NATIONAL INCOME

National income means the value of goods and services produced by a country
during a financial year. Thus, it is the net result of all economic activities of any
country during a period of one year and is valued in terms of money.

National income is the sum total of the value of all the goods and services
manufactured by the residents of the country, in a year. Within its domestic
boundaries or outside. It is the net amount of income of the citizens by
production in a year.

To be more precise, national income is the accumulated money value of all final
goods and services produced in a country during one financial year.
Computation of National Income is very vital as it indicates the overall health of
our economy for that particular year.

Definition of National Income

The definition of National Income if of two types-
 Traditional Definition of National Income
 Modern Definition

Traditional Definition of National Income-

According to Marshall: “The labor and capital of a country acting on its natural
resources produce annually a certain net aggregate of commodities, material and
immaterial including services of all kinds. This is the true net annual income or
revenue of the country or national dividend.”
Modern Definition
This definition has two subparts
 GDP
 GNP

Gross Domestic Product

Gross Domestic Product, abbreviated as GDP, is the aggregate value of goods
and services produced in a country. GDP is calculated over regular time
intervals, such as a quarter or a year. GDP as an economic indicator is used
worldwide to measure the growth of countries economy.

Goods are valued at their market prices, so:

 All goods measured in the same units (e.g., dollars in the U.S.)
 Things without exact market value are excluded.

Constituents of GDP
 Wages and salaries
 Rent
 Interest
 Undistributed profits
 Mixed-income
 Direct taxes
 Dividend
 Depreciation
The Formula for Calculation of GDP

GDP = consumption + investment + government spending + exports - imports.

Gross National Product

Gross National Product (GNP) is an estimated value of all goods and services
produced by a country’s residents and businesses. GNP does not include the
services used to produce manufactured goods because its value is included in
the price of the finished product. It also includes net income arising in a country
from abroad.

Components of GNP
 Consumer goods and services
 Gross private domestic income
 Goods produced or services rendered
 Income arising from abroad.

Formula to Calculate GNP

GNP = GDP + NR (Net income from assets abroad or Net Income Receipts) -
NP (Net payment outflow to foreign assets).

The aggregates include as part of the value of current output, the value of
capital services consumed in the production of output. It is desirable to have
accounts which show the output net of capital consumption allowances. Thus
the national income could be measured either as on a gross basis or on a net
basis.

National Income is the aggregate value of all goods and services produced by
firms in a given financial year. It can be stated that when the aggregate
revenue generated by the firms is paid out to factors of production, it equals
aggregate income or National Income. There are different variants or
aggregates of National Income and each of the aggregates has a specific
meaning, use, and method of measurement. These aggregates are as follows:
1. Gross Domestic Product at Market Price (GDP MP)
2. Gross Domestic Product at Factor Cost (GDP FC)
3. Net Domestic Product at Market Price (NDP MP)
4. Net Domestic Product at Factor Cost (NDP FC)
5. Gross National Product at Market Price (GNP MP)
6. Gross National Product at Factor Cost (GNP FC)
7. Net National Product at Market Price (NNP MP)
8. Net National Product at Factor Cost (NNP FC)

Basic Aggregates of National Income

A number of goods and services are produced in a year by different

production units within an economy. It is not possible to add those goods and
services in terms of their quantity; therefore, these are added in terms of
money. There are eight aggregates in National Income for measuring the
value of goods and services in terms of money. These are as follows:
1. Gross Domestic Product at Market Price (GDP MP)
GDPMP refers to the gross market value of all the final goods and services
produced during a year within the domestic territory of a country.

Gross in GDPMP means that the total value of final goods and services
includes depreciation, i.e., no provision has been made for it.

Domestic in GDPMP means that the final goods and services produced are
located within the domestic boundaries of the country.
Product in GDPMP indicates that only final goods and services are included.
Market Price in GDPMP means that the amount of indirect taxes paid is
included in GDP; however, the subsidies are excluded from it.
The rest of the aggregates are determined by making some adjustments in
GDPMP.

2. Gross Domestic Product at Factor Cost (GDP FC)

GDPFC refers to the gross money value of all the final goods and services
produced during a year within the domestic territory of a country. It can be
determined as:
GDPFC = GDPMP – Net Indirect Taxes
3. Net Domestic Product at Market Price (NDP MP)
NDPMP refers to the net market value of all the final goods and services
produced during a year within the domestic territory of a country. It can be
determined as:
NDPMP = GDPMP – Depreciation

4. Net Domestic Product at Factor Cost (NDP FC)

NDPFC refers to the net money value of all the final goods and services
produced during a year within the domestic territory of a country. It can be
determined as:
NDPFC = GDPMP – Net Indirect Taxes – Depreciation

NDPFC is also known as Domestic Factor Income or Domestic Income.

Relationship between the four Domestic Aggregates
(GDPMP GDPFC NDPMP and NDPFC)
Domestic in each of these aggregates states that the contribution of only those
producers whether they are resident or non-resident will be included who are
producing within the domestic territory of the country.

5. Gross National Product at Market Price (GNP MP)

GNPMP refers to the gross market value of all the final goods and services
produced during a year by the normal residents of a country. It can be
determined as:
GNPMP = GDPMP + Net Factor Income from Abroad
GNPMP of a country can be less than its GDP MP if NFIA is negative. However,
it can be more than GDPMP if NFIA is positive.
6. Gross National Product at Factor Cost (GNP FC)
GNPFC refers to the gross money value of all the final goods and services
produced during a year by the normal residents of a country. It can be
determined as:
GNPFC = GNPMP – Net Indirect Taxes

7. Net National Product at Market Price (NNP MP)

NNPMP refers to the net market value of all the final goods and services
produced during a year by the normal residents of a country. It can be
determined as:
NNPMP = GNPMP – Depreciation

8. Net National Product at Factor Cost (NNP FC)

NNPFC refers to the net money value of all the final goods and services
produced during a year by the normal residents of a country. It can be
determined as:
NNPFC = GNPMP – Net Indirect Taxes – Depreciation
NNPFC is also known as National Income.
Relationship between the four Domestic Aggregates
(GNPMP GNPFC NNPMP and NNPFC)
National in each of these aggregates states that the contribution of only those
producers who are normal residents of a country will be included. It does not
matter if the production is being held outside the domestic territory of the
country.
Domestic Income (NDPFC) v/s National Income (NNP FC)
Basis Domestic Income
It refers to the net money
value of all the final goods
Meaning and services produced during
a year within the domestic
territory of a country.
Domestic Income is a
territorial concept. It includes
Nature of the value of all the final
Concept goods and services produced
within the domestic territory
of a country.
All producers within the
Category of domestic territory of the
Producers country are included in
Domestic Income.
Domestic Income does not
NFIA
include NFIA.
National Income
It refers to the net money
value of all the final goods
and services produced
during a year by the
normal residents of a
country.
National Income is a
national concept. It
includes the value of all
the final goods and
services produced in the
whole world.
All producers who are
normal residents of the
country are included in
National Income.
National Income includes
NFIA.
Gross Domestic Product at Market Price (GDPMP) v/s National Income

Basis Gross Domestic Product

at Market Price (GDPMP) National Income (NNPFC)

It refers to the gross market It refers to the net money

value of all the final goods value of all the final
and services produced goods and services
Meaning
during a year within the produced during a year by
domestic territory of a the normal residents of a
country. country.

Nature of GDPMP is a territorial National Income is a

Concept concept. It includes the national concept. It
value of all the final goods includes the value of all
 Basis Gross Domestic Product
at Market Price (GDPMP) National Income (NNPFC)

and services produced the final goods and

within the domestic services produced in the
territory of a country. whole world.

All producers within the All producers who are

Category of domestic territory of the normal residents of the
Producers country are included in country are included in
GDPMP. National Income.

National Income is at
GDPMP is at market price;
Net Indirect factor cost; therefore, net
therefore, net indirect taxes
Taxes indirect taxes are
are included.
excluded.

Depreciation is not
Depreciation is included in
Depreciation included in National
GDPMP
Income.
Steps to Calculate Practicals of Basic Aggregates of National Income

There are eight basic aggregates of National Income among which four are of
Domestic Concept (GDPMP GDPFC NDPMP and NDPFC) and four are of
National Concept (GNPMP GNPFC NNPMP and NNPFC). To determine the
National Income of a country, it is required to first calculate one of the basic
aggregates of national income out of the rest of the seven. To better
understand, let us take an example where we have to
determine NDPMP from GNPFC.
Step 1:
Prepare an equation by placing the aggregate to be determined on the left
side of the equal-to sign and the aggregate given on the right side.
For example, NDPMP = GNPFC ± Adjustments.

Step 2:
Identify the Adjustments required and then calculate the answer.
In the above example, as we have to determine NDP MP from GNPFC, there are
three adjustments required.
1. G in GNPFC refers to Gross. It means that it includes Depreciation.
Therefore, depreciation will be subtracted from GNP FC to arrive NNPFC
2. N in GNPFC refers to National. It means that it includes Net Factor
Income from Abroad (NFIA). Therefore, NFIA will be subtracted from
NNPFC to arrive NDPFC
3. FC in GNPFC refers to Factor Cost. It means that it does not include Net
Indirect Taxes (NIT). Therefore, NIT will be added to NDP FC to arrive
NDPMP
Hence, the final equation to determine NDP MP will become NDPMP = GNPFC –
Depreciation – NFIA + NIT.

Example 1:
Calculate National Income or NNP at FC.
Particulars ₹ in crores

GNP at MP 7,000
 Particulars ₹ in crores

Subsidies 400

Net Factor Income from Abroad 300

Depreciation 100

Indirect Tax 500

Solution:
NNP at FC = GNP at MP – Depreciation – NIT (Indirect Taxes – Subsidies)
= 7,000 – 100 – (500-400)
= ₹6,800 crores
Note: We will not adjust NFIA as there is national value in both NNP at FC
and GNP at MP.

Example 2:
Calculate NNP at FC.
Particulars ₹ in crores

GDP at MP 6,500

Goods and Services Tax (GST) 500

 Particulars ₹ in crores

Factor Income from Abroad 260

Factor Income to Abroad 400

Subsidies 110

Consumption of Fixed Capital 150

Solution:
NNP at FC = GDP at MP – Consumption of Fixed Capital + NFIA (Factor
Income from Abroad – Factor Income to Abroad) – NIT (Goods and
Services Tax – Subsidies)
= 6,500 – 150 + (260 – 400) – (500 – 110)
= ₹5,820 crores
Example 3:
Calculate Factor Income from Abroad.
Particulars ₹ in crores

GNP at MP 7,000

Indirect Taxes 500

Replacement of Fixed Capital 150

Factor Income to Abroad 270

Subsidies 50

NDP at FC 4,600

Solution:
GNP at MP = NDP at FC + Replacement of Fixed Capital + NFIA (Factor
Income from Abroad – Factor Income to Abroad) + NIT (Indirect Taxes –
Subsidies)
Therefore,
Factor Income from Abroad = GNP at MP – NDP at FC – Replacement of
Fixed Capital + Factor Income to Abroad – NIT (Indirect Taxes –
Subsidies)
= 7,000 – 4,600 -150 + 270 – (500 – 50)
= ₹2,070 crores
Note: Replacement of Fixed Capital is another name for Depreciation.

Example 4:
Calculate:
i) Indirect Tax
ii) Depreciation
iii) Domestic Income or NDP at FC
Particulars ₹ in crores

GNP at FC 80,000

Subsidies 15,000

GNP at MP 1,00,000

National Income or NNP at FC 75,000

GDP at MP 1,10,000

Solution:
i) GNP at FC = GNP at MP – NIT (Indirect Tax – Subsidies)
Indirect Tax = GNP at MP + Subsidies – GNP at FC
= 1,00,000 + 15,000 – 80,000
= ₹35,000 crores
ii) NNP at FC = GNP at FC – Depreciation
Depreciation = GNP at FC – NNP at FC
= 80,000 – 75,000
= ₹5,000 crores
iii) Domestic Income or NDP at FC = GDP at MP – Depreciation – NIT
(Indirect Tax – Subsidies)
= 1,10,000 – 5,000 – (35,000 – 15,000)
 = ₹85,000 crores

Example 5:
The Net Domestic Product at Factor Cost of an economy is ₹5,000 crores.
Its capital stock is worth ₹3,000 crores and it depreciates @20% per annum.
The Subsidies, Indirect Taxes, Factor Income to the rest of the world, and
Factor Income from the rest of the world are ₹70 crores, ₹150 crores, ₹400
crores, and ₹400 crores respectively. Find out the Gross National Product
at Market Price.
Solution:
Gross National Product at Market Price = Net Domestic Product at FC +
Depreciation + Net Indirect Taxes (Indirect Taxes – Subsidies) + Net Factor
Income from Abroad (Factor Income from the rest of the world – Factor
Income to the rest of the world)
= 5,000 + 20% of 3,000 + (150 –
70) + (400 – 400)
= 5,000 + 600 + 80 + 0
= ₹5,680 crores
Quick Revision:
Net Indirect Taxes = Market Price – Factor Cost
Depreciation = Gross Value – Net Value
Net Factor Income from Abroad = National Value – Domestic Value
GDPFC = GDPMP – Net Indirect Taxes
NDPMP = GDPMP – Depreciation
Domestic Income or NDPFC = GDPMP – Depreciation – Net
Indirect Taxes
GNPMP = GDPMP + Net Factor Income
from Abroad
GNPFC = GNPMP – Net Indirect taxes
NNPMP = GNPMP – Depreciation
National Income or NNPFC = GNPMP – Depreciation – Net
Indirect Taxes
Importance of National Income
Setting Economic Policy
National Income indicates the status of the economy and can give a clear picture
of the country’s economic growth. National Income statistics can help
economists in formulating economic policies for economic development.

Inflation and Deflationary Gaps

For timely anti-inflationary and deflationary policies, we need aggregate data of
national income. If expenditure increases from the total output, it shows
inflammatory gaps and vice versa.

Budget Preparation
The budget of the country is highly dependent on the net national income and its
concepts. The Government formulates the yearly budget with the help of
national income statistics in order to avoid any cynical policies.

Standard of Living
National income data assists the government in comparing the standard of living
amongst countries and people living in the same country at different times.

Defense and Development

National income estimates help us to bifurcate the national product between
defense and development purposes of the country. From such figures, we can
easily know, how much can be set aside for the defense budget.
The national income of a country can be measured by alternative

methods:.

Value Added Method

The distinction between the value of material outputs and material inputs at
every stage of production is Value added.

GDP Vs GNP
The Gross Domestic Product and the Gross National Product are the two most
widely used measures in a country’s calculation of aggregate economic unit.

GDP is the measure of the value of goods and services that are being produced
within a country's borders, by the citizens and the non-citizens. While GNP
determines the value of goods and services that are being produced by the
country's citizens in the domestic and abroad spectrum. GDP is popularly used
by the global economies at large. While, the United States eliminated the use of
GNP in the year 1991, thereby adopting GDP as the measure to compare their
economy with other economies.
Product Method:

In this method, national income is measured as a flow of goods and services.

We calculate money value of all final goods and services produced in an

economy during a year. Final goods here refer to those goods which are directly

consumed and not used in further production process.

Goods which are further used in production process are called intermediate

goods. In the value of final goods, value of intermediate goods is already

included therefore we do not count value of intermediate goods in national

income otherwise there will be double counting of value of goods.

To avoid the problem of double counting we can use the value-addition method

in which not the whole value of a commodity but value-addition (i.e. value of

final good value of intermediate good) at each stage of production is calculated

and these are summed up to arrive at GDP.

The money value is calculated at market prices so sum-total is the GDP at

market prices. GDP at market price can be converted into by methods discussed

earlier.

According to this method, the aggregate value of final goods and services
produced in a country during a financial year is computed at market prices. To
find out GNP, the data of all the productive activities-agricultural products,
Minerals, Industrial products, the contributions to production made by transport,
insurance, communication, lawyers, doctors, teachers. Etc are accumulated and
assessed.

Income Method:

Under this method, national income is measured as a flow of factor incomes.

There are generally four factors of production labour, capital, land and

entrepreneurship. Labour gets wages and salaries, capital gets interest, land gets

rent and entrepreneurship gets profit as their remuneration.

Besides, there are some self-employed persons who employ their own labour

and capital such as doctors, advocates, CAs, etc. Their income is called mixed

income. The sum-total of all these factor incomes is called NDP at factor costs.

In this method, we add net income payments received by all citizens of a

country in a particular year. Net incomes that result in all the factors of
production like net rents, wages, interest, and profits are all added together, but
incomes received in the form of transfer payments are omitted.

Expenditure Method:
In this method, national income is measured as a flow of expenditure. GDP is
sum-total of private consumption expenditure. Government consumption
expenditure, gross capital formation (Government and private) and net exports
(Export-Import).

The total expenditure by the society in a financial year is summed up together

and includes personal consumption expenditure, net domestic investment,
government expenditure on goods and services, and net foreign investment.
This concept is backed by the assumption that national income is equal to
national expenditure.
CENTRE-STATE FINANCIAL RELATION

Centre-State financial relation:The financial relation states the distribution of

various taxes and the allocation of cost spending to each State by setting up a

limit and granting access to these cost spending.

Centre-State financial relations states the taxes imposed on particular objects for
maintaining strong relations as well as enhancing the financial stability of the
respective government.

The constitution of India has made detailed provisions related to tax distribution
and the non-tax revenues, the borrowing power and the provisions being
supplemented for the grants to respective states by the union. It implies that the
parliament has complete power to impose taxes on subjects summarised in the
list of centre as well as the state. State legislature has absolute power to charge
taxes on subjects specified in the list of states. The tax revenue is distributed by
the centre and state individually which signifies that service taxes are imposed
by the centre and are collected and detained by both states and centres.

Centre- State relations need to be strong when finance is concerned because

maintaining a strong relationship will help in the financial stability of the
Central government as well as its respective States. The financial relation states
the distribution of various taxes and the allocation of cost spending to each State
by setting up a limit and granting access to these cost spending. It implies the
power of Centre on the State government in providing access, which assists in
minimising the cost spending and maximising the revenue generation through
the tax charged on the object. It further signifies that the State is dependent on
the Centre for the financial development because the revenue generation of the
State is on the financial commission basis. It states the collection of taxes and
distribution to the respective States is done following the law being stated in the
government. The taxes are being collected by the Central government and need
to be expropriated to the State. Since most of the states are having less income,
the Centre provides grants which aid the respective states to scuttle their
development and administrative expenses.
 State-Centre financial relation: Categorization

Relations uniting State and Centre can be categorised into various categories
namely financial emergency and financial commission. The Finance
Commission plays a crucial role in maintaining the financial relations of the
Centre with the State. It signifies that the President is responsible to make
recommendations every five years regarding the allocation and distribution of
taxes between State and Centre. It further signifies that the commission should
suggest specific principles on the revenues being granted to the State out of
integrated funds. Financial emergency ascertains the power to the Central
government over the State government to observe specific standards of financial
propriety. It also directs the government to minimise the allowance and the
salaries of judges and employees which aids in maintaining a healthy financial
relationship uniting the State and Centre.

Centre-State Relation: Financial control

The central government has effective control over State government which can
further be exercised by informal means which includes:

 Control over the expenditure and income implies that the Central government
might be competent to determine which taxes the State government has access
to as well as to determine the forms of diplomatic transfers. In case of
expenditure, the Centres might seek to supervise the State’s access to borrowing
funds for capital purposes.
 Control on administrative regulation states the ways by which the state services
and functions are provided by the Centres which enables the Centre to
effectively manage the State’s administrative regulation.
 Control over State’s access implies that the access granted to the State
government influences the process of decision making individually and
collectively through which the Centre is able to make use of the access.

Conclusion

Financial relations between State and Central government are based on the taxes
being levied on specific objects and the distribution of taxes by the Central
government to the State government. It concludes that the taxes charged on the
specific subjects are the source of revenue for the Central government and the
commission based on that revenue acts as a source for the State government. It
further concludes that the Central government set up a limit in the cost
expenditure for the State government in order to maintain an effective cost
structure.