Nation Income of India-Estimates

National Income
• National income measures the total value of
goods and services produced within the
economy over a period of time.
 National Income
• National income refers to the
• market value of goods and services
• produced by an economy
• during the period of one year,
• counted without duplication.
Why is national income important?
• Measuring the level and rate of growth of national
income is important to economists when they are
considering:

– Economic growth and where a country is in the business

cycle

– Changes to average living standards of the population

– Looking at the distribution of national income (i.e.

measuring income and wealth inequalities)
Estimates of National Income in India

Pre-Independence Estimates

Independence

Post-Independence Estimates
 Pre-Independence Estimates of
National Income
• No central authority or government
organization in India before independence to
prepare National Income Estimates.
• Certain important citizens and economists
made some estimates of national income at
their personal level.
 Methods of Measuring National
Income before Independence
• Non-scientific Method:
– Dadabhai Naoroji, Shah and Khambata, Wadia and
Joshi and certain others first estimated the value
of agriculture production.
– And a certain percentage of it was added as the
value of non-agriculture production.
 Scientific Method:
• Dr. V.K.R.V. Rao was the first person to adopt a scientific
procedure for the estimation of national income in 1931.
• He divided Indian Economy into two parts:
– Agriculture Sector: agriculture, forests, fishing and hunting.
– Corporate Sector: industries, construction, transport, and public
services.
• Dr. Rao used mixed method for estimation of national
income.
• Product Method for estimating income in the agriculture
sector.
• Income Method for estimating income in the corporate
sector.
• Net factor Income earned from abroad was added to the
income of both these sectors to obtain national income.
 Difficulties and Limitations
• No Government Agency:
– All estimates were prepared at personal level.
• Incomplete and unreliable data
• Different methods
– Choice of methods depended upon the preference of
the person concerned.
• Different geographical areas
– The income of the country was estimated on the basis
of data collected from different geographical areas.
• Based on the current prices
 Estimates of National Income after
Independence
• After independence, the government of India in 1949, appointed
National Income Committee
• Under the chairmanship of Prof. P.C. Mahalanobis
• Prof. Gadgil and Dr. V.K.R.V. Rao were two other members of the
committee.
• The committee presented its first report in 1951.
• Acc.to first report of this committee, National Income of India was
Rs. 8,710 Crore and Per Capita income was Rs.225 in 1948-49.
• This report discussed
– Details of methods for the estimation of data on National Income
– Various sources and limitations of data on national income
• Since 1955, the National Income estimates are being prepared by
Central Statistical Organization
 Estimates of National Income by
Central Statistical Organization (CSO)
• CSO has prepared 6 series of National Income
estimates relating to different base years:
• Conventional Series:
– Between 1952-1967, same methods of national income
estimates were adopted as recommended by National
Income Committee.
– 1948-49 was taken as base year
– After 1966, CSO discontinued the publication of
conventional series
• First Revised Series
– In 1967, certain major changes introduced by CSO.
– 1960-61 was taken as base year instead of 1948-49
– Economic activities were classified into three different
sectors, viz., Primary, Secondary and Tertiary Sector
• Second Revised Series
– CSO introduced this series in 1978
– 1970-71 taken as base year instead of 1960-61 4.
• Third Revised Series
– CSO introduced this series in 1988
– 1980-81 taken as base year instead of 1970-71
• Fourth Revised Series
– Introduced in 1999
– 1993-94 taken as base year
– Important methodological changes were introduced
• Fifth Revised Series
– Adopted in 2004-05
– Base year was 1999-2000
• New Series
– Adopted in 2009-10
– Base year was 2004-05
• Personal Income (PI)
Personal Income i s the total money income
received by individuals and households of a
country from all possible sources before direct
taxes.
• Per Capita Income (PCI)
Per Capita Income of a country is derived by
dividing the national income of the country
by the total population of a country.
 National Income:
Concept and Measurement
• Production of goods and service generates
income and income give rise to demand for goods
and service, demand give rise to expenditure, and
expenditure give further rise to production of
goods and service. there is a circular flow of
production, income and expenditure.
• On the basis of these flows, national income can
be analysed at
1. as a flow of goods and services
2. as a flow of incomes
3. as a flow of expenditure on goods and services.
Figure: Measuring National Product and National Income
 NATIONAL INCOME CONCEPTS
• Gross domestic product (GDP) is defined as
"an aggregate measure of production equal to
the sum of the gross values added of all
resident institutional units engaged in
production
• Gross national product (GNP) is the market
value of all the products and services
produced in one year by labor and property
supplied by the citizens of a country.
 Gross National Product at Market
Price (GNP mp)
• GNP mp refers to the total value of all the final
goods and services produced during the
period of one year plus the net factor incomes
earned from abroad during the year.
• The word “gross” is used to indicate that the
total national product includes in it that part
of product which represents depreciation.
• GNP includes the economic activities of all the
residents of a nation whether operating
within the country or outside it.
• It takes into account the incomes which the
residents get from rest of the world and at the
same time it excludes those incomes which arise
from the economic activities within the country
but have to paid out to the non-residents
• GNP being the monetary measure of all final
goods and services produced, is widely used as an
index for judging the performance of an economy
Net National Product at Marker Price
(NNP mp)
• price is equal to GNP minus the charges of
depreciation and replacements, where
depreciation represents the values of fixed
capital consumed during the process of
production.
• NNP mp = GNP mp – Depreciation. The
concept of NNP is important because it gives
an estimate of the net increase in the output
of final goods and services.
 Net National Product at Factor Cost
(NNP fc) or National Income
• NNP fc or national income is equal to the sum
total of factor incomes received by the factors of
production during the year. It is equal to the sum
of rent, wages, interests and profits in a given
year.
• The sum total of incomes of the factors of
production is known as national income or net
national product at factor cost.
• Thus, the national income is equal to the NNP at
mp minus revenue of the government by way of
indirect taxes plus subsidies provided by the
government to the business sector.
NNP fc = NNP mp – {Indirect taxes +
Subsidies} (or)
NNP fc = NNP mp – net Indirect taxes. taxes
 National Income at Current Price and
Constant Price
• When the value of goods and services is found
out by multiplying the quantity produced during
one year by the prices prevailing in that year, we
call it National income at Current Prices.
• On the other hand, when the value of goods and
services is calculated by multiplying the quantity
during one year with prices of the base year, we
call it National Income at Constant Prices.
• Example: (1) q1 is the quantity of final product in
year 1980 and p1 is the price of that year.
• Then, the value of the final product I = q1p1
• Similarly, q2 is the quantity of final product II in
year 1980 and p2 is the price of that year.
• Then, the value of the final product II = q2p2
• Suppose we want to compare the national
income figures of 1980 and 1990, we may find
that the national income in 1990 is higher than
that of 1980.
– This increase in income may be due to (a) increase in
output (b) increase in prices may be higher in 1990
than 1980.
– To get the exact increase in real income, we need to
multiply the quantity of goods produced in 1990 with
the 1980 prices. This shows: National Income at
Constant Prices: Quantity of Current period x Prices
of Base period.
Formula for Real National Income:
Money National Income (Current year) x Price Index of
Base year
Price Index of Current year
 Measurement of National Income
• The methods of estimating national income of
a country depends upon the availability of
proper statistics.
• This can be viewed from three interrelated
angles, such as, in terms of production,
income, and expenditure.
• These three terms are broadly related to GNP,
GNI and GNE respectively.
• The ideal national income equation shows
that National Income or NI =GNP=GNI=GNE.
• To measure the national income of a country,
we use three different methods, such as:
(a) The product method
(b) The income method
(c) The expenditure method
 Product Method or Value Added
Method or Net Output Method
• The production method measures national
income as the sum of net products produced
by the production units in the given period.

• Therefore, the production method involves

the following steps:
(i) Identifying the production unit
(ii) Estimating their net products
(iii) Valuing the goods and services
(iv) Estimation of net income from abroad
 Steps in Final Product Approach
The market value of all final goods and service produced within the country gives the estimate of
Gross Domestic Product at Market Price
(GDP at MP)

The addition of net factor income from abroad in GDP at MP gives Gross National Product at Market
Price (GNP at MP).
GDPMP + NFIA = GNPMP

The deduction of depreciation from Gross National Product at market price (GNP at MP) MP provides
Net National Product at
market Price (NNP at MP).

GNPMP - Dep = NNPMP

The deduction of net indirect taxes from NNP at MP give Net National Product at Factor Cost (NNP at
FC)
NNPMP - NIT = NNPFC
 Income Method
• It is the sum of all income derived from
providing the factors of production.

• It includes wages and salaries, rent, interest

and profits within a country in a given year.
• The income method measures national income as the sum
total of factor income shares accruing to the factor owners.
• Factors of Production: Land, Labour, Capital and
Organization.
• Factor incomes: Rent, Wage, Interest and Profit.
• One can easily aggregate all the factor incomes over a
period of time and this aggregate figure is known as
national income at factor cost.
• There are major additions and deductions to the national
income accounting.
• Additions: Income from foreign sectors in the form of rent,
profits etc.
• Deductions: Incomes from all illegal activities: theft,
robbery, smuggling, child labor, etc.
• Incomes to the foreign sector acting in domestic sectors.
• Comparison between Product method and
Income method:
NI fc = NI mp – Indirect tax + Subsidies.
• For the sake of convenience, economists
suggests that the Product method is for
Primary sector and the Income method is for
tertiary sectors.
 Expenditure Method
• Because of identical relation the
GNP=GNI=GNE, the expenditure of one
becomes the income of other. Hence, the GNE
is calculated which will be identical with GNI.
• The Expenditure in the Economy can be
broadly divided into three types, such as,
(i) Consumption Expenditure
(ii) Investment Expenditure
(iii) The pure Govt. Expenditure
• Consumption expenditure provides direct satisfaction
where investment expenditure is necessary to
increase the productivity of the nation.
• Pure Govt. expenditure is necessary for maintenance
of law and order situation and providing the
infrastructural facilities to the nation.
• In detail, all expenses are again divided into five
different categories:
1. Private Consumption Expenditure
2. Public Consumption Expenditure
3. Private Investment Expenditure
4. Public Investment Expenditure
5. Pure Government Expenditure
 Trends in National Income
• In order to understand the level of Economic
Development of the nation, trends of national
income are studied.
• By analyzing these trends, one can come to
know the level of national income, per capita
income, their growth rates over different
periods of time.
Trends in National Income and Per
Capita Income
Annual growth rate of National Income
and Per Capita Income
 Percentage share of different sectors
in GDP of different nations (year 2010)