NATIONAL INCOME

National income is defined as the market value of goods

and services produced by a country during a financial year .It is the net
result of all economic activities of any country during a period of one year
and is valued in terms of money.

The flow of production of goods & services in the current year is the
source of the flow of income received by the factors of production & the
flow of incomes is the source of expenditure incurred on commodities.

The amount received as national income is identical to the amount spent

as national expenditure, which is also identical to what is produced as
national output. Throughout macroeconomics the terms income, output
and expenditure are interchangeable.

The three measures of NI are :

National Product = National Income = National Consumption
Alternatively, National Income is the total amount of income accruing to a
country from economic activities in a years time. It includes payments
made to all resources in the form of wages, interest, rent, and profits.
DR GAURI SETH MBAC101 NSUT
 The income generating process across
different sectors of an economy creates two
kinds of flows – Product flows & money flows

PRODUCT FLOW OR REAL FLOW- the flow

of factor services from households to firms
and corresponding flow of goods and
services from firms to households is known
to be as real flow.

INCOME FLOW- It refers to money flow in

the form of factor payments and
consumption expenditure. Households get
monetary reward for their services in the
form of rent, wages, interest, and profit from
firms and spend it for obtaining various
types of goods to satisfy their wants.

The flow of money is a measure of national

income and changes with changes in the
national income. In year of depression,
when national income is low, the volume of
the flow of money will be small and in years
of prosperity when the level of national
income is quite high, the flow of money will
be large. DR GAURI SETH MBAC101 NSUT
DR GAURI SETH MBAC101 NSUT
IMPORTANT CONCEPTS
FINAL VERSUS INTERMEDIATE GOODS
• Final goods :- those goods which are purchased for final use for
consumption & investment, and not for resale.
• Intermediate goods:- those goods which are purchased for resale or for
further processing.
The value of final output already includes the value of intermediate
goods.
( the value of furniture already includes the value of wood used in it.
That’s why to avoid double counting value of final output is taken. )
• An increase in inventory must be considered a final good because it
involves current production .
• Final consumer goods – for ultimate consumer
Final producer goods –capital goods / investment goods

DOMESTIC VERSUS NATIONAL:

Domestic product includes production activity of all the enterprises
located within the domestic territory of a country irrespective of
whether they are performed by residents or non residents ,during one
year.
National product includes production activity of residents of a country
irrespective of whether they are performed within the economic
territory or outside of it, during one year.
DR GAURI SETH MBAC101 NSUT
MARKET PRICE VERSUS FACTOR COST
Market Price is money value of all final goods and services
produced in an economy during an year. Multiply each of these
goods and services by their respective market prices.
Factor cost is sum of all factor payments.
GROSS VERSUS NET
The capital goods like machinery wear out, fall in value as a
result of its consumption or use in the production process. This
consumption of fixed capital or fall in the value of fixed capital
due to wear & tear is called DEPRECIATION .
TRANSFER PAYMENTS
One-way payments made to an individual without rendering any
productive services are called transfer payments. eg:- old age
pension , unemployment benefit, scholarship to students , social
security benefits. Governments use such payments as means of
income redistribution by giving out money under social welfare
programs.

DR GAURI SETH MBAC101 NSUT

GROSS DOMESTIC PRODUCT (GDP)
GDP refers to the total market value of all the goods and services
produced in the given year within the domestic territory of the country.
Incomes earned by foreigners in the country are included and incomes
earned by residents abroad and remitted to the home country are
excluded.

DR GAURI SETH MBAC101 NSUT

 GROSS NATIONAL PRODUCT
(GNP)
• GNP- Gross National Product (GNP) is the total market value of
all finished goods and services produced by a country’s residents
in a given financial year, irrespective of their location(both within
and outside the economic territory )

• GNP = Market value of domestically produced goods &

services
Plus incomes earned by the residents of the country abroad
Minus incomes earned by foreigners in the home country

• GDP = Market value of all the goods & services produced by the
residents of the country
Plus incomes earned in the country by foreigners
Minus incomes received by the residents of the country
abroad DR GAURI SETH MBAC101 NSUT
• GNP=C+I+G+(X-M)+NFIA
GDP=GNP-NFIA
NET FACTOR INCOME FROM ABROAD

NFIA is difference between the income received from abroad from

rendering factor services by the normal resident of the country & the
income paid for the factor services provided by non residents in the
domestic territory of a country.
NFIA includes three components
 Net compensation of employees from abroad
 Net property and entrepreneur income( rent interest profit dividends)
from abroad
 Net retained earnings of resident companies working in foreign
countries

• GNP/ GDP exclude transfer payments

• To avoid double counting it excludes transactions involving intermediate goods
• Also it does not include the production contribution of housewives , improvement
in product quality not reflected in price changes
• In the case of a transaction involving selling a second-hand good, and which was
new two years ago, no value is added to national income .

DR GAURI SETH MBAC101 NSUT

 GROSS DOMESTIC PRODUCT AT
MARKET PRICE & FACTOR COST

• GDPfc = GDPmp – Net Indirect Taxes

GDPfc = GDPmp – Indirect taxes + Subsidies
[Net indirect taxes = Indirect taxes - Subsidies]

A subsidy is a benefit given to an individual, business or

institution, usually by the government. It is usually in the form of
a cash payment or a tax reduction. The subsidy is typically given to
promote a social good or an economic policy.

NET NATIONAL PRODUCT

NNP is defined as GNP less depreciation,
NNP =GNP-depreciation.

DR GAURI SETH MBAC101 NSUT

 NATIONAL INCOME AT
FACTOR COST(NNP at FC)

• Simply called National Income .It is the sum of all

incomes earned by resource suppliers for their
contribution of land, labor, capital and entrepreneurial
ability, which go into the year’s net production.NNP
divided by the population of the country gives the per
capita income

• NI=NNP mp-Indirect Taxes+ subsidies

DR GAURI SETH MBAC101 NSUT

DR GAURI SETH
MBAC101 NSUT
 Practice
1. Calculate GDPmp & NDPfc
•Items Rs Crores
•GNPmp 58350
•Indirect taxes 2590
•Subsidies 1540
•Depreciation 1625
•NFIA - 240

2. Find NNPfc, NDPmp, NDP,fc

•Items Rs Crores
•GNPmp 97503
•NFIA -201
•Depreciation 5699
•NIDT 10576

DR GAURI SETH MBAC101 NSUT

• PRIVATE INCOME : Income of the private sector generated within the
domestic territory & abroad by private enterprises & households from
all sources earned & unearned( transfer payments).
• In contrast public income accrues to the public sector ,including
administrative units of the government & government commercial
undertakings.
• Private income = Net Domestic Product – Public income

• PERSONAL INCOME: personal income measures total income received

from all sources by the individuals of a country before taxes .
• The largest component of total income is wages and salaries. There
are many other categories of income including rental income,
government subsidy payments, interest income, earnings from self
employment, fees & commission .
• It includes transfer incomes like pensions , unemployment allowance,
old age benefits , social security benefits.

• PERSONAL DISPOSABLE INCOME: The amount of income left to an

individual after taxes(income tax, property tax etc)have been paid,
available for spending and saving.
• Personal Income – (personal taxes + Fines + fees)
• Consumption + Savings

DR GAURI SETH MBAC101 NSUT

 GNP DEFLATOR
• The GNP deflator is a price index that is used to adjust GNP for inflation. Real GNP is nominal
GNP(value at current year prices) adjusted for inflation.

• Changes in GNP do not necessarily mean that our economy is growing.

• GNP does not measure how many goods and services are being produced. It measures how much the
goods and services that are produced, cost in the market .
• This means that we could make the exact same number of goods and services this year as we did last year
but we could still see GNP rise if the prices of the goods and services rose. It would look like the economy
was growing because GNP rose, but in reality, the only thing that happened was an increase in prices
(inflation).

• The GNP deflator shows how much prices have risen since a base year.

• GNP Deflator = Nominal GNP

• ----------------- X 100
• Real GNP

• The GNP deflator provides an alternative to the Consumer Price Index ( The Consumer Price Index
measures the average change in prices over time that consumers pay for a basket of goods and services.)

CPI is the most widely used measure of inflation and, by proxy, of the effectiveness of the government’s
economic policy.

• The CPI is based upon a basket of goods and services while the GNP deflator incorporates all of the final
goods produced by an economy.
• This allows the GNP to capture more accurately the effects of inflation since it's not limited to a smaller
subset of goods.

DR GAURI SETH MBAC101 NSUT

MEASURING NATIONAL INCOME

Given money flows NI can be measured in three ways :

PRODUCTION METHOD
INCOME METHOD
EXPENDITURE METHOD

DR GAURI SETH MBAC101 NSUT

 PRODUCTION METHOD (value
added method )
• National income is the value of all the final output of goods and services produced
in one year. Goods are produced in a number of ‘stages’ – From raw materials to
when they reach the final consumer- there are various stages.

• Value is added at each stage, and at the final stage, the product is given a retail
selling price.

• The retail price reflects the value added in terms of all the resources used in all
the previous stages of production.

• To avoid the problem of double counting, only the value of the final stage, the retail
price, is included, and not the value added at all the intermediate stages – the
costs of production, plus profits.

• The economy of the country is divided into different sectors such as agriculture ,
manufacturing, trade, banking, mining , construction , transport etc. The value
of gross product of all the producers in a sector is totaled up and from this
summation the value of intermediate products is subtracted.

DR GAURI SETH MBAC101 NSUT

WHAT IS THE SECTOR-WISE CONTRIBUTION TO GDP IN
INDIA?

The Indian Economy is classified into three major sectors:

1. Agriculture & Allied Sector (primary sector ): This sector includes agriculture,
forestry, fishing, Mining & quarrying. At the time of Indian independence, this sector
had the biggest share in the Gross Domestic Product of India. But year by year its
contribution goes on declining and currently, it contributes only 17% of Indian GDP
at current prices in 2018-19 .It provides jobs to around 53% population of India.

2. Industry Sector (secondary sector) : This sector includes Manufacturing , Gas,

Electricity, Construction, and Water supply . Currently, it is contributing around 29.6
% of the Indian GDP (at current prices) in 2018-19.

3. Services Sector (tertiary sector): Services sector includes 'Financial, real estate &
professional services, Public Administration, defence and other services, trade, hotels,
transport, communication and services related to broadcasting. Currently, this sector
is the backbone of the Indian economy and contributing around 54.3% of the Indian
GDP in 2018-19.

DR GAURI SETH MBAC101 NSUT

VALUE ADDED METHOD

1. Gross value added in the primary sector( agriculture, mining, fishing,

quarrying)
2. GVA in the secondary sector (manufacturing- It encompasses the
industries which produce a finished, usable product or are involved in
construction.)
3. GVA in the tertiary sector (services)

GVA = Value of output(sales + change in stock ) – Intermediate

consumption

4. GDPmp = 1+2 +3

5. GDPmp – depreciation = NVA mp or NDPmp

6. NDPmp – Net indirect taxes = NVA fc or NDP fc

7. NDP fc + NFIA = NNP fc

DR GAURI SETH MBAC101 NSUT

Sale & purchase of second hand goods is not included

The value of housework by a house wife e.g., Cooking and cleaning

does not enter GNP, but restaurant's cook’s product does enter into
GNP.

Illegal income is not included in in GNP because counting it is not

possible as they are most often not divulged and as such cannot be
accounted for.

In case of goods and services meant for self or self consumption for
e.g., farmer’s produce kept aside for self consumption, imputed
values of such produce or imputed rent is included .

DR GAURI SETH MBAC101 NSUT

 INCOME METHOD
(1) Also called factor income method.

(2) This method measures the national income after it has been distributed and
appears as income earned or received by individuals of the country.

(3) N I is obtained by totaling all the incomes according to the various factors of
production used in producing the national product,

The factor payments are classified into the following groups:

• Compensation of employees : wages & salaries, compensation in kind ,

employer’s contribution to social security schemes

• Operating surplus : rent , interest, profit ( dividend, corporate tax ,

undistributed profits)

• Mixed income of self employed

• NFIA

DR GAURI SETH MBAC101 NSUT

 INCOME METHOD

1.COMPENSATION OF EMPLOYEES which includes

• Wages & Salaries,
• compensation in kind
• employer’s contribution to social security schemes

2.OPERATING SURPLUS which includes

• Income from property (Rent and Royalty)
• Interest
• Profit(Profits are divided into 3 sub-groups-
• Dividends
• Undistributed profits
• Corporate tax)

3.MIXED INCOME OF THE SELF EMPLOYED

NDP fc= 1+2+3
NNP fc = NDP fc + NFIA

DR GAURI SETH MBAC101 NSUT

 EXPENDITURE METHOD

• Expenditure method arises at National Income by adding up all expenditures made

on goods & services during a year. We add up the following types of expenditure:-

• C + I + (X–M) + G

Expenditure on consumer goods & services by individual and households called

final private consumption expenditure. It is denoted by “C”.
• Govt. expenditure called govt. final consumption expenditure. Denoted by “G”
• Expenditure by productive enterprises on capital goods and inventories of stocks
called gross domestic capital formation donated by “I”.
• The expenditure made by foreigners on goods & services exported to other
countries which are called exports denoted by “X”.
• We deduct from exports the expenditure by people on imports of goods & services
form other countries denoted by “M”.
• C + I + (X–M) + G = GDP mp
• GDP mp + NFIA - NIDT – Depreciation = NNPfc

DR GAURI SETH MBAC101 NSUT