National Income

CONTENT
National Income
1. National Income ............................................................................................................................................. 3
2. Introduction.................................................................................................................................................... 3
Meaning Of National Income ....................................................................................................................... 3
Significance Of National Income Accounting .............................................................................................. 3
Problems In Calculating National Income ................................................................................................... 3
3. Measures Of National Income ...................................................................................................................... 4
Gross Domestic Product (Gdp) ..................................................................................................................... 4
Concept Of Factor Cost And Market Price .......................................................................................... 5
Few Elements Of Gdp Calculations ....................................................................................................... 5
Types Of Gdp ................................................................................................................................................. 6
Nominal Gdp Or Gdp At Current Prices .............................................................................................. 6
Real Gdp Or Gdp At Constant Price .................................................................................................... 6
Real And Nominal Value ........................................................................................................................ 6
Example 1 ................................................................................................................................................ 6
Example 2 ................................................................................................................................................ 7
Approaching Gdp By Various Methods....................................................................................................... 7
Production Or Value Added Method .................................................................................................... 8
Meaning Of Value Addition ................................................................................................................... 8
Example Of Value Addition ................................................................................................................... 8
Example 1 ................................................................................................................................................ 8
Gdp Calculation In Value Added Method ............................................................................................ 8
List Of Goods And Services Included And Not Included In Value-Added Method: ........................ 8
Income Method Or Factor Earning Method ........................................................................................ 9
Expenditure Method ............................................................................................................................... 9
4. Other Measures Of National Income ......................................................................................................... 10
Net Domestic Product (Ndp) ....................................................................................................................... 10
What Is Depreciation? .......................................................................................................................... 10
Gross National Product (Gnp) .................................................................................................................... 10
Gdp Vs Gnp ........................................................................................................................................... 11
Net National Product (Nnp) ........................................................................................................................ 11
Gdp, Gnp, Nnp, Ndp - Which Is Better? ............................................................................................. 11
National Income(Ni) .................................................................................................................................... 11
Personal Income ........................................................................................................................................... 12
Disposable Personal Income........................................................................................................................ 12
National Disposable Income ........................................................................................................................ 12
Per Capita Income ....................................................................................................................................... 12
Per Capita Income: India ..................................................................................................................... 13
5. Other Concepts Related To Gdp ................................................................................................................ 13
Gdp Deflator................................................................................................................................................. 13
Significance Of Gdp Deflator ............................................................................................................... 13
Base Year ...................................................................................................................................................... 14
6. Gdp Calculation In India ............................................................................................................................ 14
New Changes In National Accounts In India ...................................................................................... 15
Significance Of New Series Of Nas ............................................................................................................. 15
7. Gap Between Gdp-Gva And Its Reasons ................................................................................................... 15
Utility Of Gdp And Gva Under Different Circumstances ................................................................. 16
Gdp Data Presents The State Of Economy From Consumers Side (Demand Side):....................... 16
Gdp Presents The State Of Economy From Producers Side (Supply Side). .................................... 16
Comparison Of Gdp And Gva ............................................................................................................. 16
8. Potential Gdp................................................................................................................................................ 17
9. Gdp And Welfare ......................................................................................................................................... 17
Gdp Is Not The Correct Measure Of Growth..................................................................................... 18
Alternate Ways To Measure Growth ......................................................................................................... 18
Green Gdp ............................................................................................................................................. 18
Gross National Happiness Index (Gnhi) ............................................................................................ 19
Components Of Gnhi: ........................................................................................................................... 19

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 National Income

Significance Of Gnh .............................................................................................................................. 19

Limitations Of Gnh ............................................................................................................................... 20
Human Development Index (Hdi) ........................................................................................................ 20
Components Of Hdi .............................................................................................................................. 20
Thriving Places Index ........................................................................................................................... 21
10. PYQS............................................................................................................................................................. 21

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 National Income

National Income
INTRODUCTION
National Income provides a comprehensive measure of the economic activities of a nation. It
denotes the country’s purchasing power. The growth of an economy is measured by the rate at
which its real national income grows over time. National income thus serves as an instrument of
economic planning.

MEANING OF NATIONAL INCOME

● National Income means the total money value of all final goods and services produced in a
country during a particular period of time (one year).
● It is also the sum of incomes earned by the residents of the country from the factor services
rendered to the production units both within and outside the geographical boundaries of the
country.
○ The term “residents” here refers to those individuals (and institutions) whose economic
interest lies in the country in which they live (or located). By economic interest, we mean
we mean the basic economic activities of production, consumption and investment.
■ For Example: Mr. Zen may or may not be an Indian citizen, but as long as his economic
interest lies in India, he is treated as an Indian resident.

SIGNIFICANCE OF NATIONAL INCOME ACCOUNTING

National Income is of great importance for any economy. From formulating national policies to
planning and evaluating progress, its data is essential.
● It provides a comprehensive measure of economic activities of a nation. It indirectly measures
the progress of the nation. The data on national income provides estimates on the country’s
purchasing power.
○ It is helpful in knowing a country’s per capita income that reflects the economic welfare of
a country. Thus, it provides a picture of standard of living in the country.
● Statistical data on national income not only helps in making economic analysis but also helps in
policy formulation.
○ Moreover, it not only helps in formulating fiscal policy, monetary policy, and foreign trade
policy but also helps in making modifications and amendments wherever necessary.
○ It thus serves as an instrument of economic planning. It helps business houses/ private
players in planning their production activities. It is also helpful in forecasting the effect of
economic policies on the level of production & employment.
● It helps us in comparing national income and per capita income of our country with those of
other countries.
○ This may lead us to make suitable changes in our plans and approach to achieve rapid
economic development of our country.
● It is helpful in providing knowledge of structural changes occurring in the economy. We come
to know about the share of different sectors (agriculture, Industry, Services etc.) in the economy.
○ It enables us to know the importance of various sectors of the economy and their
contribution to the economy. It gives an idea how income is produced, distributed, how
much spent, saved or taxed.
● The performance of the government economic policies can be evaluated based on the growth
in National Income.

PROBLEMS IN CALCULATING NATIONAL INCOME

● Presence of Formal Sector: India has a large informal sector that has employed a large section
of population. As per the Economic Survey 2019-20, there are an estimated 38 crore

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 National Income

unorganized workers in India. It poses a conceptual problem. Here the proper valuation of
output becomes difficult.
● Payments with no economic activities: Government’s expenditure in form of scholarship,
pension, unemployment allowances etc. are not counted in national income. Because there is
no production or economic activity done in return of the payment. Domestic transfer payments
are also excluded from the national income of a country.
○ For example, if an individual receives a cash gift from his father who is also a resident of
India, it will not be a part of India’s national income. However, any transfer payment from
abroad will be a part of a country’s national income.
● Unpaid Services: There are a number of services that are unpaid in an economy. For Example:
domestic work done by housewives. She is not paid for her service and her service is not directly
counted in national income.
● Subsistence farming: Subsistence farmers who produce food for themselves and their family
members consume a major portion of their own output every year. Since this portion is not sold
through the market, it is excluded from GDP
● Goods given free of Cost: It is very difficult to find the true values of government services
(public goods like national defense, law and order, etc.) since these are not sold through the
market. These are provided to people free of cost.
● Income through illegal activities: Income earned through illegal activities like gambling,
smuggling, illicit extraction of liquor is not counted in national income.
● Capital assets like house, land, property, stocks that are sold at a higher price that paid for it at
the time of purchase. The gain is excluded from the national income.
● Statistical Problem: There are statistical problems too. Care has to be taken to avoid double
counting. There are a number of sources for compiling the data and reliability becomes the
issue. Accurate and reliable data are not adequate as farm output in the subsistence sector is not
completely informed.

MEASURES OF NATIONAL INCOME

The following are some of the concepts used in measuring national income.

GROSS DOMESTIC PRODUCT (GDP)

● It is the total market value of final goods and services produced within the country during a
year.
● It measures the value of final goods
and services produced within the
geographic boundary regardless of
the nationality of the individual or
firm.
● For example, toys manufactured in
India by Chinese company will be
included in Indian GDP. Similarly, toys
manufactured in America by an
Indian company will not be counted
in India’s GDP but America’s GDP.
● GDP at market Price: When GDP is
calculated at market prices and is
known as GDP at market prices. The
word market price signifies that the
value of production is calculated by
multiplying by the price which

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 National Income

buyers paid and not the price which production units actually receive.
● GDP at Factor Cost: GDP is also calculated as factor cost.

Concept of Factor Cost and Market Price

Concept of Factor Cost and Market Price
Factor Cost (FC) Market Price (MP)
There are a number of inputs that are included Once goods and services are produced they are
into a production process when producing goods sold in a market place at a set market price.
and services. These inputs are commonly known
as factors of production and include things such
as land, labour, capital and entrepreneurship.
Producers of goods and services incur a cost for It is the price that consumers will pay for the
using these factors of production. These costs are product when they purchase it from the sellers.
ultimately added onto the price of the product
The factor cost refer to the cost of production Taxes charged by the government will be added
that is incurred by a firm when producing goods onto the factor price while subsides provided
and services. will be reduced from the factor price to arrive
at the market price.
Examples of such production costs include the Taxes are added on because taxes are costs
cost of renting machines, purchasing machinery that increase the price, and subsidies are
and land, paying salaries and wages, cost of reduced because subsidies are already included
obtaining capital, and the profit margins that are in the factor cost, and cannot be double
added by the entrepreneur. counted when market price is calculated.
It does not include the taxes that are paid to the Thus, MP = FC + Indirect Taxes - Subsidies
government since taxes are not directly involved
in the production process
However, subsidies received are included in the
factor cost as subsidies are direct inputs into the
production.

Few Elements of GDP calculations

1. Final goods and services: These are those goods that are purchased for the purpose of
consumption or final use.
● For example, if a burger is treated as a final product for GDP calculation, then buns used in
burgers will not be counted as a final product as buns are intermediate goods in this case.
2. Domestic Territory: Domestic territory is the geographical territory administered by the
government within which persons, goods, services and capital freely flow. It includes:
● Political frontiers including territorial water and air space;
● Indian Embassies and Consulates;
● Military bases located abroad,
● Ships and aircrafts owned and operated by residents between 2 or more nations, fishing
vessels, oil and natural gas rigs etc. operated by the residents of a country in the
international waters where they have exclusive rights of operation.
3. Residents: For National Income Accounting, a resident is defined as a person or an institution
who normally resides (at least one year or more in India) in a country and whose center of
economic activity lies in that country.
● Residents also include Indians working in the Indian embassies abroad and foreign citizens
living in India for more than one year.
o However, foreigners who come to India for medical treatment or study purposes are not
considered normal residents even if they stay for more than one year.

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 National Income

● The resident does not include- Foreigners working in the Indian embassies abroad;
foreigners working in the office of WHO, IMF etc. located in India; foreign technical experts
working in India for a period less than one year and foreign visitors or travelers.
4. Transfer Payment: Transfer payments are those payments that are earned without any
economic activity or income for which no goods and services are produced. While measuring
the national income of a country, it must be kept in mind that not every income is a factor
income.

Key Points to note about Transfer Payments

● Transfer payments are payments made, typically by government or governmental agencies, to
individuals who are in need of such assistance.
● Transfer payments are also excluded from the national income of a country.
● Transfer payments are earned without any economic activity
Examples of transfer payments include social security benefits, state pension, unemployment
benefits, public health services, etc.

TYPES OF GDP
Nominal GDP or GDP at current prices
● The total monetary value of all the goods and services produced in the domestic territory of a
country during a given financial year and counted on the basis of market prices prevailing in
that year, is known as Nominal GDP or GDP at current prices.
○ In short it is calculated at current market price.
○ It does not require any adjustments for inflation.

Real GDP or GDP at constant price

● It refers to the total monetary value of all the final goods and services produced in the
domestic territory of a country during a given financial year valued at constant price.
○ In short, Real GDP is the GDP calculated at constant prices(or base year price).
○ It is adjusted for inflation to reflect changes in real output.
○ While discussing economic growth, real GDP is considered

Example: For example, suppose a country only produces cars. In the year 2011-12 it had produced
200 units of car, price was Rs 100 per car. In 2022-23 the same country produced 300 units of cars
at price Rs 110 per car. Therefore, Nominal GDP in 2021-22 is 33000 (total units * Current year
prices). Real GDP in 2021-22 calculated at the price of the base year 2011-12 is (300*100= 30000).
Real and Nominal Value
● Nominal values are the current monetary values.
● Real values are adjusted for inflation and show prices/wages at constant prices.
● Real values give a better guide to what you can actually buy and the opportunity costs you face

Example 1
When Mr Y buys stocks for Rs 200 at the start of the year, and sells them at the end of the year and
earns Rs 210, we say that Mr X has earned an interest of 5%. This is his nominal interest rate.
Inflation needs to be factored in order to get the real value of X’s interest rate.
Suppose in that year the inflation rate was 3%, it means that if Mr X was to buy goods for Rs 200 at
the start of the year, he would have to buy the same goods for Rs 206 at the end of that year.The
effect of inflation means that the real value of X’s interest is much less, because of reduced
purchasing power as a result of inflation.
Therefore to get the real value of what X has earned, he would have to subtract the inflation rate
from the nominal interest rate. In this case therefore, the real interest rate is 2%, which reflects the
real value of X’s stocks

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 National Income

Example 2
● If you receive an 8% increase in your wages from Rs 100 to Rs 108, this is the nominal increase.
● However, if inflation is 2%, then the real increase in wages is (8-2%) 6%.
● The real wage is a better guide to how your living standards change. It shows what you are
actually able to buy with the extra increase in wages.

APPROACHING GDP BY VARIOUS METHODS

All goods and services produced in the country must be counted and converted against money value
during a year. Thus, whatever is produced is either used for consumption or for saving. Thus,
national output can be computed at any of three levels, viz., production, income and expenditure.
Accordingly, there are three methods that are used to measure national income.
1. Production or value added method
2. Income method or factor earning method
3. Expenditure method

And if these methods are done correctly, the following equation must hold.
Output = Income = Expenditure
This is because the three methods are circular in nature. It begins as production, through
recruitments of factors of production, generating income and going as incomes to factors of
production.

GDP - By Sum of Spending, Factor Incomes or Output

GDP (Value of Output) GDP (Factor Incomes) GDP (Expenditure)
Value added from each Sum of all factor income (e.g. Sum of all item of final
of the main economic wages, rent, interest, etc) expenditure is measured like
sectors ● Profits of private sector Consumption, Government
These sectors are business spending, etc
● Primary ● Rent income from the
● Secondary ownership of land
● Manufacturing
● Quaternary

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 National Income

Production or value added method

In this method, national Income is estimated by calculating the value addition done by the firms at
each stage of production in all the sectors of the economy i.e. agriculture, manufacturing,
industries, Services, trade and commerce, etc. The value of the final product is derived by the
summation of all the values added in the productive process.
Meaning of Value addition
Value-added refers to the addition in the value of a raw material or intermediate good by an
organization during the production process.
Value Added = Value of Output – Intermediate Consumption

Example of Value Addition

Example 1
● Shyam needs only flour to produce the bread. He purchases the flour from a miller as an
intermediate good worth ₹50. Shyam converts the flour into bread with the help of production
activities. Shyam then sells the bread for ₹100.
○ In this case, flour is an Intermediate Good whose value is ₹50 and is termed the value of
Intermediate Consumption. Bread sold to the Market is the final good whose value is ₹100
and is termed Value of Output.
○ Value Added = Value of Output – Intermediate Consumption (Rs 100- Rs 50= Rs 50)

Example 2
● Shyam manufactures one bottle of orange juice for ₹100 and he used intermediate goods
(orange and sugar) of ₹50 in the production.
o Then the value added by Shyam is the Price of juice minus the price of sugar and orange
(100-50) is Rs 50.
Example 3
● Maggi buys Wheat flour at Rs 50/ Kg. This flour is then processed and turned into noodles. Then
a mix of spices is also made from various raw spices having different rates.
o Wheat Flour and Spices are intermediate products here and packed maggi noodles is the
final product here which is sold at Rs 100 in the market.
o Then the value added here is Rs 100 - Rs 50 = Rs 50. This is also called Gross value added.

GDP calculation in value added Method

GDP at Current Market Price (MP) = (Summation of Gross value added of all goods and Services)
+ Taxes- Subsidies
GDP @ current MP -----🡪 Adjusted with the base year ---🡪 GDP at Constant Market Price (official
GDP)

List of goods and services included and not included in value-added method:
Goods and Services Included/Not included
Goods and Services sold in the market. Included.
Services provided by the agents. Included.
Buying and selling of second hand goods. Not Included.
Transfer payments such as scholarships, pensions. Not Included (as income is received but no
goods and services are created).
Imputed rent or Imputed Interest. Included
When a property is owned and used by the same
person , then rent is not actually paid by him to
himself. That rent is termed as imputed rent and is
part of national Income.

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 National Income

Income method or factor earning method

This method approaches national income from the distribution side. Under this method, GDP is
calculated by adding up all the incomes generated in the course of producing national product.
The value that is derived is GDP at Factor Cost.

● In this method we measure the factor incomes given to the owners of factors of production
● There are basically 4 Factors of Production namely – Land, Labour, Capital, Entrepreneurship
which get income in the form of Factor Payments
○ The first factor of production is Land. This not only includes land but also other natural
resources like water, coal, Petroleum etc. The income or return that the owners of land
get is called rent.
○ The second factor of production is Labour. This is basically the hard work and effort put by
people to produce any good or service. The income or return that labour resources earn is
called wages.
○ The third factor of Production is Capital. This includes machinery, tools etc. which are used
to produce other goods. The income or return that owners of capital earn is called
interest.
○ The fourth factor of production is Entrepreneurship. An entrepreneur is an innovator who
combines all the other factors of production. The income or return that entrepreneurs earn
is called profit.
● Under this method, factor incomes are calculated under the following three major components.
They are:
○ Compensation to Employees: This includes wages, salaries n employer’s contribution to
social security schemes, dearness allowances etc.
○ Operating Surplus: This includes rent, profit, royalty and interest, Profit includes corporate
tax, dividend and undistributed profit.
○ Mixed income of Self Employed: It refers to income of self-employed people like farmers,
doctors, Lawyers etc.
● Thus we derive
○ GDP at Factor Cost = Rent + Wages + Interest + Profit
○ Example: Suppose we only produce LPG cylinder in a country. The Factor cost of LPG is Rs
500. However, it is the not the final market value as it does not include taxes. Now suppose
the tax of Rs 500 is added to Factor cost and subsidy of 300 is deducted from the factor
cost. Now final price in the market is (500+500-300= 700). The actual final market value of
LPG is 700
○ GDP at Factor cost + Tax - Subsidy ---🡪GDP @ Current MP --🡪 Adjusted with base year---🡪
GDP at Constant Market Price.

Expenditure Method
● In expenditure methods, we measure the expenditure incurred on final products produced by
production units located within the economic territory during a given year.
● In simple language, GDP is estimated by the expenditure made on the purchase of final goods
and services produced in the economy in a given year.
● The assumption here is that at equilibrium where demand meets supply, the total cost of
spending will be equal to the total cost of producing all goods and services (GDP). Expenditure
method is also called as “Consumption and Investment Method” or “Income Disposal Method”.
● This method is the other side of the coin of the value added method. The value added method
approaches the estimation of national income from the sales side while the expenditure
method approaches from the purchases side.
● Under this method Expenditure made on final goods and services is counted under the following
heads:

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 National Income

● Consumption Expenditure (C) – This includes expenditure on final goods and services by
individuals, households, private firms. Example – TV, Car, Food, Transportation etc.
○ Ignore purchase of second hand goods
○ Construction of new house is not counted here, it’s counted in (I: Investment)
● Investment Expenditure (I) – This includes expenditure on investment or capital goods by firms,
households or government. Example – Machinery, Residential Property, Highways, Dams, Raw
material & intermediate goods, wages to workers for production, unsold inventory,
○ E savings in bank, shares and bonds etc are not counted as it has been given to
entrepreneur as ‘Capital’ to buy above things
● Government Expenditure (G) - This includes expenditure on final goods and services by
government. Example – Administrative expenses, Defence, Law and Order etc.
○ Government’s scholarship, subsidy, Transfer Payments’ are not counted as they’re
counted in “C” (Private) consumption by the respective beneficiaries
● Net Export (NX) – This refers to difference between Exports (X) and Imports (I). Thus, NX = X – M
● Thus, GDP at MP = C+I+G+NX(X-M).
● GDP @ current MP -----🡪 Adjusted with the base year ---🡪 GDP at Constant Market Price (official
GDP)

OTHER MEASURES OF NATIONAL INCOME

NET DOMESTIC PRODUCT (NDP)
● NDP is the net market value of all the final goods and services produced within the domestic
territory of a country during a financial year.
● GDP is indicator of gross availability of final Products while NDP is indicator of net availability of
final products. This is because we arrive at NDP by deducting consumption of fixed capital from
GDP.
● In other words, GDP deducted by consumption of fixed capital or depreciation is NDP. NDP
thus gives a more realistic picture of an economy.
○ NDP= GDP- Depreciation
● For example: Suppose in India only 5 cars are produced in the year 2021-22 at the cost of RS 1,
00,000 each. So, total GDP of India for 2021-22 will Rs 5, 00,000(5*1, 00,000). However, let’s
assume these 5 cars suffer certain wear and tear of RS 50,000. So in this case NDP will be Rs
4,50, 000 (5,00,000-50,000) after adjusting depreciation.
○ Thus we can also conclude that GDP of a country will always be greater than NDP of a
country.

What is Depreciation?
● Depreciation refers to a fall in the value of fixed assets due to its normal wear or tear and
foreseen obsolescence.
o Normal wear and tear means fall in the value due to normal use in production.
o Foreseen obsolescence means a fall in value due to expected changes in technology, market
demand, government policy etc.
● Depreciation is also known as Consumption of Fixed Capital or Capital Consumption Allowance
or Replacement Cost.

GROSS NATIONAL PRODUCT (GNP)

● GNP is the total value of final goods and services produced by the citizens of a country in a
given financial year, irrespective of their location.
● GDP is about where production takes place. Whereas, GNP is about who produces them.
● The goal of GNP is to measure the physical activity of a nation by adding all the different types of
productions.

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 National Income

● The income of foreign nationals or companies in India is excluded while calculating GNP (As
they are citizen of othe countries)
● Example: Google is a US-based firm. When it opens up a subsidiary in India, value of output
from that subsidiary is added to India’s GDP, but it is not added while calculating the GNP of
India.
o Similarly, when Indian companies such as Wipro produce services in the US, the value of
those services are not added to the Indian GDP, but they are added to India’s GNP.
● GNP = GDP +NFIA
o Where NFIA(Net factor income from abroad) = (Factor income earned by the domestic
factors of production employed in the rest of the world) – )Factor income earned by the
factors of production of the rest of the world employed in the domestic economy)
● In India’s case GNP is lower than GDP as income from abroad is has always been negative

GDP vs GNP
GDP
It measures the value of final goods
and services produced within the
geographic boundary regardless of
the nationality of the individual or
firm.
GNP
GNP is the total value of final goods
and services produced by the citizens
of a country in a given financial year,
irrespective of their location.

GDP at MP = C+I+G+NX(X-M). GNP = GDP +NFIA

NET NATIONAL PRODUCT (NNP)

● It is a measure of the value of output produced by the nationals of a country irrespective of
the geographical boundaries. It is obtained after deducting the loss due to depreciation from
GNP.
● NNP = GNP – Depreciation
● However, here we are getting the NNP at ‘Market Prices’. We’ve to convert it to Factor cost.
● NNP (Factor Cost) = NNP (Market Price) (-) Indirect Taxes (+) Subsidies
● Relationship between GDP, GNP, NDP and NNP
○ GNP= GDP + NFIA
■ =NDP+ Depreciation + NFIA ( as NDP= GDP- Depreciation)
○ NNP= GNP- Depreciation
■ = GDP+ NFIA – Depreciation ( as GNP = GDP +NFIA)

GDP, GNP, NNP, NDP - Which is better?

● NDP is used to understand the the losses due to depreciation in historical comparison for the
economy and also analyse the sectoral impact of depreciation in industry and trade in
comparative periods
● But NDP cannot be used to compare the economies of the world as different rates of
depreciation are set by the all countries
● NNP is also not used for comparison for same reasons
● GDP is preferred method for economic comparison as it includes domestic production and
shows a more clear picture of economy wrt any nation.

NATIONAL INCOME(NI)
● It is a measure of the sum of all net factor incomes earned by the citizens of a country for their
land, labor, capital, and entrepreneurial talent, whether within the country or abroad.
● In short, it is a measure of factor incomes accruing to the residents of a country. It is equal to
the Net National Product (NNP) at Factor Cost.

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 National Income

● It adds the remunerations from abroad and subtracts payments to abroad (NFIA), which means
the real total income.
● It also subtracts the depreciation as it is a loss in the income.
● It is the real income of the people as it does not add indirect taxes like sales taxes, excise taxes
etc. (not the payments for factors of production).
● NNP at factor cost ≡ National Income (NI ) ≡ NNP at market prices – (Indirect taxes – Subsidies)
≡ NNP at market prices – Net indirect taxes

PERSONAL INCOME
● PI is the total income received by the individuals of a country from all sources before payment
of direct taxes in a year.
● It is derived from national income by deducting undistributed corporate profit, and
employees’ contributions to social security schemes and adding transfer payments.
● For example: Salary received by resident A in India, Salary Received by resident B in USA ,
Scholarship received by C from the Government of India, Gift received by Mr D from his relative
in Saudi Arabia, LPG Subsidy received by Mr E etc. will be Included in Personal Income
○ Similarly salary paid to a non-resident, gift given to a non-resident will be excluded from
Personal Income. Also, retained earnings of companies like Infosys, Wipro will also be not
included in Personal Income.
● Personal Income = National Income– (Social Security Contribution and undistributed corporate
profits) + Transfer payments.

DISPOSABLE PERSONAL INCOME

● It is the amount left at individuals hand after paying personal taxes such as income tax,
property tax, professional tax etc.
● It is the amount available at household for consumption. It is the amount, which households
can spend and save.
● This concept is very useful for studying and understanding the consumption and saving
behavior of the individuals.
● Personal Disposable Income = Personal income – Direct Tax.
● As the entire disposable income is not spent on consumption. Disposable income =
consumption + saving.
● For example: Total income of A is Rs 1000. Now, he has to pay Rs 100 as tax. Then, Personal
Disposable income will be equal to Rs 900 (1000 – 100). This is the amount that A can actually
spend ultimately according to his own wish.

NATIONAL DISPOSABLE INCOME

● The sum of factor and non-factor incomes accruing to the residents of a country is called
National Disposable Income.
● The idea behind National Disposable Income is that it gives an idea of what is the maximum
amount of goods and services the domestic economy has at its disposal.
● Example: Suppose Tata Company paid Rs 1000 salary to A, who is an Indian Resident. Also, A
received a gift of Rs 500 from his relative B, who lives in Dubai. Then, in this case, Rs 1000 and Rs
500 received by A will be included in National Disposable Income.

PER CAPITA INCOME

● It is the average income of a person of a country in a particular year.
● It is the income per head of the population.
● It is calculated by taking a measure of all the sources of income in the aggregates (such as GDP
or Gross national Income) and dividing it by total population.
● Per capita Income= National Income/ Population

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 National Income

● Per capita Income= Net National Product (NNP)/Population (as NNP at factor cost ≡ National
Income (NI ))
● Example: If there is an area where 100 people are making Rs 100 per year and other 1000
people are making 1000 per year. The Per Capita Income = 100 *100 +
1000*1000/1000+100=918.18

Per Capita Income: India

● According to World Bank,
India is the sixth largest
country in the world by gross
domestic product (GDP), with
a size of around $3.17 trillion.
● Since 1950, the per capita
income (PCI) has jumped
over 500 times. In 1950, it
stood at Rs 265.
● It increased to Rs 1,28,829
in 2020-21. Since the fold of
the new millennium, in 2000-
01, when it was Rs 18,667,
the PCI has jumped seven
times.

OTHER CONCEPTS RELATED TO

GDP
GDP DEFLATOR
● It is the ratio of the value of final goods and services produced in an economy in a particular
year at current year prices to that of prices that prevailed during the base year.
● It is calculated by dividing the nominal GDP in a given year by the real GDP for the same year
and multiplying it by 100. It is a measure of inflation.
● GDP Deflator = Nominal GDP / Real GDP * 100
● For example, for the year 2020-21, a country produced 100 units and the price of one unit is ₹10
for this current year and the price of one unit was ₹5 for the base year 2011-12 then nominal
GDP= ₹1000, Real GDP= ₹500 and GDP Deflator =1000/500 = 2

Significance of GDP deflator

● Using the GDP deflator helps economists compare the levels of real economic activity from one
year to another.
● The GDP deflator is a more comprehensive inflation measure than the Consumer Price Index
(CPI) index because it isn't based on a fixed basket of goods.
● Other inflation measures like CPI and WPI are based on a limited basket of goods and services,
thereby not representing the entire economy.
● The GDP deflator also includes the prices of investment goods, government services and exports,
and excludes the price of imports whereas the basket of WPI (at present) has no representation
of services sector
● Changes in consumption patterns or the introduction of new goods and services or structural
transformation are automatically reflected in the deflator which is not the case with other
inflation measures (CPI & WPI)

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 National Income

BASE YEAR
● It is the year chosen to enable inter-year comparisons of national accounts. It is a reference
year with respect to which GDP numbers for the following as well as preceding years are
computed.
● For example: if the GDP of a country was 100 units in 2010 and it was 150 units in 2020, then
GDP growth for the decade can be calculated as GDP growth rate = GDP 2020 – GDP 2010 / GDP
2010 *100 = 150-100/100* 100 = 50% is the decadal growth rate of GDP. Here, 2010 is
considered as the base year as we measured the growth based on that year.
● To capture the structural changes in the country, base Year is changed periodically. For
example, in 1990 there were no mobile phones while after the 2000s these mobile phones are
produced and it has to be added to the GDP calculation. So base year needs to accommodate as
many items as possible and hence it is changed from time to time.
● At present, the base year for GDP calculation in India is 2011-2012.

GDP CALCULATION IN INDIA

● India's Central Statistic Office calculates the nation's gross domestic product (GDP). it is an
Indian Governmental Agency that comes under the Ministry of Statistics and Programme
Implementation.
● In 2019, the National Sample Survey Office (NSSO) merged with the Central Statistical Office
(CSO) to form the National Statistical Office (NSO).
● In 2015, as part of comprehensive review of GDP measurement approach, GVA at basic prices
(base year 2011-12) became the primary measure of output across the economy’s various
sectors in India to conform with the UN System of National Accounts (SNA), 2008.
● Earlier, India used GVA at factor cost to measure overall economic output.
● The quarterly and annual estimates of GVA are given by National Statistical Office (NSO) under
eight broad sectors- covering goods and services in India. They are as follows:
○ Agriculture, forestry, and fishing
○ Mining and quarrying
○ Manufacturing
○ Electricity, gas and water supply
○ Construction
○ Trade, hotels, transport, and communication
○ Financing, insurance, real estate, and business services
○ Public administration, defence and other services.
● The Ministry of Statistics and Programme Implementation (MOSPI) is considering changing of
base year for GDP calculation from 2011-12 to 2017-18.

System of National Accounts 2008

● The 2008 SNA is a comprehensive, consistent and flexible set of macroeconomic accounts to
meet the needs of government and private-sector analysts, policy-makers, and decision-makers.
● It is the latest version of the international statistical standard for the national accounts adopted
by United Nation Statistical Commission (UNSC)
● It was prepared jointly by the International Monetary Fund, the European Union, the
Organization for Economic Co-operation and Development, the United Nations, and the World
Bank.
● These five organizations constitute the Inter-Secretariat Working Group on National Accounts
(ISWGNA).
● ISWGNA has been mandated by the Statistical Commission of the United Nations to oversee
international coordination in the development of national accounts.

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 National Income

New Changes in National Accounts In India

Component Old NAS series Changes made in New NAS series (2015)
Base Year 2004-2005 2011-2012
Measuring of GDP at factor cost GDP at market price.
Growth rate

Sector-wise GVA at factor cost GVA at basic price

estimates of gross GVA at Basic Prices will include
value added production taxes and exclude
production subsidies available on the
commodity
Database Companies’ goods/service Using companies’ balancesheet details
production data was computed submitted to Ministry of Corporate
using Annual survey of Affairs.
industries (ASI) and index of
industrial production (IIP).
Changes in Data only included value-added The new data includes value addition in
calculation of in farm produce Livestock as well.
agricultural income

SIGNIFICANCE OF NEW SERIES OF NAS

● Conformity with International Standards: The revision of the base year of national accounts is in
accordance with an international set of standards.
o The new and updated base year takes into account the structural changes that have been
taking place in the economy.
o It depicts a true picture of the economy through macro aggregates like Gross Domestic
Product (GDP).
● Better Indicator of Economic Growth: The concept of GVA is considered to be a better indicator
to measure economic activities as it includes not only the cost of production but also product
subsidies and taxes.
o The new method will make India’s GDP growth numbers comparable with that of developed
nations. GVA gives a sector-wise breakdown.
● Comprehensive Database: The new database is much more comprehensive, covering financial
institutions and regulatory bodies’ like- SEBI, PFRDA, and IRDA. Also, local organizations and
institutions are well represented in this series.
● Robust Statistics: The new method is statistically more robust since it estimates more indicators
such as consumption, employment, and the performance of enterprises.It also incorporates
factors that are more responsive to current changes.
● Widened Dataset: In the new series, the CSO used the MCA 21 data set that has about five lakh
non-financial private companies, thus significantly widening the dataset.
● Enterprise Approach: The use of enterprise approach takes into account the services rendered
by company headquarters in the form of marketing, accounting and other ancillary services.
Hence , the size of GVA will be higher under this method.

GAP BETWEEN GDP-GVA AND ITS REASONS

Due to the fundamental distinction that GDP is computed at market prices while GVA is determined
at basic prices, GDP and GVA are not the same. GDP-GVA gap has been diverging since FY18 because
of various reasons-

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 National Income

● Due to greater subsidies and lower taxes as a result of lockdown, the GDP growth in FY21 lagged
behind GVA growth by 180 basis points.
● Due to increased tax revenues and decreased subsidies from FY21, the GDP growth in FY22 was
60 basis points greater than the GVA growth.

Utility of GDP and GVA under different circumstances

GDP data presents the state of economy from Consumers side (demand side):
● GDP determines an economy's health, i.e., whether it is expanding or going through a recession.
● Using information on income and personal consumption, you may fairly estimate peoples'
standards of life.
GDP presents the state of economy from Producers side (supply side).
● GVA provides a true indication of the state of economic activity, i.e. the volume of goods and
services produced.
● GVA gives a breakdown of value added by industry (region wise and sector wise), assisting
policymakers in identifying industries in need of incentives or stimulus.

Comparison of GDP and GVA

Gross Value Added (GVA)
GVA is the difference between the value of a
firm’s output and value of intermediate goods.
GVA mp = Value of Output – Value of
Intermediate Goods
or
It is the total value of goods and services
produced within a country after deducting the
cost of inputs and raw materials.
Gross Domestic Product (GDP)
GDP refers to the total value of final goods and
services produced in the domestic territory of a
country in a given financial year.
or
It is the market value of all final goods and
services produced within the territorial
boundaries of a country for a given period

It is represented as GVA mp. It is represented as GDP mp.

It is measured by output reach and used as a
proxy for GDP.
GVA gives a picture of the state of economic
activity from the producer or supplier side.
GVA is calculated for all the three sectors
individually i.e. GVA for Agriculture Sector, GVA
for Manufacturing Sector and GVA for Service
Sector.
It’s a sector-based concept.
GVA for individual sectors will tell us about the
performance of individual sectors only and not
the economy as a whole.
It is measured by the output, income, and
expenditure approaches.
GDP gives a picture of the state of economic
activity from the consumer side.
When GVA for all the three sectors is combined
together, it gives us the value of GDP i.e.
GDP = GVA for Agriculture Sector + GVA for
Manufacturing Sector + GVA for Service Sector.
It’s a territory-based concept.
GDP gives us information about the
performance of an entire economy as a whole.

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 National Income

GDP Growth Estimates: Union Budget 2023-24

The government has estimated a nominal GDP growth
rate of 10.5% in 2023-24 (i.e., real growth plus inflation).

POTENTIAL GDP
● Potential GDP is an estimate of the value of the output that the economy would have produced
if labor and capital had been employed at their maximum sustainable rates—that is, rates that
are consistent with steady growth and stable inflation.
● In simple words, potential GDP is the level of output that an economy can produce at a
constant inflation rate.
● The difference between the level of real GDP and potential GDP is known as the output gap.
o When the output gap is positive(i.e., when GDP is higher than potential), the economy is
operating above its sustainable capacity and is likely to generate inflation.
o When GDP falls short of potential, the output gap is negative.

GDP AND WELFARE

● Welfare refers to the sense of wellbeing. The welfare of the people in the wider sense is
influenced by economic and non-economic factors.
o Economic factors are the factors which can be expressed in terms of money like income and
consumption.
o Non-economic factors cannot be expressed in terms of money like law and order, pollution
etc.
● If a person has more income, he or she can buy more goods and services, and his or her material
well-being improves. So it may seem reasonable to treat his or her income level as his or her
level of well-being.

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 National Income

● GDP is the sum total of the value of goods and services created within the geographical
boundary of a country in a particular year. It gets distributed among the people as incomes
(except for retained earnings).

Hence, we may be tempted to treat the higher level of GDP of a country as an index of greater well-
being of the people of that country. But this may not be correct due to the following reasons:
● Distribution of GDP – how uniform is it: If the GDP of the country is rising, the welfare may not
rise as a consequence. This is because the rise in GDP may be concentrated in the hands of
very few individuals or firms. For the rest, the income may in fact have fallen. In such a case the
welfare of the entire country cannot be said to have increased.
● Non-monetary exchanges: Many activities in an economy are not evaluated in monetary
terms. For example, the domestic services women perform at home are not not counted in the
Indian GDP. This is a case of underestimation of GDP.
o Hence GDP calculated in the standard manner may not give us a clear indication of the
productive activity and well-being of a country.
● Externalities: Externalities refer to the benefits (or harms) a firm or an individual causes to
another for which they are not paid (or penalised). For example-In carrying out the oil
production, a refinery may also be polluting the nearby river. In this case, the GDP is not taking
into account such negative externalities.
o Therefore, if we take GDP as a measure of welfare of the economy we shall be
overestimating the actual welfare. This was an example of negative externality.
o There can be cases of positive externalities as well. In such cases GDP will underestimate
the actual welfare of the economy.
● Unequal Contribution: GDP includes different types of products like food articles, houses,
clothes, police services etc. Some of these products contribute more to the welfare of the
people, like food, clothes etc. But other products like police services, military services etc., may
comparatively contribute less and may not directly affect the welfare of people.
o Therefore, the degree of economic welfare would depend more on the types of goods
and services produced and not simply on the quantity produced. It means that if GDP
rises, the increase in welfare may not be in the same proportion.
● Negative Contribution: GDP includes all final products whether it is milk or liquor. Liquor may
provide some immediate satisfaction, but ultimately, it may lead to a decline in welfare because
of its harmful impact on health.
o GDP includes only the monetary values of the products and not their contribution to
welfare. Therefore, economic welfare depends not only on the volume of consumption but
also on the type of goods and services consumed.

GDP is not the correct measure of Growth

● As discussed above, GDP is neither a measure of welfare nor an indicator of well-being. That is
because it is not set up to recognize important aspects of our lives that are not captured by the
acts of spending and investing.
● There is no scope in GDP for volunteering or housework . GDP does not recognize that there is
value in community or in time spent with families.
● More measurable things such as damage to our environment are also left out.

ALTERNATE WAYS TO MEASURE GROWTH

Green GDP
● Green GDP, accounts for the environmental consequences of a country’s traditional GDP.
● It is an indicator of economic growth with environmental factors taken into consideration along
with the standard GDP of a country.

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 National Income

● In short it is environmentally adjusted domestic product or monetization of the loss of

biodiversity caused by climate change.

Gross National Happiness index (GNHI)

● The GNHI is a measure of the economic and moral progress of a country.
● It believes that sustainable development must have a holistic approach towards the notion of
progress giving importance to the non-economic aspect of human wellbeing.
● Bhutan introduced the GNHI in the 1970s as an alternative to GDP.

Components of GNHI:
● The GNHI is a single number index developed from 33 indicators categorised under nine
domains, namely- psychological wellbeing, health, education, time use, cultural diversity and
resilience, good governance, community vitality, ecological diversity and resilience, and living
standards.
● The Index makes the analysis of the nation’s well-being with each person’s achievements in each
indicator

Significance of GNH
● GNH measures quality of life or social progress in more holistic and psychological terms than
only the economic indicator of gross domestic product.
● GNH policies take into account equality, family integrity, health, gender equity, and satisfying
jobs, among other things.
● GNH includes specific indicators. For example, in the area of health, it envisions a person to
have over 26 healthy days a month, have high self-reported health, and not suffer from serious
deprivations because of disabilities.

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 National Income

● GNH can encourage businesses to measure success by the bottom line and the environmental
and social benefits they offer, with new initiatives such as GNH business certification. And it can
help track how people really feel about the changes in their society.

Limitations of GNH
● Translation of happiness surveys into policy recommendations at times yields anomalous
results. For example, at times of higher unemployment rates, the unemployed are happier than
before because of the reduced stigma of being unemployed.
● There is the probability of disguise reporting by individuals to manipulate state policy pertaining
to happiness.
● Measuring the happiness of sadists or psychopaths becomes difficult.

Human Development Index (HDI)

● HDI is a measure of a country's average achievements in three dimensions (health, knowledge
and standard of living) of human development.
● It is published by the UNDP (United Nations Development Programme) through its Human
Development Report every year.
● The HDI ranks the countries based on their performance in three dimensions of human
development.
o Each of these dimensions is given a weightage of 1/3 to arrive on a score between a
minimum of 0 to maximum of 1. The higher a country's human development, the higher its
HDI value.

Components of HDI
1. Health: It is measured by the life expectancy at birth.
2. Education: It is measured by mean years of schooling for adults aged 25 years and expected
years of schooling for children of school entering age.
3. Standard of living: It is measured by Gross National Income per capita based on purchasing
power parity in terms of the US dollar.

Significance of HDI
Single index The HDI provides a single index measure to capture three key dimensions of
human development, making it a reliable indicator of the development of the

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 National Income

nations.
Track of the The HDI acts as a measuring tool that helps in gauging the socio-economic
country conditions of the country every year and also keeps track of the same.
Policy making The HDI is used to focus the attention of policy-makers, the media, and non-
governmental organisations to change the approach from general economic
statistics to human outcomes.
Accountability The HDI can be used to question national policy choices, asking how two countries
with the same level of GNI per capita can end up with different human
development outcomes.

Limitation of HDI as a Measure of Development

● HDI is not a comprehensive measure of human development-It just focuses on the basic
dimensions of human development and does not take into account a number of other important
dimensions of human development like gender inequality, poverty and environmental
degradation.
● High Gross national Income may not result in economic welfare and a better standard of
living-It depends on the country’s spending. For example, if a country spends more on military,
arms and armaments rather than spending on human welfare- this is reflected in higher GNI, but
welfare could be lower. Higher GNI may hide widespread inequality in a country.
● There is little room for development-The HDI is measured by measuring the factors between 0
to 1. This means that certain countries that already have a high life expectancy, for example,
have little room to improve in terms of life expectancy.

Thriving Places Index

● The Thriving Places Index helps to answer three important questions. Are we creating the right
local conditions for people to thrive? Are we doing that equitably, so everyone can thrive, and
sustainably, so current and future generations can thrive?
● It shows whether the conditions are in place for people to thrive – in a fair and sustainable way.
● It radically challenges the current paradigm that defines progress by purely economic and
financial means.
● Three headline elements
○ Local Conditions
○ Equality
○ Sustainability
● Created by Centre for Thriving Places

PYQS
Q.1) The Multi-dimensional Poverty Index developed by Oxford Poverty and Human Development
Initiative with UNDP support covers which of the following? (2012)
1. Deprivation of education, health, assets and services at household level
2. Purchasing power parity at national level
3. Extent of budget deficit and GDP growth rate at national level
Select the correct answer using the codes given below:
(a) 1 Only
(b) 2 & 3 Only
(c) 1 & 3 Only
(d) 1, 2 & 3

Answer: (a)

Q.2) The national income of a country for a given period is equal to the:(2013)

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 National Income

(a) Total value of goods and services produced by the nationals

(b) Sum of total consumption and investment expenditure
(c) Sum of personal income of all individuals
(d) Money value of final goods and services produced

Answer: (a)

Q.3) Increase in absolute and per capita real GNP do not connote a higher level of economic
development, if:(2018)
(a) Industrial output fails to keep pace with agricultural output.
(b) Agricultural output fails to keep pace with industrial output.
(c) Poverty and unemployment increase.
(d) Imports grow faster than exports.

Answer: (c)

Mains:
Q.1) Define potential GDP and its determinants. What are the factors that have been inhibiting India
from realizing its potential GDP? (Answer in 150 words.) (10 Marks) (2020)

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