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Take–away of today’s lecture
National Income
 Lecture Outcomes

• Explain the meaning of national income

• Differentiate between the three approaches of measuring

national income

• Examine the difficulties in calculating national income

 National Income

• In general sense of the term, national income refers to the aggregate

money value of all final goods and services resulting from the
economic activities of the people of a country over a period of one
year.

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 Economic Production

• Economic production refers to the production of those goods and

services which are meant for sale and have market value, and those
goods and services which are produced and provided jointly to the
people by the government and public organisations, for which people
pay indirectly through tax payment.

• All marketable production is economic production but all economic

production is not marketable.

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 Non Economic Production

• Non-economic production includes the production of goods and services that are
not meant to be sold, nor is there any market for them, nor do they have a market
price.

• To this category belong mainly the following services:

i. Services rendered to self
ii. Services provided to the family members
iii. Services provided by the neighbours to each other

• These services are not included in the measurement of the national income.
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 Intermediate and Final Goods

• Intermediate goods- The goods that flow from one stage to another
in the process of production of a good, with their form changing.

• Final goods- The goods that reach the final stage of production and
flow to their ultimate consumers/ users.

• The need for distinction between the intermediate and final products
arises because of the problem of double counting.
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 Intermediate and Final Services

• The classification of services under the intermediate and final product

categories depends on the purpose of their use.

• When used for production purpose, these services are treated as

intermediate products and when used for private consumption, they
are treated as final products.

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 Pooling Question

• Which out of the following is not a final good:

(a) Refrigerator in a restaurant.
(b) Refrigerator in the hospital.
(c) Refrigerator in the chemist shop.
(d) Refrigerator purchased by electronic showroom
 Transfer Payments

• Transfer payments are the payments made by people to the people,

and by govt to the people, without corresponding transfer of goods
and services or addition to the total output.

• Transfer payments are not taken into account while counting the
national income.

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 Consumer and Producer Goods

• Consumer goods- The goods and services that are consumed by the
people to directly satisfy their needs and yield utility to the consumer.

• Producer goods- The category of final products which are used for
enhancing the production capacity of the national economy with the
purpose of increasing the flow of income in the future.

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 Gross Domestic Product (GDP)

• The Gross Domestic Product (GDP) can be defined as the sum of market
value of all final goods and services produced in a country during a specific
period of time, generally one year.

• It includes income earned by the foreigners in the country and excludes

income earned abroad by the residents.

• The market value of domestic product is obtained at both constant and

current prices.
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 Pooling Question

• Sum of NNPMP and net current transfers from abroad is equal to:
(a) Gross National Disposable Income
(b) Net National Disposable Income
(c) Personal Disposable Income
(d) Personal Income
 Gross National Product (GNP)
• The concept of GNP includes the income of the resident
nationals which they receive abroad, and excludes the
incomes generated locally but accruing to the non-nationals.

GNP = Market value of domestically produced goods and services

plus incomes earned by the residents of a country in foreign countries minus
incomes earned by the foreigners in the country.

GDP = Market value of goods and services produced by the residents in the country
plus incomes earned in the country by the foreigners
minus incomes received by residents of a country from abroad.

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 Net National Product (NNP)

• The NNP is the measure of national income which is available for

consumption and net investment to the society.

• It the actual measure of national income.

• The NNP divided by the population of the country gives the per capita
income.

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 Personal Income (PI)

• Personal income (PI) can be defined as the sum of all kinds of incomes
actually received by the individuals from all sources of incomes.

• The sum of personal incomes is not exactly the same as NNP.

(where UDP = undistributed company profits; SPU = surplus of public

undertakings; RPP = rentals of public properties and PI excludes items not
included in NNP)

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Disposable Income and Private Income
• Disposable income- refers to personal income of the
income earners against which they do not have any
legally enforceable payment obligations.

• Private income-Broadly, all personal incomes are

private incomes. However, the term private income
is used in contrast to public income.

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 Methods of Measuring National Income

• Net Product Method or the Value Added Method

• Factor Income Method, and
• Expenditure Method

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 Expenditure Approach
• GDP at Market Price = Personal Consumption (C) + Investment (I) +
Government Spending's (G) + Net Exports (X-M)

• GNP =GDP + Net factor income abroad

MP MP

• GNPFC = GNPMP - indirect taxes + Subsidies

• National Income GNPFC – Depreciation

• Personal Income = National income+ transfer payments – corporate income
tax – retained earnings – social security contributions – insurance premium
• PDI = Personal income – personal income tax
 Item Rupees (Million)
Exports 500
Personal Consumption expenditure 1400
Changes in stock -40
Indirect business tax 30
Government expenditure 990
Investment 1000
Personal income tax 80
Subsidies 50
Imports 400
Factors income paid abroad 80
Depreciation 40
Factors income received from abroad 90

Calculate:
GDPMP, GDPFC, GNPFC, National Income
Solution..
GDP at Income Approach
Question..
Solution
 Product Approach

• Net value of all finale goods and services produced in a year. Also
known as VAM (value added method)

• In calculating GDP under product approach only money value of finale

goods and services are included in the calculation
• The value of raw material and intermediate goods are subtracted
from the value of GDP to avoid double counting
 Uses of national income

• Standard of living
• Economic performance over time
• National planning
• Sectoral contributions
• Inflation and deflation
• Distribution of income
 Difficulties

• Non monetized sector

• Illiteracy
• Problem of expertise
• Problem of availability of sophisticated machinery
• Double counting
• False information
• Problem of multi-occupations