4 MEASUREMENT OF NATIONAL INCOME INTRODUCTION VALUE ADDED METHOD: INCOME METHOD EXPENDITURE METHOD. RECONCILIATION OF THREE METHODS TREATMENT OF DIFFERENT ITEMS IN NATIONAL INCOME TREATMENT OF DIFFERENT ITEMS IN DOMESTIC INCOME NATIONAL INCOME AT CURRENT PRICE AND CONSTANT PRICE NOMINAL GDP AND REAL GDP SOLVED PRACTICALS GE ORUCTION ee eee National income is considered as the most comprehensive measure of the performance of an economy. However, its measurement is an extremely complicated task. * When the process of production takes place, then the factor incomes are paid to factors of production for their factor services. It means, there is an ‘Income Flow’ corresponding to the ‘Output Flow’. * Factors of production spend their income on purchase of goods and services by making consumption ‘Expenditure’ Thus, production gives rise to income, income results in expenditure, which in turn, generates income again. Similarly, National Income of a country can be measured by 3 different methods: 1. Value Added Method 2. Income Method 3. Expenditure Method. We have three different methods to measure the national incomelbeealise: production, income and expenditure are three different phases of circular flow of income. Use ofa particular method depends on the availability of reliable data. ‘It must be noted that all the three methods give the same value of Used to measure the same physical output at three different, ‘national income is entrusted with the Central Statistical Organisation “oe 442 VALUE ADDED.METHOD This method is used to measure national income in different + Every individual enterprise adds certain value to the products, which it purchases some other firm as intermediate goods. » When value added by each and every individual firm is summed up, we get the value national income. Concept of Value Added Itis the contribution of an enterprise to the current flow goods and services. It is calculated as the difference between value of output and value of intermedi consumption. Value Added = Value of Output - Intermediate Consumption Example of Concept of Value Added 7 Suppose a baker needs only flour to produce bread. He purchases flour as inputs worth % 50 from the miller and then by virtue of its productive activities, converts the flour into bread a sells the bread for % 700. In the given example: * Flour is an input (Intermediate goods) and its value of % 500 is termed as value 9 ‘Intermediate Consumption’. I * Bread is the Output and its value of & 700 is termed as ‘Value of Output’. | * Difference between the value of output and intermediate consumption is termed as “Va Added’. It means, that the baker has added a value of 200'to the total flow of final g and services in the economy. * Value added by each producing enterprise is also known as the Gross Value Added Market price (GVAysp). It means, value added by baker (% 200) can be termed either as . total of GVAy,p of all producing enterprises within the domestic terri country during one year is equal to GDP,» (Gross Domestic Product at Market WEVA p= GDP yp Letus now understand ‘Intermediate Consumption’ and ‘Value of Output’ in detail. Intermediate Consumption and Final Consumption | Intermediate Consumption refers to the expenditure incurred by a prod i purchasing those goods and services from other production units, which are n _ or for using up completely (i.e. further production) during the same year. In the g ite consumption Final Consumption refers to the g In the given example, expenditure on!‘Measurement Of ‘income Imports are not Separately Included Ifoalue of intermediate consumption is given, then imports are not included I alia as imports are already included in the value of intermediate consumption WRG UGRASG OE RAW Material is BERD _itgenerally means thatitncludes parchases within the domestic teritory and purchases from abroad (Le imports): How ever if domestepurchases are specifically mentioned then imports eS Let us understand this through following cases: Calculate Intermediate Consumption in the following cases: Case 1: (i) Intermediate Consumption = % 1,200; (ii) Imports = € 300 ‘Ans, Intermediate Consumption = % 1,200 ‘As imports are already included in the value of intermediate consumption. Case 2: (i) Purchase of raw material from domestic firm = € 500; Gi) Imports= 7100 ‘Ans. Intermediate Consumption = %500 + % 100 = 7600 Imports are included as itis specifically mentioned that purchase of raw materials from domestic firm. Case 3: (i) Purchase of raw material = € 1,000; (ii) Imports= % 200 ‘Ans. Intermediate Consumption = & 1,000 Imports are not included as total purchase of raw material is given. Case 4: (i) Purchase of raw material = € 700; (ii) Imports= € 1,500 Ans. Intermediate Consumption = % 700 + € 1,500 = 72,200 In this particular case, we cannot assume that imports of € 1,500 to be included in purchases of %700. So, we will consider both separately. Value of Output Value of output refers to market value of all goods and services produced during a period of one year. How to Measure the Value of Output? (i) When the entire output is sold in an accounting year, then: Value of Output = Sales + Production for Self-Consumption** “All the goods produced are not necessarily sold in the market. A part of them is kept by the producer for his own use and consumption. Imputed value of such goods is included in Value of Output. f baer EE |Value of Output = Sales + Change in Stock + Production for Where, Change in stock = Closing stock - Opening One More way to Calculate Value of Output “Itean also be calculated as: Value of Output = (Quantity x Price) + Change in Stock \ For example, ifa firm manufactures 1,000 pairs of shoes annually and sells them @ & 500, "(assuming change in stock is nil), then: Value of Output = 1,000 x 500 =" 5,00,000 Exports are not Separately Included ’ Like imports, exports are also not separately included in value of output if ‘Sales’ are given (and. sales are not specifically mentioned). In case of an open economy, sales include both domestic: and exports. Let us understand this: Calculate Value of Output: Case 1: (i) Sales = % 2,000; (ii) Exports = % 400 i Ans. Value of Output = 2,000 As exports are already included in the value of sales. Case 2: (i) Domestic Sales = % 700; (ii) Exports= % 200 Ans. Value of Output = ¥700 + %200 = % 900 Exports are included as domestic sales are specifically mentioned. Before we proceed with the steps needed to estimate national income, let us first group various production units into distinct industrial groups or sectors. It is done because itis to estimate national income of a group of similar production units as compared to esti for each production unit separately. mn Were ar All the production units of the economic territory are grouped into three broad groups: 1. Primary Sector: It includes production units exploiting natural resources like land, water, subsoil assets, etc. For example, farming, fishing, mining, animal husbandry, forestry, itis primary as itis the source of basic raw materials for the secondary sector. 2. Secondary Sector: It includes production units which are engaged in transforming 900d into another good. Such an activity is called manufacturing activity. These unit Convert raw materials into finished goods. For example, firms engaged in conver ‘sugarcane into sugar, construction companies, power generation, etc. It is ‘secondary because it depends on primary sector for raw materials, 3. Tertiary Secior:Itincludes production units engaged in producing services. For: transport, education, finance, government administration, etc. This sector finds third because its growth is primarily dependent on primary and secondary sectors. Steps of Value Added Method The main steps for estimating national income by Value Added Method are:i ol fy and classify the production units VALUE ADDED on Mey ety stale pc 1 rises of anv economy into primary, secondary and =. Estimate Gross Domestic Product at Market step? ‘Gross Domestic Product — step, Gross Value Added at Market Price ar Pree Cor In of each sector is calculated and sum total of GV) |) Depreciation tes give GDPyp le. EGVAyn= GDP Mt (Ne rect Taxes * Calculate Domestic Income (NDP,,.) Domestic Income (NOP =<) SF ociNs the amount of depreciation and net indirect « ByR from GDPyp- We Bet domestic income, ie. NDP, = a Depreciation ~ Net Indirect Taxes. i [Rational ncome (WNP, sept Estimate net factor income from abroad (NFIA) to arrive at National Income pee fina step, NFIA is added to domestic income to arrive at National Income. ‘National Income (NNP 5) = NDP + NFIA s of Value Added Method Fhe various precautions to be taken in Value Added Method are: Intermediate Goods are not to be included in the national income: since such goods are already included in the value of final goods. If they are included again, it will lead to double counting. 2. Sale and Purchase of second-hand goods is not included:as they were included in the year inwhich they were produced and do not add to current flow of goods and services. However, any commission or brokerage on sale or purchase of such goods will be included int the national income as it is a productive service. 3. Production of Services for self-consumption (Domestic Services) are notincluded: Domestic services like services of a housewife, kitchen gardening, etc. are not included in the rational income since it is difficult to measure their market value. These services are produced ‘and consumed at home and never enter the market place and are termed as non-market transactions. tmust be noted that paid services, lke services of maids, drivers, private tutors, etc. should be ‘included in the national income. 4, Production of Goods for self-consumption will be included: in the national income as they contribute to the current output. Their value is to be estimated or imputed as they are not sold in the market. 5, Imputed value of owner-occupied houses should be included: People, who live in their own houses, do not pay any rent. But, they enjoy housing services similar to those people who stay in rented houses. Therefore, value of such housing services is estimated according to market rent of similar accommodation. Such an estimated rent is known as imputed rent. 6 Change in *Stock of Goods (Inventory) will be included: Net increase in the stock of inventories will be included in the national income as it is @ part of capital formation.46 Introductory Macroeco “Stock or Inventory is unsold goods, unused raw material or semi-finished goods which a firm, from one year to the next. 7. Sale and purchase of shares, bonds and debentures (new and old) will not be inely such transactions do not contribute to current flow of goods and services. These financial are mere paper claims and involves a change of title only. However, any comm: brokerage on such financial assets is included as it is a productive service. Goods Produced for self-consumption are included in National Income: All the ‘g00ds produced within the country are not necessarily sold in the market. A part of kept by the producer for his own use and consumption. For example, farmers keep a Part of their produce for self-consumption. Imputed value of such goods is included in income. q * Services Produced for self-consumption are not included in National Income: Services like housewife working in her own house, doctor treating his own child or teacher teaching his own child will not be included in national income as its difficult to ascertain their value and such services are not rendered for the purpose of earning income. Problem of Double Counting In measuring the National Income, the value of only final goods and services is ! included. However, the problem of double counting arises when value of intermediate go i is also included along with value of final goods. Double counting refers to. counting of an ou more than once while passing through various stages of production commodity passes through various stages of production before reaching the final stage. value of the commodity is taken at each stage, itis likely to include the cost of inputs more | once. This leads to double counting. Let us understand this through the famous example of Farmer, Miller and Baker. | * Turner: Suppose, farmer produces 50 kg of wheat and sells it for € 500 to miller (flour mil For farmer, wheat of & 500 is a final product. If intermediate cost for farmer to be 2ery, his value added will be 500). I * Miller: For miller, wheat is an intermediati | it for € 700 to a baker. Now, | miller = 700 - 500 = % 200) | * Baker: For baker, flour is an intermediate good. Baker m sells the entire bread to final consumers for & 1,000. Breé the baker. (Value added by baker = 1,000 — 700 = % 300) Let us present the data in a chart ‘Sells Wheat | Sells Flour Sells Bread [Fawn 0 conse] | for ® 500 for ® 700 for® 1,000 re He —— fe good. Miller converts wheat into flour and) flour of € 700 is a final product for the Miller. (Value add anufactures bread from flour. ‘ad of & 1,000 is a final product! Output Wheat Flour Bread ] Value of Output % 500 =700 1,000 Value ef Input Zero Wheat =% 500 Flour=% 700 Value Added 500 7200 300a careful examination reveals that each transaction contains the value of intermediate + The value of wheat is included in the value of four. + The value of flour is included in the value of bread, s a result, the values of wheat and flour are counted more than once. This causes the roblem of double counting. Itleads toover estimation of value of goods and services produced. In order to know the correct value of national income, we must avoid this problem of double ting. jow to Avoid Double Counting? re are two alternative ways of avoiding double counting: (i) Final Output Method: According to this method, value of only final goods should be added to determine the national income. In the given example, value of bread of € 1,000 sold to final consumers should be taken in the national income. (a) Value Added Method: According to this method, sum total of the value added by each producing unit should be taken in the national income. In the given example, value added by farmer (% 500), miller € 200) and baker (@ 300), i.e. total of € 1,000 should be included in the National Income. * Production means addition of value to the inputs through combined efforts of various factors of production (land, labour, capital and enterprise). It means, value added (or NVAco) is nothing but the contribution made by different factors in the production process. * So, every individual factor has a right to get back a share for the value added to the inputs. * The producer distributes this NVA,,,. among the owners of factors of production as rent, wages, interest and profit. Se, itis rightly said that Sum of Value Added = Sum of Factor Incomes. (Refer solved example 24 and unsolved practical 21 and 22) 4.3 INCOME METHOD Income Method measures national income from the perspective of factor incomes. Under this method, incomes received by all the residents of a country for their productive services during a year are added up to obtain the national income. According to this method, all the incomes that accrue to the factors of production by way of wages, profits, rent, interest, etc. are summed up to obtain the national income. Income method/s also known as ‘Distnbutive Share Method! or Factor Payment Method’. Components of Factor Income The sum total of all the factor incomes earned within the domestic territory of a country ue kengwn as ‘Domestic Income (NDPj<)'. System of National Accounts (SNA) 1998 {joint publication of United Nations and World Bank) has elaborated the following components of Income Method:consists of 3 elements: 6 rea (i), Wages and salaries in cash: Itincludes all monetary benefits, like wages, ‘dearness allowances, commission, etc. (ii) Wages and salaries in kind: It includes all non-monetary benefits, like rent free } free car, free medical and educational facilities, etc. An imputed value of these should be included in national income. P (iii) Employers’ contribution to social security schemes: It includes contributions 1 employer for the social security of employees.For example, contribution to pro fund, gratuity, labour welfare funds, etc. The aim of such contributions is to ensure and security of life of the employees. 2, Rent and Royalty: Rent is that part of national income which arises from own: land and building. Rental income includes both actual rent (rent of let out land) as imputed rent (rent of self-occupied properties). Imputed rent of owner occupied ho calculated on the basis of market rental value of the house. Royalty refers to income received for granting leasing rights of sub-soil assets.For exat ‘owners of mineral deposits like coal, iron ore, natural gas, etc. can earn income by git rights of mining to the contractors. 3, Interest: Interest refers to amount received for lending funds to a production unit. Iti both actual interest as well as imputed interest of funds provided by the entrepret “Interest income’ includes interest on loans taken for productive services only. For exa interest paid by a firm (private or government) to households or interest paid by ba the individuals will be included in the interest income as it contributes to the prodi of goods and services. However, interest paid by households is not included as the is taken to meet consumption expenditure. Interest income does not include: | | (0 Interest paid by government on public debt and interest paid by consumers as! interest is paid on loans taken for consumption purposes.(i/) Interest paid by one firm to another firm, 4. profit; Profit is the ction row nts habe nated non esate eRe income, i the other factors of production. ease - The profit earned by an enterprise is used for 3 purposes: (i) Corporate Tax: Its the dret tx paid by an enterprise tothe overnment on the total profit earned by it. It is also known as Profit tax or Business ik . (ii) Diridend Itrefers. 2 that part of profit, which is paid to the shareholders in the ratio of their shareholding. It is also known as distributed profits (iii) Retained Earnings: Tt refers to that part of profit, which * kept as reserve to meet nex] i i i : 2 ‘pected. oe ae or for business expansion. It is also known as Undistributed rofits or Savings of Private Sector or Reserves and Surplus. In short, Profit = Corporate Tax + Dividend + Retained Earnings ‘Operating surplus is another term used in factor payments. It refers om EO ale etcapet to sum total of income 5 rue eed ysical/ a ‘ property (rent + royalty + interest) Operating Surplus Income from Property (Rent + Royalty + Interest) ‘So, Operating Surplus = Rent + Royalty + Interest + Prof private and government enterprises. However, it does not the motive of social w-irare. lis re ril Income from Entrepreneurship (Profit) ‘Operating surplus arises in both arise in the general government sector as it works with asic aim is to operate for the benefit of public. So, Incomes like rent, interest and prt a in general government sector. income generated by own-account workers (like farmers, barbers, small shopkeepers, etc.). It is the pe of factor income. Mixed 5, Mixed Income: Itis the etc.) and unincorporated enterprises (like retail traders, term used for any income that has elements of more than one ty income arises from productive services of self-employed persons, + and these elements cannot be separated from each other. whose income includes wages, rent, interest and profi ., income of a doctor running a clinic at his residence.wpeTea * Any Increase in stock of consumer goods with households is excluded from investmentas itis assumed that such goods are consumed, the moment they are * Purchase of shares and debentures (either old or new) is not included in GDOF é a transfer of purchasing power and there is no addition to flow of goods and * Purchase of second hand goods (like old house or old machinery) is also not GDCF as such goods have been already included in the year of 4, Net Exports (X-M):Jt refers to the difference between exports and imports of a during a period of one year. * Exports (X) refer to expenditure by foreigners on purchase of domestic products. The: goods have been produced within the country’s domestic territory. So, they included in output of an economy. * Imports (M) is the expenditure by residents on foreign products. Imports are dedi obtain domestic product as they are not produced within the domestic territory. * Instead of treating exports and imports separately, the difference between the taken and is termed as Net Exports. Calculate Net Exports in the following cases: Case 1: (i) Exports = % 500; (ii) Imports = € 300 ANS. Net Exports = € 500 -% 300 = & 200 Case 2: i) Exports = % 600; (ii) Imports = & 700 ANS. Net Exports = % 600 -% 700 = -% 100 Case 3:(j) Exports = 0; (ii) Imports = € 200 APS. Net Exports = 0 -% 200 =-% 200 Case 4:() Net Exports = % 500; (ii) Imports = % 200 ANS. Net Exports = 500 Case 5: (i) Net Imports = 200 ANS: Net Exports = -% 200 {As Net Imports is positive, it means that Exports are less than: Case 6: (i) Net Imports = -% 350 APS. Net Exports = 350 4 ‘ ¢ {As Net Exports are given, we will ignore: {As Net Imports is negative, it means that ‘Exports are more than: Comparison Between Net Exports and Net Factor Income from Abroad Basis. _Net Exports __Net Meaning It refers to difference between | It refers to difference between exports and imports of goods | in |Concept__| Factor/Non-Factor It includes non-factor services Services like banking, shipping and _. Insurance, Domestic Conceptsteps involved in calculating National Income by Expenditure Method are: 1) Identify the Economic Units incurring Final Expenditure the economic units, which incur final expenditure within the domestic territory, are classified 4 groupe : (i) Household sector; (ii) Government sector; (ii) Producing sector; (iv) Rest the worl sector. " >: Classification of Final Expenditure * Private Final Consumption Expenditure (PFCE) ‘+ Government Final Consumption Expenditure (GFCE) ‘* Gross Domestic Capital Formation (GDCF) _* Net Exports (X-M). sum total of four components of final expenditure es Gross Domestic Product at Market Price DPyp), ie. GDPyyp = PECE + GFCE + GDCF XM) 5: Calculate Domestic Income (NDP) subtracting the amount of depreciation and net irect taxes from GDP jp, we get domestic income, . NDP pc = GDP yp ~ Depreciation - Net Indirect . fovea: ar at Market Price (GDP ye) "Step 4: Estimate net factor income from abroad _ (NFIA) to arrive at National Income In the final step, NFIA is added to domestic income oarrive at National Income. National Income (NNP;c) = NDP ye +NFIA (4) NFIA Precautions of Expenditure Method The various precautions to be taken while using the Expenditure Method are: 1. Expenditure on Intermediate Goods will not be included in the national income as it is already included in the value of final expenditure. If itis included again, it will lead to double counting of expenditures, 2. Transfer Payments are not included as such payments are not connected with any productive activity and there is no value addition, ’ 8. Purchase of second-hand goods will not be included as seh included when they were originally purchased, Such goods do not goods and services. However, any commission or brokerage on payment made for productive service,4.20 Introductory | 18. 16. ‘No, it will not be included in the national income as it does not add to the flow of goods and services in ‘economy. i . Increase in the prices of stocks lying with a trader. ‘No, it will not be included in the national income as it does not amount to any flow of goods. . National debt interest. {CBSE, Delhi 2012 (iy oR Interest on public debt. {CBSE, All India 2009 (II), Delhi Compt. 2016 (my ‘No, it is not included in the national income as it is the interest paid on loans taken by government om ‘ts consumption purposes. Yes, it is included in the national income by Income Method since it is a part of ‘wages in kind” employees. . Rent-free house given to an employee by an employer. {CBSE, aa | . Profits earned by the branches of a foreign bank in India. (CBSE, All India 2017) "No, itis not included in the national income as it isa part of the factor income paid abroad. Its subtraoig from domestic income to get national income. . Purchases by foreign tourists. {CBSE, Delhi 2008, Delhi Compt. 2016 OR Food purchased by a foreign tourist at a hotel in New Delhi. Yes, purchases by foreign tourists are ‘exports’ and, therefore, they are included in the national incom, through the Expenditure Method, : |. Rent received by Indian residents on their buildings rented out to foreigners in India, Yes, it will be included in the national income as it sa part of the factor income from abroad. |. Payment of fees to a lawyer engaged by a firm. {CBSE, Delhi 2009, OR Expenditure by a firm on payment of fees to a chartered accountant. {CBSE, Dethi. Itis an intermediate expenditure for the firm because it involves purchase of services by one productionunt (firm) from another production unit (lawyer). So, it is deducted from the value of output of the firm to amie at the value added. So, itis not included in national income. ). Free medical facilities by the employer. {CBSE, Foreign 2012 (i) OR Free boarding and lodging provided to a domestic servant. Yes, it willbe included in national income as these free services are part of compensation to employees - Gifts received from abroad. OR Gift received from employer. (CBSE, All india Compt ‘No, it will not be included in national income as gifts received are transfer incomes. . Profits of Reliance Industries from its chemicals business in Australia. Yes, it will be included in the national income as itis a part of the factor income from abroad. . Salaries received by Indian residents working in Russian Embassy in India. {CBSE, Yes, it will be included in the national income as it is a part of factor income from abroad. . Subsidized lunch served to workers in a factory. oR Firm incurred expenditure on medical treatment of employee's family. Yes, it is a part of the compensation of employees and, therefore, it will be included in the nati Old age pension ‘No, it will not be included in the national income as it is a transfer payment made. by the gor transfer income for the receiver. Durable goods purchased by a household.47. 49. 50. 51. 52. 53. 55. 5 58, ‘io tis not included inthe national income as its apart of the factor Income from domestic income to get national income. “ : Capital gains to Indian residents from sale of shares of a foreign No, capita gains will not be included in the national income as they do not add to the Ter ofgoods ‘and services in the economy. Harish works in USA and sends money to his family in India. ‘No, it will nt be included in the national income as its a transfer payment. Destruction of building due to an earthquake. No, “rot not be included inthe national income as it will not affect national product direct. HP uses its own new Laptops in its office for self-consumption. Yes, 1s ladedin the national ncome as it adds to curent low of goods and services. Therefor, mpuied value of laptops should be included. Purchase of a truck to carry goods by a production unit. {CBSE, Foreign 2008) asl be included in the national income as itis apart ofthe gross domestic capital formation. Direct purchase made alsroad by government. > ve Yes, it willbe included in the national income as itis a part ofthe .government final consumption expenditure. Earning from a part time job in McDonalds by a student. Yes. it is included in the national income as itis a income received for productive services. Receipt from sale of property, inherited from a relative. No, it willnot be included in the national income as receipt from sale of such, ofan already existing object. Entertainment allowance to an employee for entertaining business guests. fio itwllnotbe includedin the national incom as itis intermediate consumption expenditure ofthe business. Expenditure on the purchase of shares of a new company. oR property is by virtue of transfer Sale of bonds by a company. OR Purchase of shares by a domestic firm. {CBSE, Delhi Comptt. 2016 (I)} No, it will not be included in the national income as it is a financial claim and-does not contribute to any productive activity. Goods lying within the production boundary. ‘No, such goods will not be included in national income as goods lying within the production boundary are intermediate goods. Money received by a family in India from relatives working abroad. (CBSE, Delhi 2010} No, it will not be included in the national income as it is a transfer receipt. Dividend received by a foreigner from investment in shares of an Indian company. {CBSE, All India 2010} No, iti not included in the national income as its a part of factor income paid abroad. It's subtracted from domestic income to get national income. Sale of an old house. {CBSE, Delhi Compt. 2016 (!)} No, twill not be included as it does not result n any production. Its value already included when itwas newly constructed, Expenditure on the purchase of an old house. OR Purchase of house by the tenant. OR Purchase of rented factory building by the factory owner. No, it will not be included in the national income because payment for purchase of second-hand goods is ‘due to transfer of an already existing object.“s 4.28 Introductory Macroecononiag 'No, twill not be included in the domestic factor income as the value of imports are deducted while estimatig, of domestic factor income of a country. PE eee er edad Itis possible that an income, which is a part of domestic income of India, is not included in the national income. Similarly, an income, which is a part of national income, may not be included in the domestic income. It happens because national income includes the income of normal residents only (irrespective of their place of earning), whereas, domestic income includes the income of both residents and non-residents (but, within the domestic territory of the country). Let us clear this point with the help of some examples: Included in National Income, but not in Domestic Income 1. Salary received by an Indian employee working in the Japanese Embassy in India. It will be included in the national income as he is a resident of India. However, such an income will not be included in India’s domestic income as the Japanese Embassy is not a part of the domestic territory of India. 2. Profits ofa branch of State Bank of India (SBI) in England, {twill be included in the national income as itis a part of the factor income from abroad. However, it will not be included in India's domestic income as the SBI branch in England is not a part of the domestic territory of India Included in Domestic Income, but not in National Income 1. Rent received by a company in India, which is owned by a non-resident. {t will be included in the domestic income as the rent is received within the domestic territory of India. However, it will not be included in the national income as itis a part of the factor income paid abroad, 2. Profits eained by a branch of a foreign bank in India. 'twill be included in the domestic income as these profits are earned within the domestic | territory of India. However, it will not be included in the national income as itis a part. the factor income paid abroad (Foreign Bank is not a resident of India). 4.8 NATIONAL INCOME AT CURRENT PRICE AND CONSTANT PRICE ' It is the money value of final goods and services produced by normal resi 4 year, measured at the prices ofthe current yea) or example; measure Income of 2019-20 at the prices of 2019-20. Itis also known as ‘Nominal National Income’.) © It does not show the true hte eee Coens cr national income may be due to rise in rice le National Income at Constant Price It is the money value of final goods and services produced by normal residenRase ee 201 pe essurement of National income 429 9 Sie Year isa normal year which is free from price fluctuations. se year in India “year, measured at base year pri presently, 2011-12 is taken as the if we measure India’s National Income of 2019-20 at the prices of 2011-12, then it is termed as National Income at constant price’. ,. It is also known as ‘Real National Income) = It shows the true picture of economic growth of a country as any increase in real nati is due to increase in output only. bee national income why do we measure National Income at the prices of the Base Year? ‘The need for estimating national income at constant price arises because national income at current price may give a misleading picture of economic performance if the prices are continuously rising or falling. with high rate of inflation in India, nominal national income may create a false sense of economic growth. Numerical Illustration Lot us understand this concept with the help of following hypothetical schedulk Table 4.1: National Income at Ct Wheat (Kg) Cloth (Metres) Milk (Litres) As seen in Table 4.1, National i year prices is & 27,000 for the sa not give a true picture of econon So, real growth of an economy can ben Conversion of National Incomejaagy This can be done by eliminating the: a suitable ‘Price Index’. Price Index isi two different time periods. It indicates’ year to another is real or not, Itis done with the help of the followi National Income at Constant Price =i > | Introducte re take into account changes in inequi the distribution of income. So, welfare Of thy people may not rise as much as the rise in GDP. Change in prices: If increase in GDP is due to rise in Price® and not di physical output, then it will not be a reliable index of economic welfare. Non-monetary exchanges: Many activities in an economy are not evaluated in ie, non-market transactions like services of housewife, kitchen gardening, terms. For example, leisure time activities, etc. are not included. in GDP, due tonon availability of data. However, Jue to increase jy | individual, for which they are not pai others are termed as positive externalities and termed as negative externalities. « Example and Impact of Negative Externality: 0 industrial plants. Such pollution reduces the welfare through health. + Example and Impact of Positive Externality: Use of pu li for which no payments are made by the public. Itiner effect on health. Such external effects do not f account externalities, positive orn . Rate of population growth: GDR country. If rate of population growth a ‘due to above mentioned limitations, some economists and policy p measures national income or 0 and equitable distribution of benefits sustainability. Before we proceed to Solved Practicals, let Depreciation’ under different situations, How to Measure Depreciation? As discussed in the 24 Chapter, the concept of D between Gross value and the Net value. ‘Gross’ excludes it. Gross Value = Net Value + Depreciation.Students must be very careful while dealing with calculation of depreciation in the following cases: Calculate Depreciation ohne Case 1: (i) GDP pe = ) ‘and then we will sub Step 1. GNP, = Case 3: (i at Depreciation. It means, Step 1. GDCF = GFCF + Char Step 2. Depreciation = GDCF -| (j) Capital value of the as (iii) Scrap Value = Nil. Inthe given case, value of Durable Estimated Life Span and Scrap Value.te: Total sales of firm A are given. So, sales | of output of firm A. However, it wll be ta Value added by firm B = Sales by firm B to general gov stock of firm B - Opening stock = 100 + 350 + (40 - 30) - 200 = % 260 crores Ans. % 260 crores Gross Domestic Product at market price = Value added by firm A + Valuead = 200 + 260 = % 460 crores ‘Ans, % 460 crores Net Domestic Product at factor cost = Gross Domestic product at market price ~ Ce(i) Value added by firm B = Value added = €140 crores; (ii) Value of Inputs of firm C = € 120 crore Firm D sold their entire output to households. alue of output. Calculate value of output of firm D. ion: : Sales to B: 600 + Sales to C: 300 B | Sales toC: 800 | Purchase from A: + Sales to D: 800 C__ Sales to households: 1,600 | Purchase from A: 300 + Purchase from B: 800 D_|Sales tohouseholds: 1,800 [Purchase from B: 800 4,000 | Value of output = Value added + Intermediate consumption = 1,000 + 600 = 1,600 Value of output = B’s Value of output = 1,600 5 Value Added = 500 = %4 of value added of D », D’s Value Added = 500 x 2 = 1,000 ‘s Value of output = Value added + Intermediate consumption = 1,000 + 800 = 1,800 ‘Ans. Value of output of firm D = % 1,800 crores Practicals on Income Method Example 20. Calculate NDP at FC. Particulars | Fin Crores | (i) Rent 400 | (i) Royalty 200 | (ii) Interest 500 (iv) Compensation of Employees 1,000 (v) Profit 500 (vi)_ Mixed Income 1,000 Solution: NDP at FC = Rent + Royalty + Interest + Compensation of Employees + Profit + Mixed income = 400 + 200 + 500 + 1,000 +500 + 1,000 = % 3,600 crores Ans. % 3,600 crores Exampl@) Calculate GNP at MP from the followi (i) Net indirect tax | (i). Depreciation by firm C = & 160 crores; (ii) Value of Inputs of . Value of Output of firm C is equal to firm= 1,000 + 500 + 200 + 400 + 200 + 100 + 900 + 400 + (-) 20 = © 3,680 Ans. %3,680 crores Example 22. Calculate National Income. (i) Compensation of employees (ii) Wages in kind (iii) Indirect taxes (Wv)_ Gross domestic fixed capital formation q (V) Operating surplus (vi) Mixed income of self employed (vii) Net factor income from abroad (vill) Net exports Solution: National Income (NNP,) = Compensation of employees + Operating surplus + Mixed income of sl + Net factor income from abroad = 13,300 + 5,000 + 16,100 + 300 = & 34,700 crores Ans. © 34,700 crores "ole: = Wages in kind are not included separately as they are already included in ca employees. * Gross domestic fixed capital formation is given just to create contusion. * Operating surplus isthe sum total of income trom property (rent + roaly + from entrepreneurship (prof). Example 23. From the following data, calculate National Income. Particulars ul (i) Compensation of employees (ii) Rent