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Measurement of
National Income - UPSC Economy
Notes
Types, Methods,
Benefits and Problems
Associated
The national income of any country means the entire value of the commodities and services produced by
any country throughout its financial year.

• It is therefore the outcome of all economic activities that are taking place in any country over the
period of one year.
• It is valued in terms of money. In other words, the national income of any country is the total
amount of earnings that is acquired by it through several economic activities in one year.
• It comprises wages, interest, rent and profit obtained through various factors of production like
labor, capital, land and entrepreneurship of a nation.
• It is beneficial in determining the progress of the country.
• The equation to calculate national income is as follows:

National Income = C + I + G + (X -M)

Where,

• C stands for consumption.

• I stands for total investment expenditure
• G stands for the expense made by the government
• X stands for exports and
• M stands for imports.

The positions of X and M are interchangeable depending upon whether the trades are trade surplus or
trade deficit.

In this article, let us look at the concept of national income, its salient features, methods of measurement,
objectives of measurement, advantages, challenges and important facts of national income for the UPSC
IAS Exam.

Check the linked article on Gini Coefficient.

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The Concept of National Income

National income is measured by several concepts of National Income that include GDP, GNP, NNP, NI,
PI, DI, and PCI which give an account of the particulars of economic activities.

GDP at market price

• GDP is the monetary value of all goods and services generated within the domestic sphere
making use of the available resources during a year.

GDP = (P*Q)c

Where,

• GDP stands for Gross Domestic Product

• P stands for the total price of commodities and services
• Q is the number of goods and services
• GDP is made up of consumption, investment, government expenditure and net foreign exports
of a country.

GDP = C+I+G+(X-M)

Where,

• C= Consumption
• I= Investment
• G= Government expenditure
• (X-M) = Export minus import

Learn the Concept of Import Cover and Forex Reserves here.

Gross National Product (GNP)

• GNP is the market value of final goods and services produced by the residents of the country in
the domestic territory as well as outside the country in a year.
• GNP is the measure of goods and services that the citizens of the country produce regardless of
their location.

GNP = GDP+NFIA

GNP = C + I + G + (X-M) + NFIA

Where,

• C = Consumption
• I = Investment
• G = Government expenditure
• (X-M) = Export minus import
• NFIA = Net factor income from abroad
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Net National Product (NNP) at Market Price

• NNP is the market value of the net yield of final goods and services produced by a country's
economy during a year and the net factor income(NFIA) from outside the country.

NNP = GNP - Depreciation

NNP = C + I + G + (X-M) + NFIA - IT - Depreciation

Where,

• C = Consumption
• I = Investment
• G = Government expenditure
• (X-M) = Export minus import
• NFIA = Net factor income from abroad
• IT = Indirect Taxes

Study the Make in India Scheme here.

National Income (NI)

• NI is also known as National Income at factor cost which means the overall income earned by
resources for their contribution of land, labor, capital and organizational capability.
• Therefore, the amount of the income received by factors of production in the form of rent,
wages, interest and profit is called National Income.

NI = NNP + Subsidies - Indirect Taxes

GNP = Depreciation + Subsidies - Indirect Taxes

NI = C + G + I + (X-M) + NFIA - Depreciation - Indirect Taxes + Subsidies

Personal Income (PI)

• Personal income is the total income received by individuals and households existing in a
country from all potential sources before direct taxes.
• Therefore, personal income can be expressed as:

PI= NI- Corporate Income Taxes - Undistributed Corporate Profits - Contribution for Social Security+
Transfer Payments.

Check out the Universal Basic Income (UBI) here.

Disposable Income (DI)

• It is that income that is left over with the individuals after the payment of direct taxes from
personal income.
• It is the true income left for disposal or that can be spent for individual consumption.

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• It can be expressed as:

DI = PI - Direct Taxes

Per Capita Income (PCI)

• PCI is measured by dividing the overall national income of the country by the total population of
a country.

PCI = Total National Income / Total National Population

Check the linked article on the Consumer Price index.

Salient Features of National Income

In India national income is estimated using various factors and it is published by the Central Statistical
Office.

Macroeconomic concept

Macroeconomics explores how an economy functions as a whole and focuses on aggregate measures.
Since national income is an aggregate term, it can be considered a macroeconomic concept.

Flow concept

National income is measured over a particular span of time. It can also be said that national income has
an element of time linked to it. Therefore, it is a flow concept.

The Monetary Value of Commodities

Considering that national income is the entire market value of all the final goods and services in terms of
the money generated within the national territory during an accounting year, it can be considered that
national income is the money valuation of goods.

Incorporates the value of final commodities and services

National income covers only the value of ultimate goods. The value of intermediate goods is not contained
in the assessment of national income. This is to ward off the issue of double counting.

Net Aggregate Value

National income is a net aggregate value since it comprises the value of goods and services generated by
the firms throughout an accounting year and does not involve depreciation or consumption of the fixed
capital.

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Incorporation of Net factor Income from Abroad (NFIA)

National income includes the net factor income from abroad i.e., it involves the value of net exports and
net receipts.

Check the linked article on New Economic Policy 1991.

Objectives of measuring National Income

• To compute the economic advancement of a country.
• To compare the economic growth of several countries.
• To measure the contribution of different sectors to the country's economic growth.
• To analyze the issues experienced by the economy.
• To assist the government in planning and implementing various projects.
• To find out the limitations and benefits of various economic activities like production,
consumption and distribution.

Check the linked article on What is Unified Payment Interface.

Methods of Estimating National Income

There are three methods of measurement of national income of a country.

Income Method of National Income Measurement

• The income method of national income calculation is used in the distribution level. The national
income is estimated using this method as a flow of factor incomes.
• Labor, capital, land and entrepreneurship are the four important components of production.
• Labor is compensated with wages and salaries, capital is compensated with interest, the land is
compensated with rent and entrepreneurship is compensated with profit.
• Moreover, certain self-employed individuals, such as doctors, lawyers and accountants, make
use of their own labor and capital. The earnings of such people are classified as mixed-income.
• The Net Domestic Product (NDP) at factor costs is the sum of all of these factor incomes.
• National Income using the Income method is calculated as follows:

Net national income = Employee compensation + Operating surplus (w + R + P + I) + Net income + Net
factor income from abroad

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Where,

• w stands for wage and salaries.

• R stands for income from rental sources.
• P stands for profit.
• I stand for mixed-income.

Check out the Economic Survey 2022 here.

Product/ Value Added Method of National Income Measurement

• The national income, in this case, is estimated at the production level. The national income is
estimated using this method as a flow of goods and services.
• Over the course of a year, we determine the fiscal value of all final goods and services
produced in a country's economy. The word "final goods" refers to commodities that are
consumed right away rather than being engaged in a subsequent process of manufacturing.
• Intermediate goods are those goods that are made use of in the manufacturing process.
• Due to the fact that the value of intermediate products is already included in the value of final
goods, we do not have to take into account the value of intermediate goods in national income;
if taken into account, the value of the goods would be counted twice.
• To avoid duplication in counting, we can make use of the value-added approach, which
computes the value-addition (i.e., the value of the final product plus the value of the
intermediate product) at every single stage of production and then adds them together to get the
Gross Domestic Product.
• The sum-total is the GDP at market prices considering that the monetary value is measured at
market prices.
• National Income using Product/ Value Added method can be calculated as follows:

National Income = Gross national product - Cost of Capital - Depreciation - Indirect Taxes

Expenditure Method of Measuring National Income

• The expenditure method can be utilized to determine national income during the phase of
disposition. The national income is calculated using the expenditure method as a flow of
expenditure.
• The gross domestic product (GDP) is the sum of all the expenditures of private consumption.
• The factors such as government consumption expenditure, gross capital formation (public and
private) and net exports have to be taken into consideration here.
• National Income using the Expenditure technique can be calculated as follows:

National Income = National Product = National Expenditure

Check the linked article on Economic Planning in India.

Advantages of Measuring National Income

1. Standard of living: Standard of living indicates the nature of livelihood and comforts of
individuals. The national income estimates disclose the changes in the standard of living of the
citizens.

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2. Economic Trends: The national income estimates reveal whether the economy of a country is
moving forward or declining or in a stable condition. They also enlighten the rate of development
of the economy.
3. Output of various sectors: The national income estimates are of great use for knowing the
level of productivity in various sectors such as agriculture, industry, transport, business, etc.
They also notify the contribution of each sector to the national dividend. The different changes
that take place in the sectors are also known by the national income estimates.
4. Distribution of earnings: The income estimates provide valuable information in relation to the
distribution of income among individuals and institutions of a country. They indicate the ratio of
national income received by each section of the society. It also reveals the unevenness in the
distribution of income and wealth.
5. Devising appropriate economic policies: The income estimates help the government in
understanding the causes and effects of changes taking place in the economy. Hence, these
estimates act as a basis for devising economic policies by the government.
6. Economic planning: National income estimates give information and guidance for devising
economic plans. The governments implement various plans on the basis of these estimates.
7. Earnings, savings and investment levels can be known: The income estimate presents
correct data on the levels of savings, investment, income and consumption.
8. Changes in prices: National income estimates reveal the change in prices with an explanation
of the causes and effects of inflation and deflation.
9. Purchasing power: People's purchasing power can also be known with the help of the income
figures.
10. Global economic obligations: The income estimates are also helpful in determining the
contribution of each country in the total expenses of the United Nations Organization.

Check the linked article on Preparation strategy for GS Mains Paper 3.

Problems in Measuring National Income

The estimation of the National Income poses the following types of difficulties.

Conceptual Difficulties

• It is challenging to compute the value of some of the items such as services rendered for free
and commodities that are to be sold but are utilized for self-consumption.
• At times, it becomes difficult to make a clear distinction amongst primary, intermediate and final
goods.
• What price should be chosen to decide on the fiscal value of a National Product is always a
difficult question?
• Whether to incorporate the earnings of the foreign companies in the National Income is always
a question, since they send out a major portion of their income outside India.

Statistical Difficulties

• In case of changes in the level of prices, we need to use the index numbers that have their own
inherent limitations.
• Statistical findings are not always precise as they are based on the sample surveys. Also, all the
necessary information is not always available.
• Different countries adopt different methods of estimating National Income. Thus, it is not readily
comparable.

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Check the linked article on the National Sample Survey Office (NSSO).

Important Facts about National Income for UPSC Exams

• The table given below shows the list of all the items that are included in national income and
those that are not included:

List of items included List of items excluded

1. Goods that are produced
for consumption by self.
2. Estimated rent of the
property occupied by self.
1. Intermediate goods
2. Transfer payments (one-way payments made without any
expectations of return like the gifts, allowance for
unemployment, donations, etc.)
3. Selling and acquisition of old commodities and existing
services (shares are not included until they are bought
through an Initial Public Offering)
4. Windfall earnings (income from lotteries)
5. Black money (cannot be predicted)
6. Work done by homemakers

• The first rough estimation of National Income of the country was carried out by Dadabhai
Naoroji for the financial year 1867-68; This has been published in his book Poverty and
Unbritish rule in India (this is well-known for its Drain of Wealth theory)
• The first scientific estimation was made by Prof. V. K. R. V. Rao in the year 1931-32.
• The Government of India estimated the National Income for the first time in 1948-49 through the
Ministry of Commerce.
• The National Income Committee was laid down in the year 1949 and Dr. P C Mahalanobis, the
chairman of Indian Statistical Institute served as the chairman of the committee.
• At present, the National Statistical Office (NSO) evaluates the national income of the country
and publishes the National Accounts Statistics once a year under the Ministry of Statistics and
Programme Implementation of India.
• Now, the Central Statistical Office has been incorporated with the National Sample Survey
Organization to form the National Statistical Organization.

Check the linked article on Fiscal responsibility and budget management act.

UPSC Practice Questions on Measurement of National

Income
Q1. Examine the following statements:

1. GNP = GDP + Net factor income from overseas

2. National Income is the Net National Product at factor cost.
3. National Disposable Income equals the sum of Net National product at market prices and the
other current transfers from the rest of the world.

Which of the above three statements given is/are right?

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(a) 1 and 2 only

(b) 2 and 3only

(c) 1, 2 and 3

(d) 1 and 3 only

Q2. Study the following statements and identify the correct answer.

1. When computing GNP, income produced by foreigners in a country is taken into account.
2. When computing GNP, income produced by nationals of a country residing outside the country
is taken into account.

Which of the given statements is/are incorrect?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

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