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INTRODUCTION
= NATIONAL INCOME MEANS THE INCOME OF
NALL THE FACTORS OF PRODUCTION OF THE
COUNTRY.
= IT IS ALSO KNOWN AS NATIONAL PRODUCT.
= IT IS THE MONETARY VALUE OF ALL FINAL
GOODS AND SERVICES PRODUCED DURING
ONE YEAR.
= NATIONAL INCOME IS A MEASUREMENT OF
COUNTRIES PROSPERITY IN TERMS OF ITS
INCOME.
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DEFINITION
THE LABOR AND CAPITAL OF COUNTRY
ACTING ON ITS NATURAL RESOURCES
PRODUCES CERTAIN AMOUNT OF NET
AGGREGRATE OF COMMODITIES,
MATERIAL AND IMMATERIAL INCLUDING
SERVICES OF ALL KIND IN ONE
ACCOUNTING YEAR.
THIS IS KNOWN AS NATIONAL INCOME OR
NATIONAL PRODUCT OF COUNTRY.
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The Circular-Flow Diagram
Firms
Households
Market for
Factors
of Production
Market for
Goods
and Services
Spending Revenue
Wages, rent,
and profit
Income
Goods &
Services sold
Goods &
Services
bought
Labor, land,
and capital
Inputs for
production
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COMPONENTS OF NATIONAL
INCOME
^ THERE ARE VARIOUS COMPONENTS OF
NATIONAL INCOME, WHICH ARE AS
FOLLOWS:
= GROSS DOMESTIC PRODUCT.(GDP)
= GROSS DOMESTIC PRODUCT AT CONSTANT PRICE
AND AT A CURRENT PRICE.
= GROS DOMESTIC PRODUCT AT FACTOR COST AND
AT A MARKET PRICE.
= NET DOMESTIC PRODUCT.(NDP).
= NET NATIONAL PRODUCT.(NNP).
= NET NATIONAL PRODUCT AT FACTOR COST OR
NATIONAL INCOME.
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The Measurement of GDP
GDP is the market value of all
final goods and services
produced within a country in a
given period of time.
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GROSS DOMESTIC PRODUCT
IT INCLUDES THE PRODUCTION OF GOODS AND
SERVICES IN ONE ACCOUNTING YEAR WITH IN THE
FRONTIERS OF THE COUNTRY.
IT ALSO INCLUDES TERRITORIAL WATERS OF THE
COUNTRY.
IT ALSO INCLUDES SHIPS AND AIRCRAFTS, FISHING
VESSELS, OIL AND NATURAL GAS PLANTS,
EMBEMBASSIES, CONSULATES AND MILITARYV
ESTABLISHMENT OF THE COUNTRY LOCATED
ABROAD.
IT CAN BE OBTAINED BY MULTIPLYING THE PRICE
OF COMMODITY WITHIN ITS QUETRITITY.


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0.9
4.7


17.5

5.4

12.2
3.4
8.0

0.8

24.0


4.8

13.0

5.2

100.0
Agriculture, forestry and fishing 8 241 m
Mining, energy and water supply 41 378 m

Manufacturing
153 132 m

Construction 47 327 m

Wholesale and retail trade; repairs 106 766 m
Hotels and restaurants 29 359m
Transport and communication 70 252 m

Banking, finance, insurance, etc. 6 667 m

Letting of property 209 839 m


Public administration and defence 42 096 m

Education, health and social work 114 069 m

Other services 45 101 m

Total GVA 874 227 m
P
e
r
c
e
n
t
a
g
e

o
f

G
V
A

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GROSS DOMESTIC PRODUCT AND CONSTANT
PRICE AT CURRENT PRICE
= THE GROSS DOMESTIC PRODUCT MAY BE
CALCULATED AT THE CONSTANT PRICE, THE
PRICES PREVAILING THE BASE YEAR OR AT
THE CURRENT YEAR PRICES.
= THE BASE YEAR IS NORMAL YEAR WHERE
THERE HAD BEEN NO EXTRAORDINARY
PROFITS OF LOSSES.
= THIS IS TO COMPARE THE NATIONAL
INCOME OF THE CURRENT YEAR WITH THAT
OF BASE YEAR.
= THE GDP AT CONSTANT PRICES MEANS REAL
NATIONAL INCOME.
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GROSS DOMESTIC PRICE AT FACTOR
COST ATMARKET PRICE
GROSS DOMESTIC PRICE CAN BE CALCULATED AT
FACTOR COST OR MARKET PRICE.
FACTOR COST MEANS THE COST OF FACTORS OF
PRODUCTION VIZ. RENT, INTEREST, WAGES,
INTEREST & PROFIT.
THE MARKET PRICE INCLUDES FACTOR COST &
TAXES WHEREAS IT MAY NOT INCLUDE THE
SUBSIDIES, WHICH REDUCE THE FACTOR COST.
THE GDP AT FACTOR COST IS A MORE RELIABLE
DATA THAN GDP AT MARKET PRICE BECAUSE IT
DOES NOT INCLUDE TRANSFER INCOME LIKE
TAXES ETC.
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Real versus Nominal GDP
4Nominal GDP values the production of
goods and services at current prices.
4Real GDP values the production of
goods and services at constant prices.
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GDP and Economic
Well-Being
4Higher GDP per person indicates a
higher standard of living.
4GDP is not a perfect measure of the
happiness or quality of life, however.
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GDP and Economic
Well-Being
4Some things that contribute to well-being are
not included in GDP.
4The value of leisure.
4The value of a clean environment.
4The value of almost all activity that takes place
outside of markets, such as the value of the time
parents spend with their children and the value of
volunteer work.
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NET DOMESTIC PRODUCT
NET DOMESTIC PRODUCT MEANS THE
GROSS DOMESTIC PRODUCT DEDUCTED BY
DEPRECIATION OR CONSUMPTION
ALLOWANCE.
NET DOMESTIC PRODUCT WILL REVEAL
THE NET PRODUCTION OF GOODS &
SERVICES IN VARIOUS SECTORS OF THE
ECONOMY.
THUS, NDP SYMBOLICALLY MEANS.
NDP = GDP-DEPRECIATION
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GROSS NATIONAL PRODUCT
4 IT MEANS THE ADDITION TO THE DOMESTIC
PRODUCT OF THE INCOME, WHICH WE EARN FROM
ABROAD.
4 IT INCLUDES OUR FOREIGN EXCHANGE EARNINGS
THROUGH EXPORT-IMPORT & THROUGH FACTOR
SERVICES.
4 THUS, WHEN WE ADD NET FACTOR INCOME FROM
ABROAD TO THE GROSS DOMESTIC PRODUCT, WE
GET GROSS NATIONAL PRODUCT.
4 SYMBOLICALLY IT CAN BE PRESENTED AS
FOLLOWS.
4 GNP = GDP+NFIA
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GROSS NATIONAL PRODUCT
NFIA I.E. NET FACTOR INCOME FROM
ABROAD INCLUDES THE INCOME OF
NON RESIDENT INCOME OF INDIANS
WHO WORK ABROAD, INDIAN BANKS
FUNCTIONING IN OTHER COUNTRIES
& THE INCOME EARNED FROM
FOREIGN TOURIST IN INDIA.
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NET NATIONAL PRODUCT
O NET NATIONAL PRODUCT MEANS THE NET
PRODUCTION OF GOODS SERVICES INCLUDING
THE NET FOREIGN EARNINGS.
O THUS, NET NATIONAL PRODUCT MEANS GROSS
NATIONAL PRODUCT-DEPRECIATION.
O THIS IS COMPARATIVELY NEAR TO NATIONAL
INCOME OF THE COUNTRY.
O GNP- DEP = NNP
OR
NDP+NFIA = NNP
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NNP AT FACTOR COST OR NI
= THE NET NATIONAL PRODUCT AT FACTOR
COST IS KNOWN AS THE NATIONAL INCOME
OF THE COUNTRY.
= IT CAN BE DERIVED BY REDUCING THE
TAXES & ADDING THE SUBSIDY TO NET
NATIONAL PRODUCT, AT MARKET PRICE.
= IT TAKES IN TO ACCOUNT THE NET FACTOR
INCOME EARNED IN THE DOMESTIC
TERRITORY OF THE COUNTRY & NET
FACTOR INCOME FROM ABROAD.
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METHODS OF MEASUREMENT OF
NATIONAL INCOME
+ THERE ARE FOLLOWING METHODS
OF MEASUREMENT OF NATIONAL
INCOME.
- VALUE ADDED METHOD OR OUTPUT
METHOD OR PRODUCTION METHOD
- INCOME METHOD
- EXPERIENCE METHOD

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VALUE ADDED METHOD
UNDER THIS METHOD THE NATIONAL INCOME IS
FOUND BY ADDING THE TOTAL PRODUCTION IN
THE COUNTRY.
THIS METHOD IS ALSO KNOWN AS VALUE ADDED
METHOD BECAUSE ONLY THE VALUE OF FINAL
GOODS & SERVICES ARE CONSIDERED FOR THE
PURPOSE.
THE PRODUCTION OF THE ENTIRE SUB-SECTOR IS
CALCULATED & THE VALUE IS FOUND OUT AT
MARKET PRICE.
THIS LEADS TO THE VALUE OF PRIMARY,
SECONDARY & TERTIARY SECTOR IN THE
ECONOMY.
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VALUE ADDED METHOD
IT IS KNOWN AS GROSS NATIONAL PRODUCT
FOUND BY ADDING THE PRODUCTION OF
ALL THREE SECTOR OF THE ECONOMY.
HERE, THE VALUE OF INTERMEDIATE
GOODS & THE SECONDARY GOODS IS NOT
CONSIDERED.
INITIALLY WE GET GDP THAN GNP &
FINALLY NNP AT COST I.E. NATIONAL
INCOME IN SYMBOLIC FORM.
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VALUE ADDED METHOD
PRODUCTION IN
PRIMARY + SECONDARY + TERTIARY
GDP MP
+NFIA
GNP
-DEP.
NNP MP
-TAXES
+SUBSIDY
NNP FC
OR
NATIONAL INCOME.

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INCOME METHOD
O UNDER THIS METHOD THE INCOME OF ALL
THE FACTORS OF PRODUCTION IS ADDED
TO GET GDP AT FACTOR CAST.
O SINCE, THERE IS NO DEPRECIATION IN
FACTORS OF PRODUCTION WE GET
DIRECTLY NDP AT FACTOR COST.
O WHEN THE INCOME FROM ABROAD IS
ADDED IT GIVES NATIONAL INCOME.
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INCOME METHOD
O INCOME METHOD IS THAT METHOD
WHICH MEASURES NATIONAL INCOME
FROM THE SIDE OF PAYMENTS MADE IN
THE FORM OF WAGES, RENT, INTEREST &
PROFIT TO THE PRIMARY FACTORS OF
PRODUCTION I.E. LABOUR, LAND, CAPITAL
& ENTERPRISE RESPECTIVELY FOR THEIR
PRODUCTIVE SERVICES IN AN ACCOUNTING
YEAR.
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INCOME METHOD
4 THE NATIONAL INCOME-BY-INCOME METHOD IS
CALCULATED SYMBOLICALLY AS FOLLOWS:
4 METHOD I
LAND RENT
LABOR +WAGES
CAPITAL +INTEREST
ENTREPRENEUR +PROFIT
NDP FC
+NFIA
_______________
NNPFC
OR
NATIONAL INCOME.
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SECOND METHOD
EMPLOYEES COMPENSATION
BUSINESS OPERATUNG SURPLUS
SELF EMPLOYED MIXED INCOME
___________________
NDP FC
+NFIA
____________________
NNPFC
OR
NATIONAL INCOME
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EXPENDITURE METHOD
IT CALCULATES THE NATIONAL INCOME FROM THE
EXPENDITURE SIDE.
WHEN WE ADD THE EXPENDITURE ON ALL TYPES
OF CONSUMPTION BY ALL UNITS OF THE
ECONOMY.
WE GET GROSS NATIONAL PRODUCT AT MARKET
PRICE FROM WHICH WE CAN DERIVE THE
NATIONAL INCOME.
HERE, THE CONSUMPTION BY HOUSEHOLDS,
PRODUCERS, GOVERNMENT, & REST OF THE
WORLD IS ADDED TO GET NATIONAL INCOME.
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The Components of GDP
GDP (Y ) is the sum of the following:
4 Consumption (C)
4 Investment (I)
4 Government Purchases (G)
4 Net Exports (NX)
Y = C + I + G + NX
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The Components of GDP
4Consumption (C):
4The spending by households on goods and
services, with the exception of purchases of
new housing.
4Investment (I):
4The spending on capital equipment,
inventories, and structures, including
new housing.
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The Components of GDP
4Government Purchases (G):
4The spending on goods and services by local,
state, and federal governments.
4Does not include transfer payments because
they are not made in exchange for currently
produced goods or services.
4Net Exports (NX):
4Exports minus imports.
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EXPENDITURE METHOD
EXPENDITURE METHOD IS THE METHOD
WHICH MEASURES THE FINAL
EXPENDITURE OF GROSS DOMESTIC
PRODUCT AT MARKET PRICE DURING AN
ACCOUNTING YEAR.
THIS TOTAL FINAL EXPENDITURE IS EQUAL
TO THE GROSS NATIONAL PRODUCT.
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SYMBOLIC WAY
CONSUMPTION
+INVESTMENT
+GOVERNMENT EXPENDITURE
+ EXPORTS (X)
- IMPORTS (M)
________________
GNP (MP)
-DEP
________________
NNP (MP)
-TAXES
+SUBSIDY
________________
NNP FC
OR
NATIONAL INCOME
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Equality of Expenditure and
Income
=
GDP
Net foreign
factor income
GNP
Depreciation
Indirect business taxes
Rents
Interest
Profits
Employee
compensation
National
Income
(3)
Income
(2)
Output
Net exports
Government
expenditures
Investment
Consumption
(1)
Expenditures
=
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NON MONETISED SECTOR
IN INDIA THERE EXIST THE BARTER SYSTEM
IN MANY VILLAGES AND URBAN AREAS.
SUCH TRANSACTIONS ARE NOT RECORDED
AS MONETARY TRANSACTION AND HENCE
THEY ARE NOT ADDED IN THE NATIONAL
INCOME OF THE COUNTRY.
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LACK OF DISTINCTION
LARGE NUMBERS OF PERSONS IN INDIA ARE
ENGAGED IN AGRICULTURE SECTOR IN
INDUSTRIAL SECTOR.
SO THEY EARN INCOME FROM TWO
SOURCES AND IT BECOMES DIFFICULT TO
CLASSIFY THEIR ACTIVITY FOR THE
PURPOSE OF PRODUCTION PROCESS.
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PARALLEL ECONOMY OF BLACK
MONEY
= A LARGE PART OF MONEY TRANSACTION IS
NOT SHOWN IN RECORDS TO SAVE THE
TAXES.
= THIS MONEY CANT BE CONSIDERED FOR
THE PURPOSE OF CALCULATION OF
NATIONAL INCOME.

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ILLITERACY
SINCE MAJOR PART OF INDIAN
POPULATION IS UNEDUCATED, THEY DO
NOT KEEP THE RECORDS OF THEIR
BUSINESS AND HENCE, SUCH INCOME
CANNOT BE TAKEN INTO ACCOUNT FOR
CALCULATION OF NATIONAL INCOME.
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INCOMPLETE INFORMATION
4 There is lack of willingness on part of the
person who collects the information & the
data.
4 Therefore, the data collected by him are not
completely reliable.
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TERMINOLOGICAL PROBLEM
+ It means the problem as to the inclusion of
one or the other item for the purpose of the
estimation of national income.
+ As a result which item is to be considered in
which method, creates confusion.
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ILLEGAL ACTIVITIES
= The income from illegal sources like
smuggling etc. cannot be considered for the
purpose of calculation.
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DEEMED INCOME
It is that income for which the work is done
but the income is not earned
E.G. The housewife does not get any
amount for her services in her own house, a
teacher doesnt earn when he teach to his
own child.
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DOUBLE COUNTING
- Many times the income can be calculated
more than one time under different sectors.
- This is known as double counting.
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Personal Income
4Personal income is the income that
households and noncorporate businesses
receive.
4Unlike national income, it excludes retained
earnings, which is income that corporations
have earned but have not paid out to their
owners.
4In addition, it includes households interest
income and government transfers.
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Other National Income Terms
4Personal income (PI) is national income
plus net transfer payments from
government minus amounts attributed
but not received.
PI = NI + Transfer payments from government
+ Net non-business interest income
Corporate retained earnings
Social security taxes
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Disposable Personal Income
4Disposable personal income is the income
that household and noncorporate
businesses have left after satisfying all
their obligations to the government.
4It equals personal income minus personal
taxes and certain nontax payments.
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Other National Income Terms
4Disposable personal income is personal
income minus personal income taxes and
payroll taxes.
4Disposable personal income is what people
have readily available to spend.
DPI = PI - Personal taxes
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Comparing GDP Among
Countries
4GDP gives a measure of economic size
and power.
4Per capita GDP is another measure often
used to compare nations' GDP.
4Because of differences in non-market
activities, per capita GDP can be a poor
measure of the living standards in
various nations.
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Comparing GDP Among
Countries
4Purchasing power parity is used to get
around the problems of per capita GDP.
4Purchase power parity adjusts for different
relative prices among nations before making
comparisons.
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Some Limitations of National
Income Accounting
4Limitations of national income
accounting include the following:
7Measurement problems exist.
7GDP measures economic activity, not
welfare.
7Subcategories are often interdependent.
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GDP Measures Market Activity,
Not Welfare
4GDP does not measure happiness, nor
does it measure economic welfare.
4Welfare is a complicated idea, very
difficult to measure.
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Measurement Errors
4GDP figures leave out the following:
7Illegal drug sales.
7Under-the-counter sales of goods to avoid
income and sales taxes.
7Work performed and paid for in cash.
7Unreported sales.
7Prostitution, loan sharking, extortion, and
other illegal activities.
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Measurement Errors
4A second type of measurement error
occurs in adjusting GDP for inflation.
7If the price and the quality of a product go up
together, has the price really gone up?
7Is it possible to measure the value of quality
increases?
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Misinterpretation of
Subcategories
4The subcategories of GDP can be
misinterpreted.
7For example, the line between investment
and consumption is often fuzzy.