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National Income

Accounting
Definitions of National
Income
“The labour and capital of the 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 net annual income
or
 revenue of the country, or the national
dividend.”
 Alfred Marshal
Defi……..

 Irving Fisher:
 “The national dividend or income consists
solely of services as received by ultimate
consumers, whether from their material or
from their human environment.”
 National Income Committee of India,:

 “ National income estimate measures the


volume of commodities and services turned
out during a given period counted without
duplication.”
Basic Concepts
 Gross National Product

 Gross National Product (GNP) is the total


value of output (goods and services)
produced and income received in a year by
domestic residents of a country. It includes
profits earned from capital invested abroad.
 Gross Domestic Product
 Gross Domestic Product (GDP) is the total
value of output (goods and services)
produced by the factors of production
located within the country’s boundary in a
year. The factors of production may be
owned by any one – citizens or foreigners.
 GNP – Net income earned from abroad =
GDP
NET NATIONAL PRODUCT

 Net National Product (NNP) is arrived at by


making some
 adjustment, with regard to depreciation, in GNP.
As noted above, GNP is the total value of output
produced and income received in a year by domestic
residents of a country. Over this one year period, the
available plant and machinery (capital) will wear and
tear and get condemned. Such decline in the capital
assets due to wear and tear is measured as ‘capital
depreciation’.
 NNP is arrived at by deducting value of such
depreciation from GNP.
 That is GNP – Depreciation = NNP
NET DOMESTIC PRODUCT
(NDP)
 Net domestic product (NDP) is also
arrived from GDP by making adjustment with
regard to depreciation in the same way
described above.
 (NDP is calculated by deducting
depreciation from GDP).
 GDP – Depreciation = NDP
PER CAPITA INCOME
 Per capita income (or) output per person is
an indicator to show the living standards of
people in a country. If real PCI increases, it
is considered to be an improvement in the
overall living standard of people.
 PCI is arrived at by dividing the GDP by the
size of population. It is also arrived by
making some adjustment with GDP.

CIRCULAR FLOW OF
INCOME
METHODS OF CALCULATING
NATIONAL INCOME

 Product or Output Method


 Income Method
 Expenditure Method
OUTPUT OR PRODUCT
METHOD
 In the output or product method, the measures of
GDP are calculated by adding the total value of
the output (of goods and services) produced by all
activities during any time period, such as a year.
The major challenge of this method is the problem
of double-counting. The output of many
businesses is the inputs of some other businesses.
 For example, the output of the tyre industry is the
input of racing bike industry. Counting the final
output of both industries will result in double-
counting of the value of tyre. This problem can be
avoided by including only the value added at each
stage of production or by adding only the final
value of output produced.
INCOME METHOD

 In the income method, the measures of GDP are calculated by


adding all the income earned by various factors of production which are
engaged in the production of output. The various incomes included to
compute the gross national income are:
 � Wages and salaries
 � Income of self-employed
 � Profits and dividends of business corporations
 � Interest
 � Rent
 � Surplus of government enterprises
 � Net flow of income from abroad

 All of them are known as factor incomes and they are paid in
return for the inputs engaged in some productive process which have
resulted in corresponding output. The sum of all these incomes (or
factor prices ) provide us the measure of national income.
EXPENDITURE METHOD
 Expenditure Method
 In the expenditure method, the measures of GDP are
calculated by adding all the expenditures made in the
economy. The essential components of expenditure are:
 C = consumption expenditures
 I = domestic investment
 G = government expenditures
 X = exports of goods and services
 M = imports of goods and services
 NR = net income receipts from assets abroad
 The sum of all these aggregate expenditure provides
us the measure
 of national income.
 GDP = E = C + I + G + (X-M)
 where E is aggregate expenditure.
NATIONAL INCOME
IDENTITIES
 NNP = GNP - Depreciation
 NNI = NNP -Indirect taxes
 PI = NNI - Retained earnings, corporate
taxes and interest on public debt
 PDI = PI - Personal taxes.
 where
 NNP - Net National Product
 NNI - Net National Income
 PI - Personal Income
 PDI - Personal Disposable Income
PROBLEMS IN CALCULATING
NATIONAL INCOME
 Black Money
 In countries where level of illegal activities, illegal
businesses and the level of corruption are very high,
the circulation of black money is so high, it has
created a ‘parallel economy’. It means unreported
economy which is equivalent to the size of officially
estimated size of the economy. GDP does not take
into account the ‘parallel economy’ as the
transactions of black money are not registered. In
India, black money is all-pervasive, affecting not only
the economy but also the society at large. The black
economy as percentage of GDP is estimated to have
grown from about 3 percent in the mid-fifties to 40
per cent by 1995-96.

PRO…….
Non-Monetization
 In most of the rural economy, considerable
portion of transactions occurs informally and
they are called as non-monetized economy.
The presence of such non-monetary
economy in developing countries keeps the
GDP estimates at lower level than the actual.
Growing Service Sector
 In recent years, the service sector is
growing faster than that of the agricultural
and industrial sectors. Many new services
like business process outsourcing (BPO) have
come up. However, value addition in legal
consultancy, health services, financial and
business services and the service sector as a
whole is not based on accurate reporting and
hence underestimated in national income
measures.
PRO…..
Household Services
 The national income analysis ignores
domestic work, and housekeeping and social
services. Most of such valuable work
rendered by our women at home does not
enter our national accounting.
Social Services
 It ignores volunteer and unpaid social
services. For example, the wonderful
services of Mother Teresa is invaluable for
millions of poor, destitute, orphans and the
diseased but at the same time not included
in our GDP.
Environmental Cost
 National income estimation does not
distinguish between environmental-friendly
and environmental-hazardous industries. The
cost of polluting industries is not included in
the estimate.
SECTORAL CONTRIBUTION IN
INDIA

Sectoral Share in GDP (%)


SECTORS 2001=02 02-03 03-04 04-05 05-06 06-07 07-08
AGRICULTUR 23.2 20.8 21.0 18.8 18.3 17.6
E
INDUSTRY 25.5 26.7 26.4 27.5 27.6 27.7
SERVICE 51.2 52.6 52.5 53.7 54.1 54.7
SECTOR