740
(vii) Mixed incomes 100
(viii) Wages and salaries 3,460
(ix) Depreciation 500
Question 32:
Calculate national income by income and expenditure method:
(i) Final consumption expenditure
- Private sector 350
- Government sector 100
(ii) Mixed income of self employed 35
(iii) Gross domestic fixed capital formation 70
(iv) Opening stock 15
(v) Compensation of employees 250
(vi) Closing stock 25
(vii) Imports 20
(viii) Rent 75
(ix) Consumption of fixed capital 10
(x) Net indirect taxes 25
(xi) Interest 25
(xii) Net factor income from abroad (-) 5
(xiii) Exports 10
(xiv) Profit 100
Question 33:

Calculate: (a) domestic income, and (b) compensation of employees.

(i) Net factor income from abroad (-) 20
(ii) Net exports 10
(iii) Net indirect taxes 50
(iv) Rent and royalty 20
(vi) Priate final consumption expenditure 400
(vii) Corporate tax 10
(viii) Interest 30
(ix) Net domestic capital formation 50
(x) Dividends 22
(xi) Government final consumption expenditure 100
(xii) Undistributed profits 5
(xiii) Mixed income 23
Question 34:
Calculate national income by output method and income method:
(i) Value of output 800
(ii) Value of intermediate consumption 400
(iii) Subsidies 10
(iv) Indirect taxes 60
(v) Factor income received from abroad 10
(vi) Factor income paid abroad 20
(vii) Mixed income of self employed 120
(viii) Rent and royalty 40
(ix) Interest and profit 20
(x) Wages and salaries 110
(xi) Consumption of fixed capital 50
(xii) Employers’ contribution to social security schemes 10
Question 35:
From the following data, calculate: (a) gross domestic product at market price, and (b) subsidies
(i) Government final consumption expenditure 7,000
(ii) Indirect taxes 9,000
(iii) NNP at FC 61,700
(iv) Mixed income of self employed 28,000
(v) Gross fixed capital formation 13,000

(vi) Net addition to stocks 10,000

(vii) Compensation of employees 24,000
(viii) Depreciation 4,000
(ix) Private final consumption expenditure 44,000
(x) Exports of Goods and Serices 4,800
(xi) Imports of Goods and Serices 5,600
(xii) NFIA (-) 300
Question 36:
From the following data, calculate: (a) closing stock, (b) national income, and (c) Government Final Consumption
Expenditure.
(i) Private final consumption expenditure 900
(ii) Net domestic fixed capital formation 2,100
(iii) Factor income to abroad 40
(iv) NNP at MP 5,230
(v) Net indirect taxes 150
(vi) Opening stock 100
(vii) Gross domestic capital formation 2,800
(viii) Consumption of fixed capital 550
(ix) Net exports 700
Question 37:
Calculate: (a) Net national product at market price, and (b) Gross domestic Product at Factor Cost.
(i) Rent and interest 6,000
(ii) Wages and salaries 1,800
(iii) Undistributed profits 400
(iv) Net indirect taxes 100
(v) Subsidies 20
(vi) Corporation tax 120
(vii) Net factor income to abroad 70
(viii) Dividends 80
(x) Social security contribution by employers 200
(xi) Mixed income 1,000
Question 38:
Calculate: (a) Operating Surplus, and (b) Domestic Income.

(i) Compensation of employees 2,000

(ii) Rent and interest 800
(iii) Indirect taxes 120
(iv) Corporation tax 460
(vi) Subsidies 20
(vii) Dividend 940
(viii) Undistributed profits 300
(x) Mixed income 200
Question 39:
Calculate: (a) gross domestic product at market price, and (b) National Income.
(i) Government final consumption expenditure 4,000
(ii) Private final consumption expenditure 3,500
(iii) Gross domestic capital formation 1,100
(iv) Net exports 500
(v) Net factor income from abroad 100
(vi) Net indirect taxes 300
(vii) Subsidies 40
(viii) Change in stock 80
Question 40:
Calculate Gross national product at market price, by: (a) Expenditure method, and (b) Income method.
(i) Compensation of employees 100
(iii) Rent 20
(v) Profits 10
(vi) Interest 10
(vii) Gross domestic capital formation 60
(viii) Net imports 10
(x) Net indirect taxes 30
(xi) Net factor income to abroad (-) 20
(xii) Change in stocks 10
(xiii) Mixed income 110



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CHAPTER 1: UNIT-I: NATIONAL INCOME ACCOUNTING

Ø According to Central Statistical Organization (CSO),

(ii) Determines Present and Future Demand:

(iii) Measure of Economic Welfare

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(iv) Possible to Make Temporal and Spatial Comparisons:

(v) Evaluation of governments’ Economic Policies:

(vi) Study of Inequality:

(vii) International Comparisons:

(viii) Economic Forecasting:

(i) Product Side:

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The product side measures production based on concept of value added.

(ii) Expenditure Side:

(iii) Income Side:

GDPMP = Value of Output in the Domestic Territory – Value of International Consumption

GDPMP = Σ Value Added

(i) Only Final Goods and Services:

(ii) Intermediate Consumption:

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(iii) Production Boundary:

(iv) Economic Activities:

(v) ‘Flow’ Concept:

(vi) Inventory Investment:

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GNPMP = GDPMP + Net Factor Income from Abroad

GDPMP = GNPMP – Net Factor Income from Abroad

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National = Domestic + Net Factor Income from Abroad

NDPMP = GDPMP –Depreciation

NDPMP = NNPMP – Net Factor Income from Abroad

Gross = Net + Depreciation

NNPMP = GNPMP – Depreciation

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Market Price = Factor Cost + Net Indirect Taxes

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Factor Cost = Market Price – Net Indirect Taxes

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DI = PI – Personal Income Taxes

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Circular Flow of Income

Disposition Distribution as factor

Ø Income/ Distribution Phase:

Ø Expenditure/ Disposition Phase:

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Method Data Required What is measured

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Gross value added (GVA MP) = Value of output – Intermediate consumption

∑ (GVA MP) – Depreciation = Net value added (NVA MP)

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NNP FC or National Income = Compensation of employees + Operating Surplus (rent + interest+

1. Final Expenditure Method

a) Private Final Consumption Expenditure (PFCE):

b) Government Final Consumption Expenditure (GFCE):

2. Gross Domestic Capital Formation

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a) Inadequacy of data and lack of reliability of available data,

Domestic territory doesn't include -