Chapter – 3

Methods of Measuring National Income

Objectives:

 Introduction
 Value Added Method
 Problem of Double Counting
 Income Method
 Expenditure Method
 Real and Nominal GDP
 GDP and Welfare
 3.1 Introduction
 Production gives rise to income, income gives rise to demand for goods and services and demand in
turn gives rise to expenditure, again expenditure leads to further production.
 Corresponding to three phases of circular flow of income (production income and expenditure), there
are 3 methods of measuring national income, namely:
1. Value Added Method or Product Method
2. Income Method
3. Expenditure Method

3.2 Value Added Method :

Value added method is the method which measures domestic income by estimating the contribution of
each producing enterprise in the domestic territory of the country in an accounting year.
 Steps Involved
Value added method involves the following steps:
A. Classification of Production Units
In the value added method, for the estimation of national income, all the production units in the
domestic economy are classified into three sectors such as primary, secondary and tertiary on the
basis of the nature of production process.
B. Estimation of Gross Value Added (GVA) by Each Producing Enterprise
The second step in the value-added method is estimation of gross value added at market price by each
of the producing enterprise.
 Value Added
 Value added or value addition is the difference between value of firms output and the value of
intermediate consumption.
 Value added by each production unit or firm is also known as Gross Value Added at Market price
(GVAMP).
GVAMP = Value of Output – Intermediate Consumption

(i) Value of Output

Value of output refers to market value of commodities produced by a firm during a period of one
year.
 Value of output P x Q
 P →Price per unit
 Q → Quantity
 Measurement of Value of Output:
(a) Value of Output = Sales
If the entire output of the year is sold during the year.
Export is a part of sales. If ‘Domestic Sales’ are given, to find the total sales exports need to be included.
Sales = Domestic Sales + Exports

(b) Value of Output = Sales + Change in Stock (△Stock)

If the entire output sold and some output remain unsold in an accounting year.
△Stock = Closing Stock (at the end of accounting year) – Opening Stock (at the beginning of accounting year)

(ii) Intermediate Consumption (Intermediate Cost)

 Value of non- factor inputs (other than factor input like land, labour, capital, entrepreneurship),
used in the production is termed as intermediate consumption.
 Generally it includes value of raw material, fuel, power etc.

Imports are part of intermediate cost. If domestic intermediate cost is given then it is necessary to add imports

C. Estimation of GVA of Each Industrial Sector

In the third step by Summing up GVA at MP of all producing units falling in each industrial sector
GVA of each industrial sector is estimated.
D. Estimation of GDPMP
By adding up Gross value added at market price of all industrial sectors we get GDP MP In other
words, sum total of GVAMP of all production sectors, is called GDPMP

GDPMP = GVAMP of PS + GVAMP of SS + GVAMP of TS

GDPMP = GVA1 + GVA2 + GVA3 + ………………………+ GVAn

GDPMP = GVAA + GVAB + GVAC + ……………………+ GVAn

OR

Σ GVAMP = GDPMP

 PS → Primary sector
 SS → Secondary sector
 TS → Tertiary Sector
 1, 2, 3…..n → Firms
 GVA → Gross Value Added
E. Estimation of National Income:
Net factor income from abroad (NFIA) is added, depreciation and net indirect taxes are subtracted
from GDPMP to arrive at NNPFC or National Income.
NNPFC = GDPMP —v Depreciation (D) + Net factor income from abroad
(NFIA) - Net Indirect Taxes (NIT)
Or
NNPFC GDPMP – D + NFIA – NIT
 Precautions in Estimation
(i) Value of Goods Produced for Self Consumption
Value of goods produced for self consumption such as food grains produced by farmers for
the consumption by their families, should be included. They are not sold in the market and
hence, do not have market price. Their value is to be estimated or imputed.
(ii) Production of Fixed Assets for Oneself
Production of fixed assets for oneself such as residential buildings by households and
factory buildings by entrepreneurs should be included.
(iii) Implied Rent of Owner Occupied Houses:
Imputed rent of owner occupied houses should be included. Many people live in their
own houses. They do not pay any rent. They are enjoying housing services similar to the
people who are staying in rented houses. To take account of the housing services
enjoyed by the house owner, value of these housing services is estimated from the
market rent of similar accommodation.
(iv) Services for Self Consumption
Services for self consumption are not included as it is default to estimate their market
price. For Example services by house wives.
(v) Value of Sale and Purchases of Second Hand Goods:
Value of sale and purchases of second hand goods is not included as they are already
included in the accounting year when they were purchased. Sale of the used goods is not
a production activity.
(vi) Commission Earned on Account of Second Hand Goods:
Commission earned on the account of second hand goods is included in the estimation
of value added as commission is the reward for the service.
(vii) Value of Intermediate Goods:
Value of intermediate goods is not included as they are already reflected in the value of
final goods.
 3.3 Problem of Double Counting
 Counting the value of a product more than once in the measurement or estimation of
national income is called double counting.
 To avoid double counting. two methods are adopted:
(i) Final Product Method
According to this method, value of only final goods and services (in terms of their
end-use) are to be
(ii) Value Added Method
According to this method, sum total of value added by each firm should be taken while
estimating GDP.

Gross Value Added = Value of Output - Intermediate Consumption (IC)

 Estimation Value Addition

Enterprise output Value of Output Intermediate Value Added (Rs.)

(Rs.) Consumption (Rs.)
Farmer Wheat 500 0 500
Mill Flour 1000 500 500
Baker Bread 1500 1000 500
Consumer Bread 1700 1500 200
Total 4700 3000 1700
 In the above table, the gross value added by all the producing enterprise is:
Rs.500 + Rs.500 + Rs.500 + Rs.200 = Rs.1700
Value Added Method is also called Product method or Industrial origin method or Net output method or
Inventory method or Commodity service method.

3.4 Income Method:

 The income method measures national income from the side of factor payments made to the primary
factors of production in the form of rent, wages, interest and profit for the use of their factor services in
an accounting year.
 According to this method, national income is estimated as the sum total of factor incomes generated by
normal residents of a country during an accounting year
 Steps Involved :
 In the first stage, producers or enterprises which employ factors are identified.
 The factor incomes are grouped under different categories viz. rent, wages, interest, profit.
 Estimation of domestic income (NDPFC)
 Estimation of National Income.
 Estimation of NDPFC (Domestic Income)
NDPFC is the sum total of factor incomes generated by all the production units located within the
domestic territory of a country during a period of one year.
 Components of NDPFC or Classification of Factor Incomes
According to income method there are three components of factor income-
(i) Compensation of Employees (COE)
(ii) Operating Surplus (OS)
(iii) Mixed Income (MI)

NDPFC = COE + OS + MI

(i) Compensation of Employees (COE) or Labour Income.

COE is the payment made by the producers or employers to their employees in the form of
wages and salaries and other payments in cash and kind and social security benefit, in return
of work done. The main elements of COE are:
(a) Wages and Salaries in Cash
 It refers to all monetary payments which employees receive in respect of their work
 It is the largest component of COE
 It includes basic pay, bonus, commission, dearness allowance (DA), house rent allowance leave
travelling allowance (LTA), sick leave allowance, travelling allowance to travel to and form work
place, etc.
(b) Wages and Salaries in Kind:
It refers to all kind of non-monetary advantages and facilities given by the employers like
accommodation, free medical and educational facilities, free or subsidized food, uniforms, free
transportation, imputed interest on interest free loans, free provision of goods and services
produced by the employees, etc.
(c) Employer’s contribution to Social Security Schemes:
It is the supplementary labour income in the form of employer's contribution (not of employees)
towards social security schemes for employees such as provision for provident fund, group
insurance, gratuity, etc.

COE = Wages and Salaries in Cash + Wages and Salaries in Kind

+ Employer's contribution to social security schemes
(ii) Operating Surplus (OS):
It is the income earned from the ownership and control of capital. It is also known as
income from pro It is and entrepreneurship.
(A) Income from Property:
(a) Rent and Royalty
 Rent is defined as the amount receivable by a landlord from a tenant for the use of his
land.
 Rent of self-occupied or owner occupied houses in the form of imputed rent is also part
of rental income.
 Royalty is defined as the amount receivable by a landlord for granting the leasing rights
of sub-soil assets. (For example Deposits of coal, iron, natural gas, etc.) and for the use
of patents, copyrights trademarks, etc.
(b) Interest
The amount payable to the owners of financial assets in the production unit. The
production unit uses these assets for production and in turn makes interest payments—
imputed or actual.
(B) Income and Entrepreneurship:
  Income earned by an entrepreneur from entrepreneurship in the form of profits is known as
income from entrepreneurship.
 Profit is a residual factor payment to the owners of a production unit. The production units use
profit for:
(a) Dividend Payment (D):
It is that part of the profit which is distributed among the shareholders according to their share
holding ratio. It is also called distributed profit.
(b) Undistributed Profits (UDP):
It is that part of the profit which is retained by the firms for future use or for business expansion. It
is also known as savings or surplus of corporate sector or retained earnings.
(c) Corporate Profit Tax (CPT):
It is that part of profit which is paid to the government in the form of profit tax. It is also known as
corporate tax or corporation tax.
OS = Rent and Royalty + Interest + Profit

(C) Mixed Income of Self-Employed (MI):

 Mixed income refers to the income Of the self employed persons for using their factor services
(labour, land, capital and entrepreneurship) to produce goods and services. The income is mixed
in terms of wages, rent, interest and profit.
 In case where total factor payment is estimable but not in different components, an additional
factor payment is called mixed income. This problem arises mainly in case of self-employed
people like doctors, chartered accountants, consultants, etc.

Domestic Income (NDPFC) = Compensation of Employees (COE) + Operating Surplus (OS)

+ Mixed Income of Self-employed (MI)
 Estimation of National Income:
Net Factor Income from Abroad (NFIA) is added to Domestic Income (NDPFC), to arrive at national
income (NNPFC)

National Income (NNPFC) = NDPFC + NFIA

 Precautions in Estimation:
(i) All Transfers Incomes (Payments)
Transfer incomes (payments) like old age pensions, unemployment allowance, scholarships, etc.
should not be included in national income because transfers are not a production activity and do
not reflect any production of goods and services in the accounting year.
(ii) Illegal Income:
Illegal income of smugglers, drug traders, gamblers etc. should not be included in national income
as they are illegal and unaccountable.
 Illegal Income
According to united nations systems of national Account 2008 (SNA 2008), illegal transactions are into
two categories.
1. Mutual Agreement Transaction:
Transaction that arises as a result of mutual agreement between the parties, should be included in
national income. For example; smuggling, black marketing etc. But it is difficult, or even impossible to
obtain data about illegal mutual agreement transactions.
2. Without Mutual Agreement
Transaction which arises without any mutual agreement between the parties, should not be in the
national income. For example, theft. Such transaction are crimes against persons or property.
(iii) Avoid Capital Gain
 Capital gain refers to the income from the sale of second hand goods, financial assets, sale of old
cars, old houses, bonds, debentures, etc. These transactions are not production transactions.
They do not contribute anything to the current flow of goods and services (reflect only changes
in ownership) so should not be included in national income.
  The commission charged by brokers on such transactions should be included in national income.
(iv) Windfall Gains
Windfall gains such as income from lotteries should not be included as they do not contribute to
the current flow of goods & services.
(v) Corporate Taxes (CPT)
In calculating National Income, we include profits before deducting CPT. Therefore; CPT should be
included separately.
(vi) Compulsory Transfer Payments
Wealth tax, Death duties, Gift tax, etc. are paid out of current income or out of past savings of tax
payer. So, these are not included.
(vii) Imputed Rent
Imputed rent of owner occupied house is included. It is factor income.
(viii) Income Tax
Income tax is paid out of COE. It should not be added separately.
(ix) Free Services of Owners
Owners work in their own unit but do not charge salary. Owners provide finance but do not charge
interest Although they do not charge, yet the services have been performed. The imputed value of
these must be included.
Note: Income method is also known as 'Distribution share method' or 'Factor payments method.

3.5 Expenditure Method:

 According to this method, national income is measured in terms of expenditure on the purchase of
final goods and services produced in the economy during an accounting year.
 It estimates national income by measuring the final expenditure on GDP,
 In other words, final expenditure is the expenditure on final goods and services.
 Expenditure method is also called “Consumption and Investment Method” or “Income Disposal
Method”.
 Expenditure on consumption and investment constitute the sale of the final product.
 Steps Involved
(A) Identification of Economic Units Incurring Final Expenditure:
All the economic units which incur expenditure on final products are divided into four groups. (i)
Households (ii) Business Sector (iii) Government Sector (iv) Rest of the world
(B) Classification of Components of Final Expenditure
Final expenditure on final goods and services in the economy is divided into four broad categories:
(a) Private Final Consumption Expenditure (C) / Personal Final CE
Private final consumption expenditure refers to expenditure on final goods and services by the
individuals, households and private non profit institutions serving households like schools, clubs,
charitable hospitals, help age, etc. It is divided into three major sub categories:
 Expenses on durable goods (TV, Car, Computer, etc.)
  Expenses on non-durable goods (Food, Beverages, etc.)
 Expenses on services. (Transportation, Medical, etc.)
(b) Investment Expenditure (I) or Gross Domestic Capital Formation (GDCF) or Gross Investment:
 Investment expenditure is the expenditure on investment or capital goods. Capital goods are
produced by firms and they may be bought by firms, by households (purchase of residential
houses) or by government.
 It refers to expenditure on the purchase of final goods by the producers. These goods are to be
further used in the process of production. Investment expenditure is the expenditure on
investment or capital goods.
 Investment can also be termed as Gross domestic capital formation (GDCF)
 Investment expenditure is divided into two categories:
(i) Gross Domestic Fixed Capital Formation (GDFCF) or Gross Fixed Capital Investment (GFCI)
It refers to the expenditure on purchase of fixed assets. It is divided into three sub-parts

• Expenditure on Business Fixed Investment

It includes expenditure on the purchase of new plants, machinery, equipment’s, factories,
transport equipment’s, etc.
• Expenditure on Residential Houses
Expenditure on construction and purchase of new houses by households.

• Government Expenditure on Public Fixed Investment.

Expenditure on construction of roads, canals, schools, hospitals, etc. by the government.
GDFCF = Business Fixed Investment + Govt. Fixed Investment + Investment on Residential Construction by Households
 (ii) Change in Stock or Inventory Investment.
 It refers to net change in stock of final goods, semi- final goods, raw materials etc.
 It is calculated by taking the difference between the closing stock and the opening stock of the
year.
I = Gross Domestic Fixed Capital Formation (GDFCF) + Change in Stock

Or
(C) Government Final Consumption Expenditure:
I = Business Fixed Investment + Govt. Fixed Investment + Investment on Residential
Construction by House Holds + Change in Stock

(c) Government Final Consumption Expenditure (G)

It refers to expenditure on final goods and services by the government. It consists of expenditure
on administration, defence, expenditure on maintenance of law & order, expenditure on social
welfare services, education, sanitation, etc.
(d) Net Exports (X-M)
Net exports are the difference between the value of goods and services exported to other
countries and the value of goods and services imported from other countries.
 Why are Net Exports Added While Computing National Income by Expenditure Approach?
There are 2 reasons:
(i) Exports (X) represent foreign spending on domestic goods and services we produce, their spending
adds to the demand for domestically produced goods & services. Goods and services exported to
other countries are produced by producers operating within the domestic territory of a country.
(ii) Expenditure on imports (M) of goods and services is a part of the aggregate spending by the
residents of a country, though it is a part of the domestic product of other countries.
Thus, net exports account for domestic spending on foreign goods and foreign spending on
domestic goods. Since, net exports are exports minus imports, adding net exports is same as
adding exports and subtracting all imports.
(C) Estimation of GDPMP
 To calculate GDPMP by the expenditure method, we add up final expenditures on the goods and
services produced by all the economic sectors of an economy. Expenditures incurred on
consumption and investment are final expenditure.
 According to expenditure method the sum total of four items consumption investment,
government spending and net exports, is the total final expenditure which gives us GDP at
market price.

GDPMP = C + I + G + (X – M)

(D) Estimation of NNPFC (National Income)

 NFIA is added, depreciation and net indirect taxes are subtracted to GDPMp to arrive at NNPFC
or National Income.
 For National Income (NNPFC):

NNPFC = GDPMP – D – NIT + NFIA

 Precautions of Expenditure Method:
(i) Avoid Intermediate Expenditure: To avoid double counting expenditure on all intermediate goods
should not be included in the estimation of national income. (Like expenditure on raw materials
etc.)
(ii) Avoid Expenditure on Second Hand Goods: Expenditure on purchase of second hand goods is
excluded from national income, because this reflects only the transfer in the ownership of these
goods. It does not lead to any addition to the economy's output. Buying second hand goods is not
a fresh activity.
(iii)Exclude Expenditure on Financial Assets: Expenditure on financial assets like shares and bonds
(old and new) is excluded because it reflects only the transfer in the ownership of these assets.
Buying financial assets is not a production activity.
(iv) Avoid Transfer Expenditure: Government expenditure on all transfer payments is excluded
because transfer payment are payments which are made without any factor services rendered in
return in the current period.
(v) Include the Self use of Own Produced Final Product: For example a house owner using the house
for self. Since the house is producing a service, the imputed value of this services must be
included in national income.
 3.6 Real and Nominal GDP

After the measurement of GDP it remains to be seen as how the changes in the GDP value are expressed in
relation to the price level changes. For this we must explain the two ways of computing GDP at current
market prices and constant prices.

 Real GDP (GDP at Constant Prices)

 Real GDP values the current year’s output at some base year prices. It is the value measured at
Constant prices (base year prices) of all the final goods and services produced in the domestic
territory of a country during one year.
 It is obtained by multiplying the goods and services produced in the current year with the prices
prevailing in the current year.
 Nominal GDP (GDP at Current Prices)
 Nominal GDP values current year’s output at current year prices. Monetary GDP or GDP at current
prices in the money value of all final goods and services measured at current prices produced in the
domestic territory of a country during one year.
 It is obtained by multiplying the goods and services produced in the current year with the prices
prevailing in the current year.
 Example of GDP at Current Price and GDP at Constant Price
 2010-11 2014-15 Base Current Real
(Nominal GDP) (Nominal GDP) Year Year GDP
(2010- (2014- (2014-
11) 15) 15)

Commodity Output Price Market Output Price Market Price Output Market
(units) (Rs) Value (units) (Rs) Value (Rs) (units) Value
(i) (ii) (Rs) (iii) (iv) (Rs) (ii) (iii) (Rs)
(i) * (ii) (iii)*(iv) (ii)
*(iii)
A 500 10 5000 400 25 10000 10 400 4000

B 200 5 1000 50 20 1000 5 50 250

C 100 2 200 50 10 500 2 50 100

Total 6,200 11,500 4,350

 Nominal GDP of 2010-2011 = Rs 6,200

 Nominal GDP of 2014-2015 = Rs. 11,500
 Real GDP of 2014-15 = Rs 4,350
Advantages of Real GDP

Real GDP has the following advantages:

• Real GDP is useful in finding out the effect of increased production of goods and services on the real
development capacity of the economy in general.

• Real GDP also enables one to make a year to year comparison of the change in the growth rate of
output of goods and services. An expansion phase of the economy is a period of rising real GDP It is a
better indicator of economic growth. An increase in the real GDP improves the standard of living.
• It is also often used in making international comparisons of economic performances across the
countries.

The objective of using constant prices is to eliminate the effect of price changes. For this the value of current year’s
GDP (Nominal GDP) is expressed in terms of prices prevailing during a reference year in the past, which is called the
base year.
 Difference between GDP at Constant Prices and GDP at Current Prices:

Basis GDP at Constant Prices GDP at Current Prices

Meaning It is the value of current output at base year It is the value of current output at current
prices. year prices.
Alternative It is also called real GDP It is also called monetary or nominal GDP,
 Name
Change It can increase only when output of goods It can rise either when output of goods and
and services rise. services rise or current price rise
Reliable Index It is a reliable index of economic growth It is not a reliable index of economic
and economic welfare i.e. more GDP at growth, i.e. there is no confirmed
constant prices implies more economic relationship between GDP at current prices
growth. and economic growth.
Measurement Base Year Price (P0) x Current Year Output Current Year Price (P1) x Current Year
(Q1) Output (Q1)
 Conversion

(a) Conversion of Nominal GDP into Real GDP:

𝑮𝑫𝑷 𝒂𝒕 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑷𝒓𝒊𝒄𝒆𝒔 (𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷)
Real GDP = 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑷𝒓𝒊𝒄𝒆 𝑰𝒏𝒅𝒆𝒙
× 100
(b) Conversion of Real GDP into Nominal GDP:
𝑮𝑫𝑷 𝒂𝒕 𝑪𝒐𝒏𝒕𝒂𝒏𝒕 𝑷𝒓𝒊𝒄𝒆𝒔 (𝑹𝒆𝒂𝒍 𝑮𝑫𝑷) ×𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑷𝒓𝒊𝒄𝒆𝒔
Nominal GDP = 𝟏𝟎𝟎

 GDP Deflator (Price Index)

 It measures the average level of the prices of all goods and services produced in the economy during an
accounting year. It shows change in the GDP because of change in price level.
Real GDP Nominal GDP Price Level
Base Year Current Year
Equal (=) Equal (=)
More (>) More (>)
Less (<) Less (<)

3.7 GDP and Welfare (Limitations of GDP as Indicator of Welfare)

 Often GDP is considered as index of welfare of the people. Increase in GDP means increase in the
level of welfare of the people. When real GDP rises, flow of goods and services tends to rise, other
things remaining constant. This means greater availability of goods per person, implying high level of
welfare. But there are strong exceptions to this generalization.
 GDP of a country not to be taken as an index of the welfare of the people of that country because of
following observations:
(i) Distribution of GDP:
 If the GDP of the country is rising, it is not necessary that the welfare will also rise. This is because
with every increase in the level of GDP, distribution of GDP is getting more unequal, welfare level
of the society may not rise.
  In the other words, the rise in GDP may be concentrated in the hands of very individuals or firms.
As a result of increase in GDP the transfer of wealth takes place from the poor to the rich. In such
a case the welfare of the country cannot be said to have increased.
No. of Persons 2015 2016

Earning Total Earning Earning (Per Person) Total Earning

(Per Person)
90 10 90 X 10 = 900 9 90 X 9 = 810

10 10 10 X 10 = 100 20 10 X 20 =200

Total GDP = Rs 1000 GDP = Rs 1010

 It is assumed that there had been no change in the price level.

 GDPMP of 2016 is higher by Rs.10.
 But the real income of 90 percent of people have decreased by 10 pct cent.
 Only 10 per cent have benefited by rise in their income by 100 per cent.
 It is clear the GDP of a country has increased but 90 pct cent of the people are worse off. With
increase in GDP inequalities of income increase, poor become more poor while rich become more
rich. This may lead to decline in welfare even though GDP has increased.
(ii) Composition of GDP
If product mix has more of war goods like explosives, guns, bombs; then destruction will increase and
welfare will reduce. Similarly, increase in GDP may be purely due to an increase in the goods which are
not socially desirable such as drugs, etc. This will surely not enhance economic welfare.
(iii) Non-monetary Exchanges
 Many transactions or activities in an economy are non-market transactions or non evaluated in
monetary terns but increasing the welfare. For example, the domestic services of women within the
home, the exchanges which take place in the informal sector without use of money (barter exchange)
affect the welfare. These activities are not registered as part of economic activity as money is not
being used in exchange. GDP may not give us a clear indication of the real level of output and quality
of life of a country.
 In developing economies like India where many remote regions arc underdeveloped, barter system of
exchange is not totally non-existent. Non-monetary transactions are quite evident in rural areas where
payments for farm-labours are often made in kind rather than cash. But such transactions are not
counted in the GDP, because they are outside the monetary system of exchange. This is a case of
underestimation of GDP.
(iv) Externalities
 Externalities refer to the benefits (or harms) a firm or an individual causes to another for which
is not paid (or penalised).
  In other words, it refers to good and bad impact of an activity without paying the price or
penalty for that. Impact of externalities is not accounted in the index of social welfare in terms
of GDP.
 Externality occurs when the actions of consumers or producers give rise to negative or positive
side effects on third party who are not part of these actions, and whose interests are not taken
into consideration. For example, introduction of' metro rail on one hand has increased the
prices of property but has also saved the time and money of general public and has provided
safe means of transport.
 Externalities do not have any market in which they can be bought or sold.
Example:

(a) Positive externalities: In case of positive externalities GDP will underestimate the actual welfare of the
country.
Use of Public parks by the people for pleasure for which no payments are made by the public. It increases welfare
through positive effect on health.

(b) Negative externalities: GDP is not taking into account negative externalities which decreases the
welfare.

Polluting river by an oil refinery reduces welfare through negative effect on health, environmental pollution caused
by industrial plants.
(v) Ecological Degradation
 With rise in GDP, there will be rise in industrialization and urbanization. This will raise pollution
of air, water and noise. With rise in GDP, there will be ecological degradation which will reduce
welfare of the people.
 We conclude that GDP and economic welfare are not positively related. An increase in GDP does
not bring about a corresponding increase in economic welfare.
Items Included/Excluded in National Income (National Product)
Included or
Items Reason
Excluded
Rent free house given to an employee by an Included According to Income method, it is a part of
employer. wages and salaries in kind to employees.
Purchase by foreign tourist. Included According to Expenditure method, these are
part of exports.
Salary received by an Indian resident Included It is a part of factor income from abroad.
working in Russian embassy in India.
Profits earned by an Indian bank from its Included It is a part of factor income from abroad.
branches abroad.
money received from sale of second-hand Excluded Second-hand goods are already included in the
goods. accounting year when these were produced.
Wheat grown by a farmer but used entirely Included It affect the current flow of goods and services.
for family's consumption. Therefore, imputed value should be included.
Commission received by a dealer from the Included According to income method, it is a part of
buyer and seller of a house. [Delhi 20021 factor income of the dealer for his services.
Services rendered by family members to Excluded It is difficult to estimate the market value of
each other. services rendered by family members.
Expenditure by government in providing Included According to expenditure method, it is a part of
free education. the government's final consumption
expenditure.
Purchase of a truck to carry goods by a Included According to expenditure method, it is a part of
production unit. the gross domestic capital formation.
Entertainment tax received by the Excluded It is an indirect tax and a compulsory transfer
government. payment received by the government.
Salaries paid to Russians working in Indian Excluded It is a part of factor income paid to abroad.
embassy in Russia.
Capital gains to Indian residents from sale of Excluded These are not production transactions. These do
shares of a foreign company not contribute anything to the current flow of
goods and services.
Earning of shareholders from the sale of Excluded it is a financial transactions and does not
shares directly affect the flow of production

Services of owner occupied houses Included Imputed rent of owner occupied houses will be
included as it is a factor income
Sale of an old car. Excluded it was treated as a part of the national income
the year it was produced. It is not the part of
current production.
Scholarship to students by the government Excluded it is a transfer payment

Interest paid by consumer households Excluded it is not a factor payment because borrowing by
(not included) the households is used to meet their
consumption, not used for production.
Interest receive on Govt. loans. Not included General govt. borrow funds for consumption

Purchased of a new mobile by a household Included According to expenditure method it is a part of

final consumption expenditure of household
 sector

School fees paid by students Included Part of personal final consumption expenditure
of households. (Expenditure method)
House rent allowance paid to workers by Included According to income method it is the part of
producers compensation of employees
Examination fees paid by students Included Part of private final consumption expenditure
(Expenditure method)
Services of a dealer in second-hand goods Included Value of services not of goods is included. It is
an earned income
Interest on debentures Included it is a factor payment because debenture means
loan by a production unit
Dividends received on shares Included It is a factor income (Income method)

Interest received by a household from a Included It is a factor income

commercial bank
Allowance of a number of parliament Included Part of compensation of employees

Increase in the prices of stocks lying with a Not included It is a capital gain and does not lead to any
trader production activity.
Expenditure on fertilisers by a farmer Not included It is a intermediate cost for the farmer and
deducted from value of output while arriving at
national income.
Purchase of tractor by a farmer Included it is capital formation (investment) by a farmer

Interest received on loans given to a friend Not included it is a non-factor receipt as the loan is not used
for purchasing a car for production but for consumption.
Dividend received by an Indian from his Included it is factor income from abroad
investment in shares of a foreign company
Money received by a family in India from Not included it is transfer receipts
relatives working abroad
Free medical facilities to employers. Included It is part of compensation of employees

Pension to senior citizens Not included it is transfer payment

Interest payment by a govt. owned firm Included It is a factor payment because the loan was
taken by a firm
Payment of corporation tax Not included Any tax payment is a transfer payment as no
good or service is provided in return
Expenditure on providing police services by Included Expenditure on any free service by government
government final consumption expenditure
Bonus Included It is compensation paid to employees

Addition to stocks Included It is investment- a final expenditure

Purchase of a taxi by a taxi driver Included It is final expenditure on Investment

Fees paid to mechanic by a firm Not included It is an intermediate cost of the firm

Interest paid by an individual Not included The loan in taken to meet consumption
expenditure and feature interest paid on such
loan is not a factor payment
Expenditure on purchasing car by a firm Included It is an investment expenditure a final
expenditure.
Expenditure by a firm on payment of fees to Not included Intermediate cost to the firm
a charted accountant
Payment of corporate tax by a firm. Not included It is a transfer payment

Purchase of refrigerator by a firm for own Included It is investment expenditure

use
Payment of interest by a firm to a bank Included Factor payment by the firm because the firm
borrow money for carrying out production.
Payment of interest by a bank to an Included Factor payment because bank borrows for
individual carrying out banking services.
Payment of interest by an individual to a Not included The individual borrows for consumption and not
bank for production
Purchase of machinery by a factory for own Included It is investment expenditure by firm
use
Purchase of uniforms for nurses by a Not included It is intermediate cost for the hospital
hospital
 Items Included / Excluded in Domestic Income (Domestic Product)
Included or
Items Reason
Excluded
Profit earned by branches of foreign bank in India. Included Profits are earned in the domestic territory
of India.
Profit earned by a company in India which is Included Profits are earned in the domestic territory
owned by a non-resident of India.
Profit earned by a branch of state bank of India in Excluded SBI is located outside the domestic
England territory of India. In other words profits are
earned outside the domestic territory of
India.
Compensation of employees to the residents of Included Indian embassy is a part of domestic
Japan working in Indian embassy in Japan. territory of India. Therefore, it will be part
of domestic factor income of India.
Rent paid by the embassy of Japan in India to a Excluded Embassy of Japan in India is a part of
resident Indian. domestic territory of Japan. Therefore, it
will be part of domestic factor income of
Japan.

Items Included or Reason

Excluded1
Salaries to Indian residents working in the Excluded Embassy of Russia in India is a part of
Russian embassy in India. domestic territory of Russia. Therefore, it will
be part of domestic factor income of Russia.
Income earned by Indian employees working Excluded Embassy of Pakistan in India is a part of
in the Pakistan embassy in India. domestic territory of Pakistan. Therefore, it
will be part of domestic factor income of
Pakistan.
Factor income from abroad. Excluded It is earned outside the domestic territory of
India.
Old age pension given by the government Excluded It is transfer income.
Profit earned by a resident of India from his Excluded Profita are earned outside the domestic
company in Singapore. territory of India.
 Items not Included in Domestic Income and National Income
Category Items / Examples Reason
Transfer Incomes Scholarships These are transfer payments and not
(Transfer Payments) Gifts related with any production activity In
other words these do not reflect any
Financial help to flood victims
production of and services
Birthday gifts
Donations
Unemployment allowance
Old age pension
Financial help to beggars
Pocket money to child
Remittance from ROW
Compulsory Transfer Wealth tax These are compulsory transfer payments
Death duty and paid out of past savings or wealth of
the tax payers.
Indirect taxes
Tax on windfall gains
Windfall Gains Lottery prize These do not affect current flow of
Horse race production of goods and services.
Contests
Intermediate Purchase of vegetables by a hotel. Expenditure on final goods and services are
Purchase of raw material by a firm included in the national income.
Expenditure Electricity consumption by a firm.
Purchase of milk by a restaurant
Purchase of fruits by a hospital
canteen.
Sale and Purchase of Sale of shares These do not affect current flow of
Financial Assets Sale of bonds production of goods and services.
Sale of debentures
Sale and thitvhnse oc Stile of old mobile These were treated as a part of national
Second-hand Goods Sale of old machine income the year these were produced. It is
Sale of old car fre of current production.
Non-mnNet Services of mother It is difficult to measure the market value
Transactions A teacher teaching his eon of these services because these are to
Services of housewife earn income.
Kitchen gardening
Capital Loss-gain Profit due to increase in price of shares These do not affect current flow of
Profit from sale of second-hand goods production of goods and services.
 Profitt due to increase in price of land.

Solved Numericals:
 Value Added Method
Q.1 Calculate Gross Value Added at Market Price (GVAup)
Items Rs. In crores
Sales 1050
Closing stock 4S
Opening stock 25
Purchase of machine 200
Intermediate consumption 450
Purchase of raw material 200
Exports 4S
Imports 30
Consumption of fixed capital 60
Sol:
 GVAMP = Value of output – Intermediate consumption
 △Stock = Closing Stock – Opening Stock
 GVAMP = (Sales + △Stock) – Intermediate consumption
 GVAMP = 1050 + (45 – 25) – 450
 GVAMP = 1050 + 20 - 450
 GVAMP = Rs. 620 crores
Q.2 Calculate Net Value Added at Factor Cost (NVAFC)
Items Rs. in crores
Domestic sales 9S0
Net addition to stock 30
Closing stock 25
Depreciation 40
Subsidies 25
Purchase of raw material 300
Exports 35
Imports 40
Excise duties 20
Sol:
 (i) GVAMP = Value of Output – Intermediate Consumption
GVAMP = (Domestic Sales + Exports + △Stock) – Intermediate Consumption
GVAMP = 950 + 30 + 35 - 300
GVAMP = Rs. 715 crores
(ii) NVAFC = GVAMP – D – NIT
NVAFC = 715 – 40 – (20 – 25)
NVAFC = 715 – 40 + 5
NVAFC = Rs. 680 crores
Q.3 Calculate Gross Value Added at Factor Cost (GVAFC)
Items Rs. in crores
Sales 450
Value of output 700
Closing stock 40
Consumption of fixed capital 35
Subsidies 25
Purchase of raw material from domestic market 40
Exports 35
Imports 25
Rent IOO
Sol:
(i) GVAMP = Value of output – Intermediate Consumption
Intermediate Consumption = Purchase of raw material from domestic market + Imports
GVAMP = 700 – (40 + 25)
GVAMP = 700 – 65
GVAMP = Rs. 635 crores
(ii) GVAFC = GVAMP - NIT
GVAFC = 635 – (0 – 25)
GVAFC = 635 + 25
GVAFC = Rs. 660 crores
Q4. Calculate Net Value Added at Factor Income (NVAFC)
Items Rs. in crores
Sales 450
Purchase of machine IOO
Import of raw material 55
Depreciation 25
 Subsidies 40
Purchase of raw material 200
Exports 25
Sales tax 35
Excise duties 20
Sol:
(i) GVAMP = Value of Output – Intermediate Consumption
GVAMP = (Sales + △Stock) – Intermediate Consumption
GVAMP = 450 - 200
GVAMP = Rs. 250 crores
(ii) NVAFC = GVAMP – NIT - D
NVAFC = 250 – (35 + 20 – 40) - 25
NVAFC = 250 – 15 - 25
NVAFC = Rs. 210 crores.
Q.5 Calculate GDPMP and National Income.
Items in crores
Sales by firm A 300
Sales by firm B to firm A 100
Sales by firm A to firm B 50
Sales by firm B to households 50
Change in stock of firm A 25
Closing stock of firm B 20
Opening stock of firm B 10
Exports of firm A 35
Imports of firm B 25
Imports of firm A 25
Exports of firm B 30
Net indirect taxes 20
Consumption of fixed capital 10
Net factor income from abroad (-) 5
Wages and salaries 200
Rent 100
Sol:
 Firm A
Sales △Stock Intermediate Consumption
(Purchase)
300 25 100 + 25 = 125
Firm B
Sales △Stock Intermediate Consumption
(Purchase)
100 + 50 + 30 = 180 20 – 10 = 10 50 + 25 = 75
(i) GVAMP of firm A = Value of Output – Intermediate Consumption
GVAMP of firm A = (Sales + △Stock) – Intermediate Consumption
GVAMP of firm A = 300 + 25 - 125
GVAMP of firm A = Rs. 200 crores
(ii) GVAMP of firm B = Value of Output – Intermediate Consumption
GVAMP of firm B = (Sales + △Stock) – Intermediate Consumption
GVAMP of firm B = 180 + 10 – 75
GVAMP of firm B = Rs. 115 crores
(iii) GDPMP = GVAMP of firm A + GVAMP of firm B
GDPMP = 200 + 115
GDPMP = Rs. 315 crores
(iv) National Income (NNPFC) = GDPMP – D – NFIA – NIT
NNPFC = 315 – 10 + (-)5 – 20
NNPFC = 315 – 10 – 5 – 20
NNPFC = Rs. 280 crores

Q.6 Calculate Domestic Income:

Items Rs. in crores
Sales by firm X to household 200
Sales by firm X to firm Y 150
Sales by firm Y to firm X 50
Sales by firm Y 400
Exports of firm X 30
Imports of firm Y 40
Imports of firm X 25
Net indirect taxes 30
Consumption of fixed capital 25
Closing stock of firm X 35
Change in inventory of firm Y (-)10
Wages 200
 Transfer payments from government 250
Sol:
Firm X
Sales △Stock Intermediate Consumption (Purchase)
200+ 150 + 30 - 380 35 50+25-75
Firm Y
Sales △Stock Intermediate Consumption (Purchase)
400 (-)10 150 + 40 190

(i) GVAMP of firm X = Value of Output – Intermediate Consumption

GVAMP of firm X = (Sales + △Stock) – Intermediate Consumption
GVAMP of firm X = 380 + 35 - 75
GVAMP of firm X = Rs. 340 crores
(ii) GVAMP of firm Y = Value of Output – Intermediate Consumption
GVAMP of firm Y = (Sales + △Stock) – Intermediate Consumption
GVAMP of firm Y = 400 +(-) 10 - 190
GVAMP of firm Y = Rs. 200 crores.
(iii) GDPMP = GVAMP of firm X + GVAMP of firm Y
GDPMP = 340 + 200
GDPMP = Rs. 540 crores.
(iv) Domestic Income (NDPFC) = GDPMP – D – NIT
NDPFC = 540 – 25 – 30
NDPFC = Rs. 485 crores.

Q.7 Calculate GDPMP and National Income:

Items Rs. in crores

Sales by primary sector 500
Sales by secondary sector 300
Sales by tertiary sector 250
Change in stock of primary sector 25
Change in stock of secondary sector 35
Change in stock of tertiary sector 30
Intermediate consumption of primary sector 100
Intermediate consumption of secondary sector 75
Intermediate consumption of tertiary sector 25
 Indirect taxes 45
Subsidies 25
Net factor income to abroad 25
Capital consumption allowance 40

Sol:

Sales △Stock Intermediate Consumption

(Purchase)

500 + 300 + 250 = 1050 25 + 35 + 30 = 90 100 + 75 + 25 = 200

(i)
GDPMP = Value of Output – Intermediate Consumption
GDPMP = (Sales + △Stock) – Intermediate Consumption
GDPMP = 1050 + 90 - 200
GDPMP = Rs. 940 crores.
(ii) National Income (NNPFC) = GDPMP – D + NFIA – NIT
NNPFC = 940 – 40 + (-)25 – (45 – 25)
NNPFC = 940 – 40 – 25 – 20
NNPFC = Rs. 855 crores.
 Income Method

Q.8 Calculate National Income and GDPMP:

Items Rs. in crores

Wages and Salaries in cash 1000

Undistributed profits 35

Dividend 45

Rent 100

Interest 120

Profit 130

Mixed income 300

Employee’s contribution to social security schemes 100

Consumption of fixed capital 50

Indirect taxes 100

Subsidies 75

Net factor income from abroad (-)20

Sales 600

Sol:

NDPFC = Compensation of Employees (COE) + Operating Surplus (OS) + Mixed Income of Self
Employed
NDPFC = 1000 + (100 + 120 + 130) + 300
NDPFC = Rs. 1650 crores.
(i) NNPFC = NDPFC + NFIA
NNPFC = 1650 + (-) 20
NNPFC = Rs. 1630 crores
(ii) GDPMP = NDPFC + D +NIT
GDPMP = 1650 + 50 + (100 – 75)
GDPMP = Rs. 1725 crores.
 Expenditure Method

Q.9 Calculate National Income:

Items Rs. in crores
Private final consumption expenditure 1000
Government final consumption expenditure 600
Net domestic capital formation 450
Change in stock 50
Depreciation 100
Exports 150
Imports 170
Net factor income from abroad (-)40
Indirect taxes 100
Subsidies 75
Operating surplus 200
 Sales 150

Sol:
(i) GDPMP = C + I + G + (X – M)
GDPMP = 1000 + (450 + 100) + 600 + (150 – 170)
GDPMP = 1000 + 550 + 600 - 20
GDPMP = Rs. 2130 crores.
(ii) National Income (NNPFC) = GDPMP – D + NFIA – NIT
NNPFC = 2130 – 100 + (-) 40 - 25
NNPFC = 2130 – 100 – 40 – 25
NNPFC = Rs. 1965 crores.
Q.10 Calculate Domestic Income:
Items in crores
Private final consumption expenditure 1200
Government final consumption expenditure 600
Net domestic fixed capital formation 800
Net addition to stock 100
Gross domestic fixed capital formation 850
Net imports 40
Net factor income from abroad (-)20
Net indirect taxes 150
Intermediate consumption 200
Sol:
(i) GDPMP = C + I + G + (X – M)
GDPMP = 1200 + (850 + 100) + 600 + ( - 40)
GDPMP = 1200 + 950 + 600 - 40
GDPMP = Rs. 2710 crores.
Depreciation = Gross Domestic Fixed Capital Formation – Net Domestic Fixed Capital Formation
Depreciation = 850 – 800 = 50
(ii) Domestic Income (NDPFC) = GDPMP – D – NIT
NDPFC = 2710 – 50 – 150
NDPFC = Rs. 2510 crores.
Q.11 Calculate Gross Domestic Fixed Capital formation:
Items Rs. In crores
Private final consumption expenditure 1000
Government final consumption expenditure 500
Net factor income from abroad 20
 Net exports 500
GDPMP 2500
Opening stock 300
Closing stock 200
Sol:
(i)
I = Gross Domestic Fixed Capital Formation
I = GDFCF + (200 – 300)
I = GDFCF – 100
(ii) GDPMP = C + I + G + (X – M)
2500 = 1000 + (GDFCF – 100) + 500 + 500
GDFCF = Rs. 600 crores.
 Combined Numerical
Q.12 Calculate National Income by using income and expenditure method:
Items Rs. In crores
Wages and salary in cash 1000
Rent 50
Interest 45
Undistributed profits 35
Corporation tax 25
Mixed income 200
Dividend 45
Net factor income to abroad (-) 20
Change in stock 40
Private final consumption expenditure 800
Gross domestic fixed capital formation 400
Government final consumption expenditure 300
Subsidies 50
Consumption of fixed capital 90
Indirect taxes 100

Sol:
(a) Income Method
 (i) NDPFC = Compensation of Employees (COE) + Operating Surplus (OS) + Mixed Income of Self
Employed
NDPFC = 1000 + (50 + 45 + 35 + 25 + 45) + 200
NDPFC = Rs. 1400 crores.
(ii) NNPFC = NDPFC + NFIA
NNPFC = 1400 + 20
NNPFC = Rs. 1420 crores.
(b) Expenditure Method
(i) GDPMP = C + I + G +(X – M)
GDPMP = 800 + (400 + 40) + 300 + 0
GDPMP = Rs. 1540 crores.
(ii) National Income (NNPFC) = GDPMP – D +NFIA – NIT
NNPFC = 1540 – 90 + 20 – (100 -50)
NNPFC = 1540 – 90 + 20 – 50
NNPFC = 1420 crores.
Q.13 Calculate Net Domestic Product at market price by using Income and Expenditure methods:
Items Rs. in crores
Wages and salary in cash 1200
Rent 150
Interest 200
Employee's contribution to social security schemes 100
Employers contribution to social security schemes 150
Private final consumption expenditure 800
Net exports 50
Operating surplus 600
Income from abroad IOO
Net domestic fixed capital formation 500
Government final consumption expenditure 600
Income to abroad 50
Gross national disposable income 2150
Net indirect taxes 100
Value of output 2000
Net national disposable income 2100
 Change in stock 100
Sol:
(a) Income Method
(i) NDPFC = Compensation of Employees (COE) + Operating Surplus (OS) + Mixed Income of Self
Employed
NDPFC = (1200 + 150) + 600 + 0
NDPFC = Rs. 1950 crores

(ii) NDPMP = NDPFC + NIT

NDPMP = 1950 + 100
NDPMP = Rs. 2050 crores.
(b) Expenditure Method
(i) GDPMP = C + I + G + (X – M)
GDPMP = 800 + (500 + 50 + 100) + 600 + 50
Depreciation = Gross National Disposable Income – Net National Disposable Income
Depreciation = 2150 – 2100 = 50
GDPMP = Rs. 2100 crores.
(ii) NDPMP = GDPMP – D
NDPMP = 2100 – 50
NDPMP = Rs. 2050 cores.
Q.14 Calculate National Income by using Income and Expenditure methods:
Items Rs. in crores
Wages and salary in cash 600
Rent 200
Interest 20
Consumption of fixed capital 10
Employer’s contribution to social security schemes 55
Private final consumption expenditure 800
Net exports 70
Royalty 25
Net factor income from abroad 30
Gross domestic capital formation 120
Government final consumption expenditure IOO
Subsidies 10
 Profit 30
Indirect taxes 60
Change in stock 50
Mixed income of self employed 100

Sol:
(a) Income Method
(i) NDPFC = Compensation of Employees (COE) + Operating Surplus (OS) + Mixed Income of Self
Employed
NDPFC = (600 + 55) + (200 + 25 + 20 + 30) + 100
NDPFC = Rs. 1030 crores.
(ii) NNPFC = NDPFC + NFIA
NNPFC = 1030 + (-)30
NNPFC = Rs. 1000 crores
(b) Expenditure Method:
(i) GDPMP = C + I + G + (X – M)
GDPMP = 800 + 120 + 100 + 70
GDPMP = Rs. 1090 crores.
(ii) National Income (NNPFC) = GDPMP – D + NFIA – NIT
NNPFC = 1000 – 10 + (-) 30 – (60 – 10)
NNPFC = 1090 – 10 – 30 – 50
NNPFC = Rs. 1000 crores
Q.15 If Real GDP is Rs. 300 and Price Index (with base = 100) is 110, calculate nominal GDP.
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
Sol: Real GDP = × 100
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
300 = × 100
110

300 ×110
Nominal GDP = = 𝑅𝑠. 330
100
O.16 If the Nominal GDP is Rs. 2400 and Price Index (with base = 100) is 120, calculate Real GDP
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
Sol: Real GDP = Real GDP = × 100
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥
2400
Real GDP = 120 × 100 = Rs.2000
Q.17 If the Real GDP is Rs. 500 and Nominal GDP is Rs. 350, calculate Price Index (base = 100)
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
Sol: Real GDP = 𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 × 100
550 550 ×100
= 𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 × 100 → 𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 = 5000 = 110
Q.18 Only one product X is produced in the country. Its output during the year 2012 and 2013 was 100 units
and 110 units respectively. The market price of the product during the year was Rs. 50 and Rs. 55 per unit
respectively. Calculate the percentage change in Real GDP and Nominal GDP in year 2013 using 2012 as the
base year.
Sol:

Physical Output Market Price per Real GDP (Rs.) using Nominal GDP (Rs.) using
Year (units) unit (Rs.) Base Year Price Current Year Price

2012 IOO 50 5000 5000

2013 110 55 5500 6050

△𝑖𝑛 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
Percentage change in Real GDP = 𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 × 100
500
= 5000 × 100 = 10%

△𝑖𝑛 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃

Percentage Change in Nominal GDP = × 100
𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
1050
= 5000 × 100 = 21%

Key Points
 Value Added: Value added is the difference between value of firms output and the value of intermediate
consumption.
 Double Counting: Counting the value of a commodity more than once in the measurement of national
income is called double counting.
 Domestic Income: It is the sum total of factor incomes generated by all the production units located within
the domestic territory of a country during a period of one year.
 Compensation of Employees (COE): COE is the payment made by the producers to their employees in the
form of wages and salaries and other payments in cash and kind and social security benefits, in return of
work done.
 Operating surplus (OS) : It is the income earned from the ownership and control of capital. It is also known
as income from property and entrepreneurship.
 Mixed Income of Self-Employed: Mixed income refers to the incomes of the self employed persons using
their factor services (labour, land, capital and entrepreneurship) to produce goods and services. These
incomes are mixed in terms of wages, rent, interest and profits.
 Net Exports: Net exports are the difference between the value of goods and services exported to other
countries and the value of goods and services imported from other countries.
 Real GDP: It is the value measured at constant prices (base year prices) of all the final goods and services
produced in the domestic territory of a country during one year.
 Nominal GDP: Nominal GDP is money value of all final goods and services measured at current prices
produced in the domestic territory of a country during one year.