UNIT-II

NATIONAL
INCOME
WHAT IS • National income is the value of the aggregate output of the

NATIONAL different sectors during a certain time period.

INCOME?
• In other words, it is the flow of goods and services produced in

an economy in a particular year.

 IMPORTANCE OF NATIONAL INCOME
• It tells us about the income of different individuals, products of industries and
transactions of international trade.

• This helps us to assess the pace of economic development of a country.

• They give us an idea about the standard of living of the people of the country.

• They are helpful in the assessment of the saving and investment potential of the
community.
CONCEPTS OF NATIONAL INCOME
• Gross and Net Concept

• National and Domestic Concepts

• Market Prices and Factor Costs

GROSS & NET PROFIT
• Gross emphasizes that no allowance for capital consumption has been made or that

depreciation has yet to be deducted.

• Net indicates that provision for capital consumption has already been made or that

depreciation has already been deducted.

 NATIONAL & DOMESTIC CONCEPTS
• The term national denotes that the total income which accrues to the normal
residents of a country due to their participation in world production during the
current year.

• It is also possible to measure the value of the total output or income

originating within the specified geographical boundary of a country known as
domestic territory. The resulting measure is called "domestic product".
 MARKET PRICE
• The valuation of the national product at
market prices indicates the total amount
actually paid by the final buyers.
• GNP at market price = GNP at factor cost +
indirect taxes – Subsidies
 FACTOR PRICE
• While the valuation of national product at factor cost is a measure of the total
amount earned by the factors of production for their contribution to the final
output.
• GNP at factor cost = GNP at market price - indirect taxes + Subsidies
 Gross

DIFFERENT WAYS
Domestic
Product (GDP)

Per Capita Gross National

Income Product (GNP)

OF LOOKING AT

NATIONAL Disposable National

Income Income

INCOME Personal
Income
GROSS DOMESTIC PRODUCT (GDP)
• Gross Domestic Product is the money value of all goods and services
produced annually within the territorial limits of the country.
• It is a key concept in the national income.
• GDP = (P*Q)
• P = Price of goods and services Q= Quantity of goods and services
GROSS DOMESTIC PRODUCT (GDP)
• GDP is basically made up of 4 Components:-
• Consumption, Investment, Government expenditure, Net foreign exports of a
country

GOVT. EXPORT MINUS

CONSUMPTION (c) + INVESTMENT (I) + EXPENDITURE + IMPORT (X-M)
(G)

GDP
GROSS NATIONAL PRODUCT (GNP)
• It is market value of final goods and services produced in a year by the
residents of the country within the domestic territory as well as abroad.
• GNP is the value of goods and services that the country's citizens produce
regardless of their location.
• GNP at market price = GNP at factor cost + indirect taxes – Subsidies
• GNP at factor cost = GNP at market price - indirect taxes + Subsidies
 GNP = GDP+NFIA or,

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

NFIA = Net factor income from abroad

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

NATIONAL INCOME
• It is also known as National Income at factor cost.
• Which means total income earned by resources for their
contribution of land, labour, capital and organisational ability.
• Hence, the sum of the income received by factors of production in
the form of rent, wages, interest and profit is called National
Income.
 PERSONAL INCOME
• It is the total money income received by individuals and households of a
country from all possible sources before direct taxes.

• PI = NI-Corporate Income Taxes-Undistributed Corporate Profits- Social

Security Contribution +Transfer Payments.
 DISPOSABLE INCOME
• It is the income left with the individuals after the payment of direct taxes
from personal income.
• It is the actual income left for disposal or that can be spent for
consumption by individuals.
• DI = PI - Direct Taxes
 PER CAPITA INCOME
• It is calculated by dividing the national income of the country by the total
population of a country.
• PCI = Total National Income / Total National Population
MEASUREMENT OF
NATIONAL INCOME
There are three methods of measuring national income of a country. They yield
the same result.
These methods are:

THE PRODUCT METHOD THE INCOME METHOD THE EXPENDITURE METHOD

PRODUCT METHOD
• Also knowns as Value Added Method

• It involves adding up the value of all the final goods VALUE ADDED
40%

and services produced in the country during the year.

• Here we focus on various sectors of the economy and NON VALUE ADDED
60%

add up all their production during the year.

MAIN SECTORS

Agriculture Manufacturing Construction Transport and

communication

Banking Administration Distribution of

and defense income.
INCOME METHOD
(i) This method seeks to measure national
income at the phase of distribution.

(ii) In the production process of an economy,

the factors of production are engaged by
the enterprises.

(iii)They are paid money incomes for their

participation in the production.
4 CATEGORIES OF PAYMENT
WAGES INTERESTS

PROFIT

RENTS
EXPENDITURE METHOD
• It measures national income as total spending on final goods and services
produced within nation during an year.
• Total aggregate final expenditure on final output thus is the sum of four broad
categories of expenditures:
(i) consumption
(ii) investment
(iii) government
(iv) Net export
• NI = C + I +G + (X - M)