National income accounting

Circular flow of income and expenditure in an economy:

Circular flow of income and expenditure is integrated flow
of resources, goods, services among the different sectors
of the economy. It consists of monetary flow and real flow
in the economy. Real flow includes goods, services and
factors. Monetary flow includes the flow of money income.
To illustrate the circular flow in an economy, the economy
is divided into four sector i.e. household sector, business
sector, government sector and foreign sector.
Two sector circular flow model
Two Sector circular flow model includes the circular flow of
income and expenditure between two sectors that is
household sector and business sector. Household sector
represents the owner of factors of production which are
involved in consumption of goods and services produced
by business sector. Business sector represents producing
unit which hire the factors services from household sector.
1. Circular flow of two sector economy isAll income is
spent on consumption i.e. there is no saving.
2. MPC remains constant.
3. All goods and services produced by business sector
are supplied to household sector.
4. Factors of production are supplied only by the
household sector.
The two sector circular flow model can be explained by
the following diagram.
According to flow chart house hold sector provides factor
services which represents real flow of factor from
household Sector to business sector. They earn money
from business sector which represents monetary flow of
business sector to household sector. Business sector
produces goods and services and supplies to the
household sector, which is real flow. The household sector
make payment for consumption of goods to the business
sector, which is monetary flow. It assumes factor
payments are equal to the factor incomes and household
expenditure is equal to value of output.
 Three sector circular flow model 
Three sector circular flow includes circular flow of income
and expenditure between household sector, business
sector and government sector. Government influences the
level of economic activities in various ways like fiscal
policy, wage policy etc. the three sector circular flow
model is based on the following assumptions:
1. There is only three sector economy i.e. house Sector,
business sector and government sector. 
2. There is government intervention.
3. There is a perfect competitive market.
4.  The government imposes taxes.
5.  The government provides subsidies to both the
household and business sector.
6. The household sector pays direct taxes to the
government.
7.  The business sector pays both direct and indirect taxes.
8. The government purchases goods from the business
sector and provides subsidies to the business sector.
9. The government sector also hires factors from
household sectors.
10.  The government sector provides transfer payment,
wages and subsidies to the household sector.
11.  The economy is closed i.e. foreign trade is not
included.
On the basis of above assumptions the three sectors
circular flow can be explained with the help of
following diagram.
  

Above circular flow shows income expenditure of close

three sector economy. Business sector produces goods
and services and supplies to the household sector and
household sector makes payment for goods and services
to business sector. Household sector pays tax to the
government and government sector provides wages,
salaries, and transfer payment to the household sector.
The business sector pays direct and indirect taxes to the
government sector and government purchases goods and
services from business sector. Similarly business sector
makes payment for factors to household sector.
Household sector save their income which is converted
into investment through financial market to the business
sector. Saving is equal to investment in capital market.
Four Sector circular flow model
 The four sector circular flow model includes flow of
income and expenditure between the household sector,
business sector, government sector and foreign sector.
Foreign sector consists of net export, which is the
difference between export and import. Four sector circular
flow is based on the following assumptions. 
1. There are four sectors in an economy. i.e.  Household
sector, business sector, government sector and foreign
sector.
2.  There is an open economy.
3.  Household sector exports only labor and capital.
4.  There is perfect competition in both internal and
external markets.
Four Sector circular flow is shown by the following
diagram.
Business sector produces goods and services and supply
to the household sector. Household sector makes
payment for goods and services to business sector.
Household sector pays tax to the government and
government sector provides wages, salaries and transfer
payment to the household sector. The business sector
pays direct and indirect taxes to the government sector
and government sector purchases goods and services
from business sector. Government sector also provides
subsidy to the business sector.
Foreign sector exports goods to the business sector and
business sector makes payment for import of goods. In the
same way business sector exports goods and services to
the foreign sector and foreign sector makes payment for
import. Household sector exports capital and manpower to
the foreign sector and foreign sector makes payment to
the household sector as foreign remittance. Similarly
foreign sector exports goods and services to the
household sector and household sector makes payment
for import of goods and services to foreign sector. 

Meaning of national income

National income is an important indicator of economic
development. It shows the aggregate economic
performance of an economy as a whole. National income
is defined as total market value of all final goods and
services produced in the country during a year. It refers
to the money value of all final goods and services
resulting from all economic activities of the country. It is
the sum of total income earned by the all factors of
production in the form of rent, wages, interest and profit
during a year.
According to Marshall “the labour and capital of a
country acting on its natural resources produced
annually a certain net aggregate of commodities,
materials and immaterial including services of all kinds.
This is true net annual income or national dividend.”
According to Pigou “national dividend is that part of
objective income of the community, including of course
income derived from abroad, which is measured in
money.”
According to Fisher “the true national income is that
part of annual net product which is directly consumed
during that year.”
Features of NI
 It is the result of all economic activities during a
year.
 It is the contribution of all resources i.e. natural,
physical and human resources.
 It is a flow concept because it shows the flow of
final goods and resources produced from all
economic sector of the country.
 There is triple identity of national income i.e.
national product, national income and national
expenditure.
 It is always calculated in terms of net i.e.
depreciation should be deducted from gross
income.
Various concept of national income:
Gross Domestic Product (GDP):
GDP is the total market value of all final goods and
services produced within the domestic territory of a
country during a year.
Features of GDP
 GDP is monetary measure.
 GDP includes only final goods and services.
 The value of final goods and services is calculated
at current market price.
 GDP is flow variable thus it takes into account
only current production. Sale of previous
produced goods are not a part of current GDP.
 Transfer payments are not included in GDP.
 GDP does not include capital gains.
 It includes contribution of national’s as well
foreign factors of production within the boundary
of a country.

GDP can be expressed by two senses .i.e.

Gross Domestic Product at market price (GDPMP):
it is a market value of all final goods and services
produced in a year. It is measured at actual
market price which consumers pay for the
purchase of goods and services for consumption.
GDP at factor cost (GDPFC): if GDP is measured as
the sum of price paid to the all factors of
production in the form of rent, wages, interest
and profit for their contribution in production is
known as GDP at factor cost.
GDPMP = P1 Q1 +P2 Q2 +P3 Q3+ ………….. + P n Q n
GDPFC= GDPMP - net indirect taxes
Net indirect taxes = indirect taxes-subsidies.
Potential GDP and actual GDP: potential GDP is
the GDP of a country when all factors are fully
employed and actual GDP is the GDP actually
produced. The difference between actual GDP
and potential GDP is called GDP gap. If GDP gap is
positive, the country has good performance.
Net domestic product (NDP): when depreciation
charge is deducted from GDP, we get net
domestic product. i. e. NDP = GDP - depreciation.
NDPFC = NDPMP – net indirect taxes
Gross national product (GNP): GNP is the total
market value of all final goods and services
produced in a year. GNP is broader concept than
GDP because it also includes net factor income
from abroad (NFIA). NFIA is the difference
between the factor income earned by our
residents from foreign countries and factor
income earned by the foreigners from our
country. It can be expressed as:
GNP = GDP + NFIA
GNP is calculated in monetary term and it
includes only final goods and services.it includes
income earned by residents of a country within
the country and abroad. It does not include
transfer payment and capital gain or losses.
GNPMP = GDPMP + NFIA
 Or, GNPMP = C+ I + G + (X - M) + NFIA
GNPFC = GNPMP - net indirect taxes.
Net national product (NNP): NNP is defined as
the total market value of all final goods and
services after providing the depreciation. It is also
called national income .i.e.
NNPMP = GNPMP - depreciation.
 National income (NNPFC)  
NI is the total sum of earning of all factors of production in

the form of rent, wages, interest and profit plus net factor

income from abroad.   

      NNP FC = GNPFC - depreciation. 
            NNPFC = NNPMP - net indirect taxes. 
               NI = NNPFc 
 
 
Personal income (PI)
PI is the sum of all incomes actually received by
individuals and households of a country during a year.
The total income received by all individuals and
households of a country from all possible sources before
payment of direct taxes during a year called personal
income.
It is never equal to the national income because the
factors of production do not get all part of income they
earn. For example, corporate income tax or corporate
profit tax should be paid to the government from corporate
profit. This is not available to the shareholders. Similarly,
some part of corporate profit is not distributed to the
shareholders, which is known as the undistributed profit.
Social Security contribution such as provident fund,
pension fund, etc. is deducted from the wages and
salaries. On the other hand, transfer payments in the form
of unemployment benefit, old age pension, etc. are the
income received but not earned.

PI = NI - Undistributed corporate profit - Corporate

income tax - Social security contribution + Transfer
payments.
Disposable Income (DI)
The total income received by all individuals and
households of a country from all possible sources after
payment of direct taxes is called disposable income. It is
equal to personal income minus direct taxes.
DI = PI - Direct taxes (Personal taxes)
Disposable income is available for households and
persons for consumption. However, the total disposable
income is not spent only on consumption because a part
of it is saved. Thus,
DI = Consumption + Saving (C+S)
Private Saving
Saving is defined as the excess 0f disposable income over
the consumption expenditure. In other words, saving is the
part of disposable income which is not spent on
consumption of goods and services, S = DI - C
Where, S = Saving.
C = Consumption expenditure.
DI = Disposable income.

Per capita Income (PCI)

The average income of the people of a country in a
particular year is called per capita income. It is expressed
at the current prices. In order to find the per capita income,
national income of a country in a particular year is divided
by population of the country in that year.

Per Capital Income for 2019 = National Income for 2019 ÷

population for 2019
PCI helps to know about the living standard of the people
in the country.

Nominal GDP
It is defined as the GDP evaluated at current market
prices. Therefore, nominal GDP includes all of the
changes in market prices that have occurred during the
current year due to inflation or deflation. In order to
remove effect of changes in the overall price level, real
GDP used.
Nominal GDP = P1Q1 + p2Q2 + ------------ + pnQn.
Real GDP
It is defined as the GDP evaluated at the market prices of
any base year. For example: if 2015 is chosen as the
base year, then real GDP for 2019 is calculated by taking
the quantities of all goods and services produced in 2019
and multiplying them by the prices of 2015. i. e.
Real GDP = p0Q1 + p0Q2+ -------- + p0Qn

Real GDP = Nominal GDP x 100

GDP Deflator

GDP deflator
It measures relative changes in current level prices in
comparison to the level of prices in the base year. In other
words, it is the ratio of nominal GDP in a given year to real
GDP of that year. The formula to calculate GDP deflator
is,
GDP deflator = Nominal GDP x 100.
Real GDP
- Real GDP = Nominal GDP x 100
GDP deflator

- Nominal GDP = real GDP x GDP deflator

100
 The GDP deflator is also used to measure the rate of
inflation of that country. i.e.
Rate of inflation = Change in GDP deflator x 100
GDP deflator of previous year

Measurement of National Income

Production of goods and services increases income which
increases demand for goods and services or expenditure
which leads to further production. Thus, there is circular
flow of production, income and expenditure. Based on this
circular flow, the national income can be measured by
using three methods i. e. Product method, income method
and expenditure method.
Product Method (output)
In this method, the national income is calculated from the
production side. Under this method first the economy is
divided into different sectors such as, primary (agriculture,
forestry, fishing, mining, etc.), secondary sector
(manufacturing, construction, electricity, gas, water supply,
etc.), and tertiary or services (banking, transport,
insurance, communication, trade and commerce etc.)
Then GDP is obtained by adding up the production of all
these sectors of the economy. Or money value of total
product of every sector is calculated and summed up to
find out GDPMP. The net factor income from abroad is
added to The GDPMP, we get GNPMP.
This method is common in many countries but there is
more possibility of double counting. To avoid the problem
of double counting, following two methods are used: i.e.
Final Product Method and value added method.

1. Final product method:

In the final product method, national income is estimated
by finding the market value of all final goods and services
produced in an economy in a year. The market value of all
final goods and services produced within the country in a
year is calculated which is known as GDPMP.
GDPMP = Money value all final goods and services
produced in all economic sectors (agriculture, industry,
trade and service) within a country in a year
GDP at MP = P1 Q1 + P2 Q2 + P3 Q3+ ... + pn Qn.
P = Price of the respective goods and services.
Q = Quantity of goods and services.
By adding the net factor income from abroad (NFIA) to
GDPMP, we get GNPMP.
GNPMP = GDPMP + NFIA
In order to get NNPMP, depreciation is deducted from
GNPMP
NNPMP = GNPMP – Depreciation.
Further deducting net indirect taxes from NNPMP, we
obtain NNPFC which is national income.
NNPFC = NNPMP - Net Indirect taxes
NI = NNP at FC
While calculating NI through final product method, the
problem of double counting occurs. In order to avoid
double counting, only final products should be included.
But it is very difficult to avoid the double counting because
same product is used as the intermediate good by firms
and final good by households. For example, flour is used
as the intermediate good by biscuit industries where as it
is used as final product by households for making bread.
Another way to avoid the problem of double counting is
value added method which is explained below.
2. Value Added Method
In the value added method, the value added at
different stages of production is counted for
estimating national income. Thus, according to this
method, national income is the sum of total value
added by different producing units in their production
process. Value added means the addition to the value
of inputs during the process of production. In order to
calculate the value added at a particular stage of
production, the cost of intermediate product is
deducted from the total value of output. Thus,
Gross value added = Value of output - Cost of
intermediate goods
Value added is the difference between the value of goods
as they leave a stage of production and the cost of the
goods as they entered that stage. In calculating GDP, we
sum up the value added at each stage of production.

Income method:
Under this method national income is measured from the
distribution side. Income method is also known as the
factor payment method. According to this method the
incomes received by all the residents of a country for their
productive services during a year are added up to obtain
national income. Thus, this method consists of income
earned by all factors of production in the forms wages and
salaries, interest, rent and profit. All these incomes of
individuals and households are summed up to calculate
NDPFC. When factors income earned from abroad is added
to NDPFC then we get NNPFC.
NNPFC is the sum of the income received by the factor of
production plus net factor income from abroad.

The important elements or components in the calculation

of national income by income method are as follows:
1. Wages and salaries: Wages and salaries earned by
labour and employees are included in the national
income. The total sum of income earned by labour
and employees is also called compensation of
employees.
Compensation of employees = Wages and
salaries + Employers' contribution to social
security + Bonus + Money value of other facilities
2. 0perating surplus: it includes rent, interest and
profit.
a. Rent: Rent received from land, building, factory,
etc. are included in national income. Income earned
by persons for the use of their real property, royalties
received by persons from patents, copyrights and
rights to natural resources.
b. Interest: Interests received from the capitals are
included in the national income. Interest is expressed
 in net rather than gross terms. It represents the
business sector's total interest payments to other
sectors minus their total interest payments to the
business sectors. All other types of interest payments
between individuals, between businesses and
between government and individuals are considered
unproductive and hence are omitted from the
calculation of GDP.
c. Profits: Profits include dividends, profit tax and
undistributed profits. Profit consists of corporate
profits before payments of corporate income taxes.
Profits of unincorporated businesses (i.e. partnership
and proprietorship businesses) are not counted here
because they were already included as part of mixed
income.
Profit = Undistributed profit + Dividend +
Corporate income tax
3. Net indirect taxes: Net indirect tax is equal to
indirect taxes less subsidies. Though final burden of
such taxes fall on final consumer in the form of higher
prices, included in GDP. This is because the indirect
taxes cause the expenditure side of GDP to be
greater than the income side. On the other hand
subsidies cause expenditure side to be lower than
income side. Therefore, indirect taxes are deducted
and subsidies are added to get GDP at factor cost.
Net indirect taxes = Indirect taxes - Subsidies
4. Net factor income from abroad (NFIA): The net
factor income from abroad is included in the national
income. Net factor income from abroad is equal to
income received by citizens of a country from abroad
 less income paid the foreigners. It is added to GDP to
get GNP.
5. Depreciation: The depreciation amount is deducted
from gross income to get net income i.e., net national
product (NNP). It is also known as the capital
consumption allowance.
6. Mixed income and income from self-employment:
Income earned by self-employed persons and profit of
small business or sole proprietorship household
industries is included in national income. The profit or
income earned from sole proprietorship or partnership
is called mixed income or proprietor’s income.
The method of calculating NI by income method
NDPFC = Wages and salaries + Rent + Profit + Interest
+ Income from self-employment + Mixed income or
proprietor's income.
NNPFC = NDPFC + NFIA
NI = NNPFC
Alternative Method
GDPMP = Compensation of employees + Rent + Profit +
Interest + Income from self-employment + Mixed
income or Proprietors income + Depreciation + Net
indirect taxes
GNPMP = GDPMP + NFIA
NNPMP = GNPMP – Depreciation
NNPFC = NNPMP - Net indirect taxes
NI = NNPFC
 Expenditure Method: Under this method national income
is measured from expenditure side. In order to calculate
national income by expenditure method, the economy is
divided into four major sectors: household, government,
business and foreign. The total expenditures of these
sectors are added to get GDPMP. GDPMP is the sum of total
final expenditures made by household government,
business and foreign sectors.
According to expenditure method, the sum of private
consumption expenditure, private investment expenditure,
government expenditure and net export gives the GDPMP.
Net export equals to total exports minus total imports.
These both are the part of the GDP. Thus, we add up the
above four types of expenditures to get final expenditures
on gross domestic product at market prices.
When net factor income from abroad is summed up to
GDPMP, we get GNPMP. GNPMP is converted to NNPMP by
deducting de preciation. At the last, NNPMP is converted to
NNPFC by deducting net indirect taxes. NNPFC is the
national income.
The components of national income by this method are as
follows:
1. Personal consumption expenditures: It consists of
expenditures on consumer goods and services i.e.
food, clothing, appliances, automobiles, medical care,
recreation, etc.
2. Government expenditure: it includes government
expenditures on security, administration,
infrastructure development, etc. However, the transfer
 payments are omitted because they do not represent
part of current output of goods and services.
3. Gross private domestic investment: it includes total
investment expenditure by business firms. Such
expenditures contribute significantly to GDP.
Gross private domestic investment (I) = Net fixed
capital formation + Depreciation + Change in
stock.
Change in stock (Change in Inventories) = Closing
stock - Opening stock
4. Net exports: To measure GDPMP in terms of total
expenditures, we must include the value of exported
goods and services that foreign buyers spend on our
total output and we subtract the value of imported
goods and services from our total expenditures.
Hence, net exports equal to total exports minus total
imports.
Net export = Export - Import (X - M)
5. Net indirect taxes: Net indirect tax is equal to
indirect taxes less subsidies. Indirect taxes are
deducted and subsidies are added to get GDP at
factor cost.
Net indirect taxes = Indirect taxes - Subsidies
6. Net factor income from abroad (NFIA): The net
factor income from abroad is included in the national
income. It is added to GDP to get GNP.
7. Depreciation: Depreciation amount is deducted from
GNP to get NNP. Depreciation also known as capital
consumption.
 The calculation of national income by expenditure method
is as follows:
GDPMP = C + I + G + (X - M)
GNPMP = GDPMP + NFIA
NNPMP = GNPMP - Depreciation
NNPFC = NNPMP - Net indirect taxes
NI = NNPFC
Where, C = Private consumption expenditure
I = Private investment expenditure
G = Government expenditure
X = export
M = import
X - M = Net export
NFIA = Net factor income from abroad.
Numerical problems
 A farmer produces wheat and sells to the miller, miller
produces flour and sales to the baker. Finally baker
produces bread and sales to the consumers. The
income and expenditure accounts of these three
industries are given below:
 
description Expenditure (Rs. Receipts (Rs. In
In billion) billion)
Wheat production:
Wages 160
Dividend 40
interest 0 200
Flour:
Wages 200
Wheat purchase 200
Dividend 80
interest 20
500

Bread industry:
Wages 300
Flour purchase 500
Dividend 100
interest 100
1000

a. Calculate GDP using final product method.

 b. Calculate GDP using value added method.
Sol.
a. According to final product method,
GDP = value of final product (bread)
= Rs. 1000 billion.
b. According to value added method
GDP = (Value of wheat - cost of intermediate goods)
+ (value of flour - cost of intermediate goods or wheat)
+ (value of bread - cost of intermediate goods or flour)

= (200 – 0) + (500 – 200) + (1000 – 500)

= Rs. 1000 billion.
 From the following hypothetical data find GDP at
market price and GDP at factor cost.
Items Rs.incrore
Net indirect taxes 38
Depreciation 34
Net income from abroad -3
Rent 10
Profit 25
Interest 20
Wages and salaries 170
Employer’s contribution to social security scheme 30
Mixed income (income from self employment) 5

Sol.
GDPMP = rent + profit + interest + wages and salaries +
mixed income + employer's contribution to social security
schemes + depreciation + net indirect taxes.
= 10 + 25 + 20 + 170 + 5 + 30 + 34 + 38
= Rs. 332 crores.

GDPFC = GDPMP - net indirect taxes.

= 332 – 38
= Rs. 294 crores.

Alternative method
GDPFC = rent + profit + interest + wages and salaries
+ mixed income + employer’s contribution to
social security + depreciation.
= 10 + 25 + 20 + 170 + 5 + 30 + 34
= Rs. 294 crores. 

 Calculate GDPMP, GDPFC, GNPMP and GNPFC from

the following hypothetical data.
Items Rs. In crore
Private final consumption expenditure 290
Government final consumption expenditure 50
Gross domestic fixed capital formation 105
Indirect taxes 50
Depreciation 45
Factor income from abroad -5
Net addition to stock 15
Net export -5
Sol.
GDPMP = private final consumption expenditure +
government final consumption expenditure + (gross
domestic capital formation + change in stock or net
addition to stock) + net export
= 290 + 50 + (105 + 15) + (- 5)
= Rs. 455 crores.

GDPFC = GDPMP - net indirect taxes

= 455 – 50
= Rs. 405 crores.

GNPMP = GDPMP + NFIA

= 455 – 5
= Rs. 450 crores.

GNPFC = GNPMP – net indirect taxes

= 450 – 50
= Rs. 400 crores.

· Calculate NNPMP from income and expenditure

method. Also calculate disposable income. (BBA
2018)
Description Rs.in billion
Export 75
Change in inventory 50
Corporate income taxes 78
Dividend 278
Employer’s contribution to social security 1oo
Net capital formation 405
Govt. con.exp. 600
Govt. investment exp. 125
Gross capital formation 450
Imports 700
Indirect taxes 315
Mixed income 134
Interest paid by firms 114
NFIA 990
Personal direct tax 125
Private con. Exp. 2550
Proprietor’s income 124
Rental income 182
Retained earnings 52
Social security contribution 225
Subsidy 27
Transfer payment 15
Wages and salaries 1705
Interest paid by consumers 28

Sol.
From income method
NDPFC = wages and salaries + employer’s contribution to
social security + rental income + retained earning +
interest paid by firms + corporate income taxes + dividend
+ proprietor’s income + mixed income.
= 1705 + 100 + 182 + 52 + 114 + 78 + 278 + 124 + 134
= Rs. 2767 billions
GDPMP = NDPFC + depreciation + net indirect taxes
= 2767 + (gross capital formation – net capital
formation) + (indirect taxes – subsidy)
= 2767 + (450 – 405) + (315 – 27)
= 2767 + 45 + 288
= Rs. 3100 billion.
GNPMP = GDPMP + NFIA
 = 3100 + 990
= Rs. 4090 billion.
NNPMP = GNPMP – depression
= 4090 – 45
= Rs. 4045 billion.
From expenditure method.
GDPMP = C + I + G + (X- M)
= 2550 + 450 + 125 + 600 + (75 – 700)
= Rs. 3100 billion.
GNPMP = GDPMP + NFIA
= 3100 + 990
= Rs. 4090 billion.
NNPMP = GNPMP – depression
= 4090 – 45
= Rs. 4045 billion

NI (NNPFC) = NNPMP - net indirect taxes

= 4045 – 288
= Rs. 3757 billion.
 PI = NI - Undistributed corporate profit - Corporate
income tax - Social security contribution + Transfer
payments.
= 3757 – 52 – 78 - 225 + 15
= 3417
Disposable Income (DI) = PI – personal direct taxes
= 3417 – 125
= Rs. 3292 billion.
 (BBA 2017) Consider the following figures for national
income accounts and compute NNP MP by both income
and expenditure method
Description Rs. In million
Wages and salary 22000
Proprietors income 3000
Government consumption 3000
Receives from the rest of the world 400
Private consumption expenditure 26480
Changes in inventory -200
Subsidy 800
Rental income 900
Net interest 1500
Dividend 1800
Mixed income 1000
Social security contributed by employers 1500
Corporate income 5000
Direct taxes 930
Current transfers from rest of the world 2500
Corporate income taxes 1200
Capital consumption allowances 1600
Social insurance payment 6800
Current transfers from government 4000
Indirect business taxes 1800
Imports 1300
Government investment 1800
Payments to rest of the world 800
Net fixed capital formation 5400
Exports 720
Current transfers from business firms 1500
Interest paid by consumer 2000
GDPMP = Wages and salaries + proprietors' income + rental
income + net interest + mixed income + social security
contributed by employees + corporate income + capital
consumption allowances + net indirect taxes
= 22000 + 3000 + 900 + 1500 + 1000 + 1500 + 5000 +
1600 +1000
= 37500 million.
GNPMP = GDPMP + NFIA
= 37500 + (2500 – 800)
= 39200 million.
NNPMP = GNPMP – depreciation
= 39200 – 1600
= 37600 million
NNPFC(NI) = NNPMP – net indirect taxes
= 37600 – 1000
= 36600
PI = NI - Undistributed corporate profit - Corporate income
tax - Social security contribution + Transfer payments
= 36600 – 1200 – 6800 + 4000
= 32600 million.
From exp.method
GDPMP = C + I + G +(X-M)
= 26480 + (1600 + 5400 – 200) + (3000 + 1800)
+ (720 – 1300)
= 37500 million
GNPMP = GDPMP + NFIA
= = 37500 + (2500 – 800)
= 39200 million.
NNPMP = GNPMP – depreciation
= 39200 – 1600
= 37600 million
NNPFC(NI) = NNPMP – net indirect taxes
= 37600 – 1000
= 36600
· (BBM 2016) calculate GDPMP by using both income and
expenditure methods.
Items RS. In billion.
Undistributed profits 84
Corporate income 224
Government purchases 288
Net capital formation 132
Consumption 980
Rents 56
Capital consumption allowances 108
Compensation of employees 884
Indirect taxes 72
Net interest 52
Proprietors income 124
Net exports 12

From income method:

GDPMP = Rent + corporate income + compensation of
employees + net interest + Proprietors income + capital
consumption allowances + net indirect taxes.

= 56 + 224 + 884 + 52 + 124 +108 + 72

= Rs. 1520 billion.
From expenditure method
GDPMP = C + I + G + (X – M)
= 980 + (132 + 108) + 288 + 12
= Rs. 1520 billion.
(BBM 2018) calculate GNPMP and NNPFC.
Items Rs. in million
Gross domestic capital formation 120
Govt. final con. Exp. 100
Private final con. Exp. 300

Net domestic fixed capital formation 100

Opening stock 20
Net indirect taxes 50
Imports 15
Export 5
Closing stock 30

GDPMP = C + I + G + (X – M)
= 300 + 120 + 100 + (5 – 15)
= 300 + 120 + 100 -10
= Rs. 510 million.
GNPMP = GDPMP + NFIA
= 510 + 0
 = Rs. 510 million.
NNPMP = GNPMP – depreciation
= 510 – 20
= Rs.490 million.
NNPFC = NNPMP – net indirect taxes.
= 490 – 50
= Rs.440 million.
 Difficulties in the Measurement of National Income
There are many difficulties to measure accurate national
income. Some of the important difficulties are as follows:
1. Definition of the term ‘Nation’
There is difficulty of defining nation in national income.
Every nation has its political boundaries. But in the
concept of national income it crosses the political
boundaries. Because in the measurement of national
income we include net income from abroad.
2. Double counting: It refers to a commodity being
included to the calculation of national income more
than once. To solve this problem, only the value of
final goods and services should be included in the
national income accounting. The value of intermediate
goods and services should be excluded from the
calculation. The best way of avoiding double counting
is value added method of calculating national income.
3. Calculation of depreciation: The depreciation is
deduced from gross national product to calculate net
national product. It is difficult to estimate accurate
depreciation. The depreciation differs from product to
product. Sometimes similar capital goods treated
differently by the different firms. The value of capital
asset changes every year. This creates problems.
 4. Change in price level: National income is measured
in monetary terms. This creates problem to calculate
national income because national income changes even
without change in output. To solve this problem of
changing prices a measure of fixed price index is used.
5. Illegal income: Income earned through illegal activities
such as bribery, gambling, smuggling etc. are not included
in national income. By excluding such activities the
national income is less than reality.
6. Transfer payment: there is difficult of including
transfer payment in national income. Transfer earning are
a part of individual income but they are government
expenditure. These are not included in national income.
Because they represent redistribution of income not actual
income, these are not result of current economic activities.
7. Non-market activities: The national income calculation
is based on the information of the market. But there are
many activities which do not appear in the market. These
activities are not included in the national income. For
example, household work done by housewife, services of
mother for children, farm output consumed at home etc.
are not included in national income.
Difficulties of Measuring National Income in the
Developing countries
In the developing countries like Nepal, there are some
special problems, which make calculation of national
income difficult. Some of these difficulties are as follows:
1. Large non-monetized sector: In the developing
countries like Nepal, there is non-monetized sector. A
large part of the production of the agriculture sector is not
brought to the market for sale. It is either directly
consumed by the producers or is exchanged for other
goods.
2. Illiteracy: In the many developing countries like Nepal,
more than 40% people are illiterate. So, it is difficult for
them to provide necessary information regarding their
income and output. They cannot keep record of production
and cost easily and correctly.
3. Lack of occupational specialization: There is lack of
occupational specialization in developing countries. The
people have been found engaged in a number of
economic activities simultaneously. In these countries,
people receive income partly from farming, partly from job
and partly from manual work in the industry. This makes
difficult to calculate national income.
4. Non-availability of reliable data: National income
measurement is required correct and reliable data.
But it is very difficult to get reliable data to calculate
accurate national income. There are no separate
institutions to collect the data.

5. Lack of efficient and trained manpower: In the

developing countries, there is lack of trained and efficient
statistical staffs which makes calculation of accurate
national income difficult.