UNIT I

NATIONAL INCOME ACCOUNTING-CONCEPTS & MEASUREMENT

• National income means the value of goods and services produced by a country during
a financial year. Thus, 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.

• National income is an uncertain term and is often used interchangeably with the national
dividend, national output, and national expenditure. 

• National Income is based on the fact that one man’s expenditure is another man’s income. So
it is represented as a triple identity i.e.,

• National Output = National Income = National Expenditure

 FEATURES
• 1. Macro economic concept: - The National income is a study of Macro economics concept.
It is the aggregate income of all goods and services produced in a country during a given year.
It provides a clear picture country’s economic performance during a particular year.
• 2. Flow concept: - National income is a flow concept i.e. flow of goods and services produced
in the economy during a year. It varies according to variations in production within the country.
National income flows only if there is productivity activity in the economy.
• 3. Monetary Concept: - The national income is a monetary concept as it is expressed in
money terms only. It is expressed in terms of market price during a period.
• 4. Value of final goods and services: -While calculating national income, only the value of
final goods and services is included. The value of intermediate goods such as raw materials is
not included. This is done to avoid double counting.
• 5. Income from Economic Activity: It includes the money value of goods & services that
are exchanged for money. E.g., services of homemakers and illegal income are ignored.

• 6. Income from Productive Activity: It only includes value of goods and services produced
during that year. E.g., income from second hand sales is ignored.

• 7. Financial Year: - National Income always relates to a time period usually a year. In India,
the national income is estimated by Central Statistical Organization annually for a financial
year beginning from 1st April and ending on 31st March.

• 8. Realized Value: National is the value of final goods and services which have been actually
produced. So it is a realized concept.
SOME BASIC CONCEPTS
• Domestic Territory- Also called Economic Territory refers to the geographical territory
administered by a government within which persons, goods and capital circulate freely. It
includes ships, aircrafts operated by normal residents, fishing vessels & floating platforms
operated by residents of a country on international waters and embassies, military
establishments of a country located abroad.

• Normal Residents- refers to an individual or institution who ordinarily resides in the country
and whose economic interest lies in that country.

• Factor Income- refers to income received by the factors of production for rendering factor
services in the production process. E.g., rent, wages etc.

• Transfer Income- refers to income received without rendering any productive service in return.
E.g., Old age pension, pocket money etc.
• The concept of Domestic Territory helps to estimate ‘Domestic Product’ which
includes production activity of production units located in the economic territory
irrespective of the fact whether carried out by the residents or non-residents.

• The Domestic Products are: GDPMP, GDPFC, NDPMP & NDPFC.

• The concept of Normal Resident helps to estimate ‘National Product’ which includes
production activities of normal residents irrespective of the fact whether performed
within the economic territory or outside it.

• The National Products are: GNPMP, GNPFC, NNPMP & NNPFC

• FINAL GOODS & INTERMEDIATE GOODS: Final goods are those goods which are used
either for consumption or for investment. Final goods should not be resold or used for further
transformation in the production process. For e.g., sugar bought for household consumption,
machinery etc.

• Intermediate goods are those goods which are used either for resale or for further production
in the same year. For e.g., sugar purchased by shop owner for stocking in his shop, sugar
used in making sweets.

• Intermediate goods have derived demand and Final goods have autonomous demand.
• NET INDIRECT TAXES- It refers to the difference between indirect taxes
and subsidies. Indirect taxes are tax imposed by the Government on
goods & services. Subsidies refer to economic/financial assistance given
By the government to the business sector or households for general
welfare. They help in calculating FC & MP concepts.
• DEPRECIATION- It refers to a fall in the value of fixed assets due to
normal wear and tear, passage of time or obsolescence. It is also
known as capital consumption or replacement cost. They help in calculating
Gross and Net concepts.
• NET FACTOR INCOME ABROAD (NFIA)- It refers to the difference
between factor income received from the rest of the world and the
factor income paid abroad. It helps in computing Domestic and
National Income
 CONCEPTS

GDPMP
PDI GDPFC

PI NDPMP

N
NNPFC
I NDPFC

NNPMP GNPMP
GNPFC
 DOMESTIC CONCEPTS
• GDPMP -refers to gross market value of
all final goods and services produced
within the domestic territory of a country
during a period of one year.
• GDPFC -refers to gross money value of
all final goods and services produced
within the domestic territory of a country
during a period of one year.
• GDPFC = GDPMP - NIT
• NDPMP -refers to net market value of all final
goods and services produced within the
domestic territory of a country during a
period of one year.
• NDPMP = GDPMP - Depreciation
• NDPFC -refers to net money value of all final
goods and services produced within the
domestic territory of a country during a
period of one year.
• NDPFC = GDPFC - Depreciation
RELATIONSHIP BETWEEN FOUR DOMESTIC CONCEPTS

• GDPMP, GDPFC, NDPMP and NDPFC are the four

domestic concepts. The term Domestic implies
that contribution of only those producers (whether
resident or non-resident) is to be included who
are within the domestic territory of the country
 NATIONAL CONCEPTS
• GNPMP-refers to gross market value of all the final
goods and services produced by the normal
residents of a country during a period of one
year.
• GNPMP=GDPMP+Net Factor Income from Abroad
• GNPFC-it is the sum of the money value of the
income accruing to the various factors of
production in one year in a country.  production in one year in a country.
• GNPFC=GNPMP-Net Indirect Taxes
• NIT is Indirect Taxes - Subsidies
• NNPMP-refers to net market value of all the final
goods and services produced by the normal
residents of a country during a period of one
year.
• NNPMP=GNPMP-Depreciation
• NNPFC-it is the sum of the money value of the
income accruing to the various factors of
 
• NNPFC=NNPMP-Net Indirect Taxes
• NIT is Indirect Taxes - Subsidies
RELATIONSHIP BETWEEN FOUR NATIONAL CONCEPTS

• GNPMP, GNPFC, NNPMP and

NNPFC are the four national
concepts. The term national implies
that production of only normal
residents of the country is to be
included even if they are outside the
domestic territory of the country.
 PERSONAL INCOME & PERSONAL DISPOSABLE INCOME
• This measures all the income that is received by individuals, but not necessarily earned. Examples of this
include social security benefits, unemployment compensation, welfare payments, benefits for veterans
etc. Individuals also have a part of the income which they do not receive immediately. This includes
corporate profits that are undistributed, corporate taxes and the contribution to Social Security.

PI = NI + income received but not earned - income earned but not received

Disposable Personal Income (DI):

• Personal Disposable Income is that part of income which is finally available to individuals for disposal.
This is arrived by deducting personal taxes from the Personal Income.

PDI = PI - Personal Income Taxes

• Disposable personal income represents what people have that they can spend. Personal Disposable
Income is either consumed or saved.

• PDI = C + S
NUMERICALS

• Calculate NDPFC
Particulars Rs. In Crores

GNPMP 8,000

Depreciation 600

Net Factor Income from Abroad 300

Net Indirect Taxes 700

NUMERICALS

• Calculate GDPMP
Particulars Rs. In Crores

NNPFC 2,000

Depreciation 200

Subsidies 70

Factor Income from Abroad 110

Indirect Taxes 180

Factor Income to Abroad 50

• Calculate National Income or NNP at FC
Particulars Rs. In crores
GDP at MP 5,500
• Consumption of fixed capital 300
Goods and Services tax 120
Factor income from abroad 150
Subsidies 70
Factor income to abroad 250
• Calculate National Income or GNP at FC
Particulars Rs. In crores
NDP at MP 25,000
• Depreciation 5,000
Factor income from abroad 400
Subsidies 30
Factor income to abroad 600
• Calculate Consumption of fixed capital
Particulars Rs. In crores
National Income or NNP at FC 4,000
• GDP at MP 5,000
Net Indirect taxes 300
Net Factor income from abroad 200