Unit 5

Unit 5 Managerial Economics
Price discrimination and

measurement of economic
concentration
MOP National Income
Unit 5
2021
Unit 5
• Syllabus
• National Income and Product; Saving,
Consumption, Investment,
• The theory of Income determination.
By Dr. Gowri Ramachandran 2

Meaning of National Income
•Since these goods are measured in different physical

units it is not possible to add them together.
Thus we cannot state national income is so many

millions of meters of cloth.
Therefore, there is no way except to reduce them to a

common measure. This common measure is money.

For example
If the value of a meter of cloth is Rs. 20 and the

total cloth produced is 100 meters, then the
money value of cloth is Rs. 2000.
In this way we can find out the value of other

goods and services and the total value of all the
goods and services produced during one year.

Basic Concepts in National income
• Gross domestic product • Gross domestic product at
constant price and at current price
• Gross domestic product at factor cost and Gross

domestic product at market price
•Net domestic product •Gross national product •Net

national Product
•Net national product at factor cost or national income

Gross Domestic Product
Gross domestic product is the money

value of all final goods and services
produced in the domestic territory of a

country
during an accounting year.

Domestic territory means
a. Territory lying within the political frontiers, including
territorial waters of the country.
b. Ships and aircrafts operated by the residents of the country

between two or more countries.
c. Fishing vessels, oil and natural gas rigs, and floating platform operated by
the residents of the country in the international waters or engaged in
extraction in areas in which the country has exclusive rights of exploitation.
Embassies, consulates and military establishment of the

d.
country located abroad.

Gross Domestic Product at Constant
price and Current price
• GDP can be estimated at current prices and at
constant prices. If the domestic product is
estimated on the basis of the prevailing prices it is
called gross domestic product at current prices.
• If GDP is measured on the basis of some fixed

price, that is price prevailing at a point of time or
in some base year it is known as GDP at constant
price or real gross domestic product.

GDP at Factor cost and GDP at Market
price
GDP at factor cost is estimated as the sum of net

value added by the different producing units.
GDP@ F.C = GDP@M.P – IT + S.
Rs800= 1000-300+100

Net Domestic Product
• A part GDP is, set aside in the form of depreciation

allowance.
When depreciation allowance is subtracted from gross

domestic product we get net domestic product. •
NDP = GDP – Depreciation.

Gross National Product
• Gross national product is

defined as the sum of the gross
• In brief GNP = GDP + NFIA.
domestic product and net
factor incomes from abroad.

Net National Product
It can be derived by subtracting depreciation

allowance from GNP. It can also be found out by
adding the net factor income from abroad to the
net domestic product. • NNP = GNP - Depreciation
. NNP = NDP + NFIA

NNP at factor cost or National Income
•NNP at factor cost or national income is

defined as the sum of domestic factor incomes
and net factor income form abroad.
If NNP figure is available at market price we will

subtract indirect taxes and add subsidies to the
figure to get NNP at factor cost or national
income of the economy. NNP= NDP+NFIA

Personal Income and Disposable
income
. Personal income may be defined as the current
income of persons or households from all
services. Personal income is not a measure of
production.
Disposable Income •. Individuals have to pay

personal direct taxes to the government. They are
free to spend only after the payment of taxes. •
DPI = Personal income – Personal Direct taxes.

Two Major Changes in GDP calculation
After 2014
Shifted From Factor cost

method to Market cost method
Base year changed to 2012.

Methods of Measuring national
income
The national
income of a
product
country can
method or As a flow of As a flow of
be measured
value Added income, and expenditure
in three
Method
alternative
ways

Product Method
. Product Method •We calculate the

money value of all final goods and services
produced in an economy during a year.
The money value of these goods and

services is calculated at market price. The
sum-total is called the GDP at market price

Income Method
. The sum of FACTOR incomes provides us the

measure of gross national income at factor cost.
• GNP = wages and salaries + rent +interest +

Dividends + undistributed corporate profits +
mixed incomes + direct taxes + indirect taxes +
depreciation + net income from abroad.

Expenditure method
If we add
Spent by
the value of
Govt
expenditure
Spent by Spent by
Household Business

Problems in estimating national
income
. • Another difficulty in estimating the national income in UDC is the prevalence of
non- monetized sector.
• Income earned through illegal activities is not included in national income.
• Services rendered free of charge are not included in GNP. By leaving out these
service, national income will work out to be less
•Transfer payments are not included in national income as they do not contribute to
national product.. .
• In the calculation of national income leisure foregone in the process of production

is not included
due to illiteracy, most producer do not keep regular accounts. •

Trends in India’s national income
growth and structure • Trend in NNP:
The real national income of India has increased at an
annual average rate of 4.4% during the 55 years of
economic planning.
If we consider the last 14 years we find that the rate of

increase in the national income has been around 6% per
annum.
Although this is an encouraging sign.

GDP to Debt of different countries
Country 2008 2018
USA 74% 108%
And people think India is the most vulnerable country
France 69% 96%
UK 50% 86%
China 27% 51%
Japan 183% 236%
India 75% 69%
Gross domestic product (GDP) growth
rate in India
• GDP growth rate compared to
previous year
• 2016 7.11%
• 2017 6.74%
• 2018* 7.36%
• 2019* 7.79%

Unit 5

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Unit 5 Managerial Economics

Price discrimination and

By Dr. Gowri Ramachandran 2

•Since these goods are measured in different physical

Thus we cannot state national income is so many

Therefore, there is no way except to reduce them to a

By Dr. Gowri Ramachandran 5

If the value of a meter of cloth is Rs. 20 and the

In this way we can find out the value of other

By Dr. Gowri Ramachandran 6

• Gross domestic product at factor cost and Gross

•Net domestic product •Gross national product •Net

•Net national product at factor cost or national income

By Dr. Gowri Ramachandran 22

Gross domestic product is the money

produced in the domestic territory of a

during an accounting year.

By Dr. Gowri Ramachandran 23

b. Ships and aircrafts operated by the residents of the country

Embassies, consulates and military establishment of the

country located abroad.

By Dr. Gowri Ramachandran 24

• If GDP is measured on the basis of some fixed

By Dr. Gowri Ramachandran 25

GDP at factor cost is estimated as the sum of net

GDP@ F.C = GDP@M.P – IT + S.

By Dr. Gowri Ramachandran 26

• A part GDP is, set aside in the form of depreciation

When depreciation allowance is subtracted from gross

NDP = GDP – Depreciation.

By Dr. Gowri Ramachandran 27

• Gross national product is

By Dr. Gowri Ramachandran 28

It can be derived by subtracting depreciation

. NNP = NDP + NFIA

By Dr. Gowri Ramachandran 29

•NNP at factor cost or national income is

If NNP figure is available at market price we will

By Dr. Gowri Ramachandran 30

Disposable Income •. Individuals have to pay

By Dr. Gowri Ramachandran 31

Shifted From Factor cost

Base year changed to 2012.

By Dr. Gowri Ramachandran 36

By Dr. Gowri Ramachandran 43

. Product Method •We calculate the

The money value of these goods and

By Dr. Gowri Ramachandran 45

. The sum of FACTOR incomes provides us the

• GNP = wages and salaries + rent +interest +

By Dr. Gowri Ramachandran 46

By Dr. Gowri Ramachandran 47

• Income earned through illegal activities is not included in national income.

• In the calculation of national income leisure foregone in the process of production

due to illiteracy, most producer do not keep regular accounts. •

By Dr. Gowri Ramachandran 48

If we consider the last 14 years we find that the rate of

Although this is an encouraging sign.

By Dr. Gowri Ramachandran 49

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