Unit II: National Income

- NI Approaches
 Real Income
•  Nominal Income (current-dollar amount of person’s income)
adjusted for price changes.
• The current prices will not indicate real state often.
• Real income = (Nominal Income/CPI)*100 --100=base year CPI
Year Salary CPI Alt CPI Real Alt Real
(Nu.) Income Income
1 250,000 140 140 178,571 178,571
2 262,500 145 150 181,034 175,000

• Real GDP =
 Per Capita Income (PCI)
• Average income of the people of a country in a
particular year→ measurement of income at
current prices and at constant prices.
• PCI = (NI/Population) in particular year
• Real PCI = (Real NI/ Population) in particular
year
 Standard of Living
Usually measured by:

Real GDP per capita = real GDP

population
 GDP Per Capita (USD)

2879
2720
2571 2610
2533
2464

2011 2012 2013 2014 2015 2016

 GNI Per Capita (USD)
2640

2479
2403 2431
2335
2295

2011 2012 2013 2014 2015 2016

GNI Per Capita (USD)
 Activity

Compute National Income (NNPfc) using expenditure

method. (Semester Exam, Nov. 2018)
S.No Particulars Nu. in Billions
1 Private Final Consumption Expenditure 210
2 Net Domestic Capital Formation 40
3 Government Final Consumption Expenditure 50
4 Net Exports -(5)
5 Wages and Salaries 170
6 Employers Contribution 10
7 Profit 45
8 Interest 20
9 Indirect Tax 30
10 Subsidies 05
11 Rent 10
12 Net Factor Income from Abroad 03
13 Consumption of Fixed Capital 25
Solution
• Expenditure Method
• NDPmp= PFCE+ GFCE + GDCF+ Net Exports
• = 210+40+50+(-5)
• = 295
• NNPfc= NDPmp + NFIA- NIT
• = 295 + 3 - (30-5)
• = 273 Billion Dollars
Measurement of National Income

Three measurement approaches:

1. Expenditure
2. Income
3. Value added
Expenditure Approach
• Expenditure of four sectors of economy: household,
business, government and foreign
• Final Consumption
• Gross private domestic investment (Gross Capital
Formation)
• Government final consumption expenditures
• Net Exports
• GDP = C + I + G + (X–M)
Income Method
• NI is the sum of five components
• Compensation of employees
• Proprietors’ income
• Corporate profits
• Rental Income
• Net interest
Income Method

• NI = Compensation of employees
+ Operating surplus (rent, Interest, profits)
+ Mixed income

Mixed Income= unincorporated enterprises (private

sectors / self-employed) – can’t segregate incomes
 Value Added
• Value added by each firm/producing enterprise (Gross Value added at
market price (GVAmp))
• Gross Value Added at market price:
= GVAmp of Primary Sector
+ GVAmp of Secondary Sector
+ GVAmp of Tertiary Sector
GDPmp
(-) Depreciation
(-) Net Indirect Taxes .
NDP fc
+ NFIA .
NI (NNPfc) .
Income Method
From NI to GDP
• GDP = NI
(-) Income earned from the rest of the world
+ Income earned by the rest of the world
+ Indirect business taxes
+ Capital consumption allowance
+ Statistical discrepancy
Reconciliation of three methods
Value Added
Sum of Gross Value Added (market price) of all industrial
Sectors

= GDP mp
(-) Consumption of fixed capital/Depreciation
(-) Indirect taxes
(+) Subsidies

+Net factor income from abroad (NFIA)

= NNP fc
Income Distribution Method
= Compensation of employees
+ Operating surplus (rent, Interest, profits)
+ Mixed income (unincorporated enterprises (private sectors /
self-employed)

= NDPfc

+ NFIA
= NNP fc
Final Expenditure Method
= Private Final Consumption Expendure
+ Govt. final Consumption expenditure
+ Gross Domestic capital formation
+ Net exports

= GDP mp
(-) Consumption of fixed capital
(-) Indirect taxes
(+) Subsidies

+ NFIA
= NNP fc
Value Added Income Distribution Method Final Expenditure Method

Sum of Gross Value Added Compensation of Private Final C. Expend.

(market price) of all employees
industrial Sectors + Operating surplus (rent,
Interest, profits)
+ Mixed income
(unincorporated enterprises
(private sectors / self-employed)
+ Govt. final C. expenditure
+ Gross Domestic capital
formation
+ Net exports

= GDP mp =NDPfc = GDP mp

(-) Consumption of fixed (-) Consumption of fixed
capital/Depreciation capital
(-) Indirect taxes (-) Indirect taxes
(+) Subsidies (+) Subsidies
+Net factor income from + NFIA + NFIA
abroad (NFIA)
= NNP fc = NNP fc = NNP fc
 Reconciliation of the Three Methods (Nu. in million) - 2016
Expenditure Income Gross Value Added
Private Compensation of
Consumption 76,557.04 employees & 130,294.11 Primary Sector 24,565.44
Expenditure (C) operating surplus
Govt. Consumption Consumption of fixed
25,061.39 11,521.80 Secondary Sector 61637.1
Expenditure (G) capital
Gross Capital
81,814.44 Indirect taxes less
Formation (I) 6,863.02 Tertiary Sector 62,476.43
subsidies
Next Export (NX) -34,753.94
GDP 148,678.93 GDP 148,678.93 GDP 148,678.93
 Class Activity

National Income estimation by Expenditure and Income

Method.
# Item Amount (Nu.)

1 Private final consumption expenditure 2000

2 Govt. final consumption expenditure 1000
3 Compensation of employees 1200
4 Net exports -20
5 Net indirect taxes 370
6 Net domestic capital formation 800
7 Consumption of fixed capital formation 100
8 NFIA -10
9 Interest 310
10 Rent 200
11 Mixed income of self-employed 900
12 Profits 800
Solution:
• Expenditure Method: 1 + 6 + 2 + 4 – 5 + 8
= NDP-Net Indirect Taxes + NFIA
= 2000+800+1000+(-20)- 370 + (-10)
= 3780 – 370 – 10 = 3400
• Income Method: 3 + 9 + 10 + 12 + 11 + 8
= NDPfc + NFIA
= (1200+310+200+800+900) + (-10)
=3410-10 =3400