National Income

National Income
 National income is the money value of all the final goods and services produced by a country
during a period of one year. National income consists of a collection of different types of goods
and services of different types.
 GDP {Gross Domestic Product}:
 Gross means Depreciation is not being counted.
 Depreciation means the fall in the value.
 GDP is the monetary value of all the goods and services produced within the physical
boundary of a country without accommodating depreciation during a specific period.
 GDP is inclusive of taxes.
 GDP provides an economic snapshot of a country, used to estimate the size of an
economy and its growth rate.
 NDP {Net Domestic Product}:
 Net means Depreciation is being counted.
 NDP is the measure of value of all the goods and services produced within the
physical boundary of a country after accommodating depreciation.
 NDP is an annual measure of the economic output of a nation that is adjusted to
account for depreciation.
 It is calculated by subtracting depreciation from the gross domestic product (GDP).
 NDP = GDP – Depreciation
 GNP {Gross National Product}
 GNP is the market value of all the goods and services produced by the nationals of a
country within or outside the physical boundary without accommodating depreciation.
 It includes the income of those residents earned by corporations owned overseas and
from working abroad.
 It is also one of the measures of National Income.
 GNP = GDP + Net Factor Income from Abroad
 Difference between National and Domestic is Net Factor Income from abroad.
 This income is at the cost of some capital.
 What about its depreciation: need to be adjusted.
 This leads to Net National Product.
 NNP {Net National Product}:
 NNP is the value of all the goods and services produced by the nationals of a country
within or outside the physical boundary after accommodating depreciation.
 NNP is often examined on an annual basis as a way to measure a nation’s success in
continuing minimum production standards.
 Sometimes directly related to National Income.
 Factor Cost:
 Means the goods and services are calculated on what they are costing.
 Calculation is done before the taxation.
 National Income
Concepts related to GDP
 Measurement of economic growth was shifted to GVA {Gross Value Added} from GDP in
around 2014.
 Again in 2018 the measurement of economic growth was shifted to GDP from GVA.
 GVA {Gross Value Added}:
 GVA = Output Produced – Intermediate Consumptions.
 GVA = (GDP – Taxes) + Subsidies

GVA GDP
Taxes are excluded. Surge in GDP due to Taxes.
GVA = (GDP – Taxes) + Subsidies

In GVA we get Sectional / Sectoral GVA It is more inclusive than GVA.

which is basically helpful for policy making.
Most international standards use GDP. So, India
uses it to compare with other nations.
In alignment with the United Nations
Accounting System 2008 (UNAS), again India
shifted to GDP.

 GDP Deflator can be calculated when you know the Nominal GDP and the real GDP.
Nominal GDP
 GDP Deflator = Real GDP
 GDP is also used as a tool to measure inflation.
 If GDP deflation is higher, then, the inflation is higher.
 Other tools to measure inflation:
 Consumer Price Index (CPI)
 Wholesale Price Index (WPI)
 Nominal GDP: When GDP is measured at current prices, it is a Nominal GDP
 It includes price fluctuations and inflation.
 Real GDP: In real GDP, we take the price of the product at with respect to the base year. It is
used as adjusting inflation.
 CPI: Inflation measure of Goods and services consumed by the final consumer. It is calculated
monthly.
 GDP deflator: Measure of inflation of all the goods and services. It automatically takes into
account all the price fluctuations. It is calculated yearly or quarterly.
 WPI: It is a measure that reflects changes in the prices paid for goods at various stages of
distribution up to the point of retail. It can include prices of raw materials for intermediate and
 National Income
final consumption, prices of intermediate or unfinished goods, and prices of finished goods .it
does not include services. It is calculated monthly.

Types of Income
 Domestic Income: An income generated out of the resource or production used of our very own
country.
 Domestic Income = National Income (NI) – Net income from abroad
 Net Income from abroad = Exports – Imports.
 When exports exceed imports, the Net Income from abroad remain positive, which result
Domestic Income lesser than National Income.
 When imports exceed exports, the Net Income from abroad will be negative, which results
Domestic Income greater than National Income.
 Private Income (PI) = (National Income + Transfer payments + Interest on Public Debts) –
Social Security – Profits from PSUs
 Personal Income =
 Personal income is the amount of money collectively received by the inhabitants of a
country.
 Sources of personal income include money earned from employment, dividends and
distributions paid by investments, rents derived from property ownership, and profit
sharing from business.
 Personal income is generally subject to taxation.

Personal Income Formula

PI = Salaries/Wages Received + Interest Received + Rent Received + Dividends
Received + Any Transfer Payments
PI = NI + Income Earned but not Received + Income Received but not Earned
PI = Private Income – Undistributed Corporate Profits – Profit Taxes

 Disposable Income
 Disposable income is net income. It’s the amount left over after taxes.
 Disposable Personal Income = Personal Income – (Payable Taxes + Other Deductions)
 Disposable Income = Private Income – Direct Taxes
 Disposable Income = Consumption Expenditure + Savings.
 Discretionary income is the amount of net income remaining after all necessities are covered.
 Shelter, food, and debts are usually paid using disposable income.
 Nominal Income:
 The value of income at current market prices.
 Does not adjust for inflation.
 National Income
 Real Income:
 The value of income at constant market prices.
 Real Income = Nominal Income – Inflation.
 This is adjusted for inflation.

UPSC MAINS QUESTIONS

1. Define potential GDP and explain its determinants. What are the factors that have been
inhibiting India from realizing its potential GDP?
2. Do you agree with the view that steady GDP growth and low inflation have left the Indian
economy in good shape? Give reasons in support of your arguments.
3. Among several factors for India’s potential growth, the savings rate is the most effective
one. Do you agree? What are the other factors available for growth potential?