National Income Determination,

GDP, GNP, NDP, NNP, Personal

Income
National Income Accounting in India
National income of a country can be defined as the total
market value of goods and services produced in the
economy in a year.

The three-important measure of calculating National Income

of a country are:

 The sum of the value of all final goods and services

produced.
 The sum of all incomes accruing to factors of
production, i.e., Rent, Interest, Profit and Wages.
 The sum of consumer’s expenditure, net investment,
and government expenditure on goods and services.

Circular Flow of Income in a Three Sector Economy

 The modern economy is a monetary economy. Money
changes hand from one sector to another.
 The Household sector supplies their services like
labour, land, Capital and entrepreneurial abilities to
firms and receives payments in return in terms of
money.
 In the first stage of the model, the Household sector
provides their services of labour, land, capital and
entrepreneurial skills to the Business firms.
 In the second stage, the Business firms pay back in
monetary terms to the Household sector in the form of
Wages, Rent, Interest and Profits.
 In the third stage, the money received by household is
spent on the goods and services produced by the firms
in the form of consumption expenditure. At the same
time, the Firms provides their goods and services to the
Household in return for the money.
 Thus, we see, that money flows from business firms to
households as payments for a factor of production
(Labour, Land, Rent and Entrepreneurial skills), and
then it flows from Household to firms when Household
 purchased goods and services produced by the firms.
This money flow is called circular flow of income.

Saving and Investment in the Circular Flow

 Along with consumption, the household also saves part

of their money.
 When Household saves, their expenditure on purchase
of goods and services decline. The decline in the
purchase will result in a decline in money received by
firms. This will result in less money flow to the
household as the firms will reduce hiring and
production operations. Thus, saving act as a leakage
from the economic system.
 But the important question to ask is, where will savings
go in the economy?
 The savings in the economy does not lead to any
reduction in aggregate spending and income as the
savings flows back into the economic system through
Financial Markets (Banks, Stock markets, insurance
etc.)
 From Financial Markets, the savings flows back to the
Business firms who borrow them and invest it into new
forms of investments.
 Thus, the saving which is a leakage in the system also
flows back into the system through investment by a
firm which acts as injections.

Government Sector in the Circular Flow

 Government affects the economy in a number of ways.

The main components of government intervention are in
the form of taxes, spending and borrowings.
 Government purchase goods and services just as
household and firms do.
 Government financed its expenditure through taxes and
borrowings.
 The money flow from Household and firms to the
government is in the form of taxes.
  The other form of money flow from Household and firms
to government is in the form of Borrowings through
financial markets.
 The Government pay back to household and firms in the
form of provision of public goods like health, education,
Policing, National Defence etc.

National Income and National Product

Gross National Product Gross Domestic Product

GDP is the value of all final

GNP is the total market value of all
final goods and services produced in a
year in a country.
goods and services produced by
the normal residents as well as
non-residents in the domestic
territory of the country but does
not includes Net Factor Income
from Abroad.

The important point to

The important thing to remember remember is whatever is
about GNP is that it is measured at produced in India, whether by
market prices/value. an Indian or foreign national is
part of Indian GDP.

To calculate GNP, only the final goods

The key difference between
and services produced in an economy
GNP and GDP is the exclusion
during in a given year must be
of Net Factor Income Abroad
counted. No intermediate goods and
from GDP.
services should be included in GNP.

GNP includes only those goods and

services that are produced by the GDPMP = GNPMP – Net Factor
residents of India whether working in Income from Abroad.
India or Abroad.

Net Factor Income from Abroad: GDP = Consumption + Gross

Private Investment +
The sum of factor incomes like
Government Expenditure + Net
rent, wages, interest and profits
Exports
generated within the domestic
country is called domestic factor Net Exports= Exports –
income.

The domestic factor income

includes both incomes earned by
residents as well as
non-residents/foreigners working in
India.
At the same time, Indian go abroad
to work and earn wages, salaries,
profits and rents.
Now the Net Factor income
abroad= the difference between
factor income received by the
residents of India working abroad
and the factor income paid to the
foreign residents for working in
India.
Imports.
If we want to calculate Net
Domestic Product from the
GDP, then we just have to
minus depreciation from the
Gross Private Investment.
NDP= Consumption + Net
Private Investment +
Government Expenditure +
Net Exports.
Where, Net Private
Investment= Gross Private
Investment – Depreciation.

GNP includes Net Factor Income

Abroad

GNP= Consumption + Gross Private

Investment + Government Expenditure
+ Net Exports + Net Factor Income
from Abroad.

Net National Product or National Income

 In the production of GNP of a year, a country uses some

fixed assets or capital goods like Machinery,
Equipments and technology etc.
 The capital goods like machinery, building and
equipment’s undergo regular wear and tear during the
production process, which reduces their value. This fall
in the value of capital assets due to regular wear and
tear is called depreciation.
 When the Depreciation is deducted from the Gross
National Product, then we get Net National Product.
  It simply means to include all market value of goods
and services produced in a year after deducting
depreciation.
 NNPMP = GNP- Depreciation.

National Income at Factor Cost

 National Income from Factor Cost is also called

National Income of a country.
 National Income means the sum of all incomes earned
by the citizens in the form of Rent, Wages, Interest and
Profits.
 The difference between National Income at Factor Cost
and National Income at Market Price (NNPMP) arises
from the fact that indirect taxes and subsidies cause
the market price to be different from the factor income
received by the citizens.
 Example, A mobile handset of Rs10,000 purchased by
you includes a GST of 12%. In this case, while the
market price of RS 10,000 includes the GST. The factor
of production used to produce mobile handset will only
get RS 8800. Thus, the difference between market price
and factor cost is the tax.
 Similarly, a subsidy results in the market price of a
product to be less than the factor cost.
 Therefore, while calculating National Income, we must
deduct indirect taxes and add subsidies into Net
National Product at Market Price.
 NNPFC = NNPMP – Indirect Taxes + Subsidies.

Personal Income

 Personal Income includes the sum of all incomes

actually received by all the individuals or households
during a given year.
 The individual pays income taxes, firms pay corporate
taxes, individual also contribute towards social
securities in the form of Cess etc., and some individuals
receive social security benefits (transfer payments) like
 pension, unemployment allowances from the
government.
 In order to move from National Income to Personal
Income of individuals and firms, we must deduct all
forms of direct taxes and social security contribution
by the individuals and must add transfer payment
received by the individuals.
 The basic idea here is to subtract all those income from
National Income that is earned by an individual but has
not been received like taxes and add all those incomes
which are received by the individuals but has not been
earned like Old age Pensions.
 Personal Income= National Income – (Undistributed
Corporate Profits+ Corporate Taxes + Social Security
Contribution) + (Transfer Payments).

GNP GDP NNPMP NNPFC Personal Income

Personal
GNPMP=
Income= National
Consumption + GDPMP
Income (NNPFC)
Gross Private = NNPFC =
– (Undistributed
Investment + GNPMP NNPMP = NNPMP –
Corporate
Government – Net GNPMP – Indirect
Profits+
Expenditure + Factor Depreciatio Taxes +
Corporate Taxes
Net Exports + Income n. Subsidies
+ Social Security
Net Factor from .
Contribution) +
Income from Abroad.
(Transfer
Abroad.
Payments).