Lecture 3

National Income accounting

EEP-1
2019-21 Batch
The Economy’s Income and Expenditure

1. When judging whether the economy is doing well or

poorly, it is natural to look at the total income that
everyone in the economy is earning.
2. For an economy as a whole, income must equal
expenditure or value added.
3. The forces of supply and demand determine the
market equilibrium price and quantity that is
produced and exchanged.
 Gross Domestic Product (or GDP)
The total market value of all final goods and services, produced
during a given period of time (usually a year), in the
geographic borders of a country (or a region, or a city).
GDP= C + I + G + NX
 Gross National Product (or GNP)
The total market value of all final goods and services produced during a given
period of time by the nation’s residents, regardless of the place produced.
GNP has following components:

1. Value of final consumer good and services produced in a year and consumed by the household which is denoted by
consumption(C)
2. Value of new capital goods produced and addition to the inventories of goods such as raw materials, unfinished good
and consumer goods produced but not sold during a year. This is called Gross Private Investment(I)
3. Value of output of General Government which is taken to be equal to the value of purchases of goods and services by
the Government denote by(G)
4. Net export(NX) which is equal to the value of goods exported minus the value of goods imported(M)
5. Net Factor Income from Abroad( it is the difference between factor incomes received from abroad by residents of India
for rendering factor services in other countries and the factor incomes paid to the foreign residents for the factor
services rendered by them in domestic territory of India).

GNP= C + I + G + NX + Net Factor Income from Abroad

GDP= GNP- (Income earned by Indians from foreign country – income
earned by foreigners from India (NFIA))
 GNP contd...
• GNP is defined as the total market value of all final goods and services
produced in a year in a country. GNP is a monetary measure. For eg. If any
Indian Professor takes a project for four month’s visiting professorship in a
foreign university, his income(production) will be a part of India’s GNP not a
part of India’s GDP .
• It includes currently produced goods and services in a year. It will exclude
the goods produced in past years and resale in current year like building , car
etc.
• Again purchase and sale of bonds and stocks do not involve current
production of goods will be excluded.
• GNP refers the value of goods and services currently produced by normal
residents of a country. Which include both national and non- national
companies have set up in India. Foreign companies can send only the profit
earned by them to their own countries.
India now measures GDP by market prices instead of
factor costs, to take into account Gross Value Addition
in goods and services as well as indirect taxes. The base
year has been shifted to 2011-12 from 2004-05 earlier.

WHY????
 How to get GDP MP ?
• Market price= Factor cost +(Indirect taxes- Subsides)
• We start from GVA or GDPFC.
GVA measures the contribution to the economy of each individual producer,
industry or sector in a country.
• GVA (at current basic prices; available by industry only) + taxes on products
(available at whole economy level only) - subsidies on products (available at
whole economy level only) = GDPMP
Or
GVA/ GDPFC + taxes on products - subsidies on products = GDPMP
Or,
GVA + Net indirect taxes=GDPMP
Why base year changed?

For that you have to understand Real

GDP and Nominal GDP…..
 Nominal GDP and Real GDP
Final Goods Quantities Market Value of final Market Price Value of final Market Price Value of final
produced Prices in goods at in Base year goods at in constant goods at
in 2013- 2013-14 current prices 2010-11 constant price 2003- Constant Price
14 of 2013-14 price of 2010- 04 of 2003-04
11

1 2 3 4 5 6 7 8
Wheat (quintals) 650 1500 per 9,75,000 700 per 4,55,000 200 per 1,30,000
quintal quintal quintal
Standard 345 320 per 1,10,400 120 per 41,400 50 per litre 17,250
Cloths(metres) metre metre
Milk(litres) 520 35 per litre 18,200 15 per litre 7,800 5 per litre 2,600
Nominal GDP Real GDP of Real GDP of
of current year current year current year
2013-14 2013-14 2013-14
=11,03,600 =5,04,200 =1,49,850

GDP Deflator= Nominal GDP of a year/ Real GDP of the year*100

Nominal and Real income
Nominal Income=

Real Income=

= price of good i in the current year

= price of good i in the base year
=output of good i in the current year
 Is NI is same as GDP?

No.
So what is National Income?
• It is the Net National Product at Factor cost NNPFC
How to determine NNPFC
Net factor income from Net factor income from
abroad abroad

Gross Private Investment Gross Private Investment Less Depreciation Less net indirect taxes

Net Private Investment

Wages

Net Export (NX) Net Export (NX) Net Export (NX) Profits

Government Purchase (G) Government Purchase (G) Government Purchase (G) Interest

Consumption Consumption Consumption Rent

Expenditure (C) Expenditure (C) Expenditure (C)

GNP GDP NDPMP NNPFC =NI

 NET NATIONAL PRODUCT OR NATIONAL INCOME AT MARKET PRICES
When depreciation is subtracted from GNP we get Net National Product (NNP)
NNPMP = GNP-DEPRECIATION
NNPMP is also known as NIMP

But NATIONAL INCOME of a country is equal to NATIONAL INCOME AT FACTOR

COST
NNPFC / NIFC = NIMP – INDIRECT TAXES + SUBSIDIES
NIFC = NNP/ NIMP - NET INDIRECT TAXES
NNPFC / NIFC is known as NI
PERSONAL INCOME, PERSONAL DISPOSABLE
INCOME, NET NATIONAL DISPOSABLE
INCOME
Net factor Less Less Personal
income from i) Undistributed Income
Taxes
abroad
Corporate Profits earned but
ii) Corporate Taxes not Consumption
Profits Plus Saving
iii) Social Security received
(C+S)
Contribution

Interest
Income
Rent Plus received
Transfer Payments but not
earned
Wages Personal Disposable
Income Personal
National (PI) Income
Income(NI or
NNPFC
 Summary

• GDP= C+ I+G+(X-M)
• GDP +NFIA= GNP
• GDPMP/GNPMP – (Indirect tax-Subsides) = GDPFC/GNPFC

(Net Indirect taxes)

• GDPFC/GNPFC - Depreciation = NDPFC/NNPFC
• NNPFC = NI
• NI- Income earned but not received +income received but not earned=PI
• PI-Personal Tax= Disposable income (DI)
• DI=C+S
 Numerical problems
1. Calculate a) GDP at market prices and b) NI from the following information Rs

Personal consumption expenditure 6500

Indirect taxes less subsidies 150
State government consumption and investment expenditure 500
Central government consumption and investment expenditure 2000
Change in business inventories 100
Gross private domestic fixed investment 1200
Exports 900
Net factors payment to rest of the world -100
Imports 1200
Depreciation 200
 Solution:
i) GDPMP=( Private Consumption Expenditure + Gross Private Investment (both
fixed and inventories) + Govt expenditure/Public Investment (both state and
central) + Net Export (X-M)).
= 6500+(1200+100)+(500+2000)+(900-1200)
=10,000
ii)NI or NNPFC= GDPMP –depreciation –net indirect taxes(i.e. indirect tax less
subsides)+factor payment to the rest of the world.
=10000-200-150-100
=9550
2. Calculate a) NI and b) Personal Disposable Income from the following
information Rs

GDPMP 6000
Receipts of factor of income from the rest of the world 150
Payments of factor income to the rest of the world 225
Depreciation 800
Indirect Taxes minus subsides 700
Corporate Profits 1200
Dividend 600
Transfer payments to person 1300
Personal taxes 1500
Solution:
i) NI or NNPFC= GDPMP –depreciation -net indirect taxes(i.e. indirect tax
less subsides)+factor payment to the rest of the world.
= 6000-800-700+(150-225)
= 6000-1500 -75
= 4425
ii) PDI= NI- retained corporate profit+ transfer payment to person-
personal taxes
=4425-(1200-600)+1300-1500
= 3625
3. Calculate a) NDP at market prices and b) NI from the following information
Rs

Subsidies 10
Sales 1000
Closing stock 100
Indirect Taxes 50
Intermediate consumption 300
Opening stock 200
Consumption of fixed capital 150
Net factors income from abroad 10
 Solution:
i) NDPMP is added through value added method i.e. sum of net value added by all
enterprises in the economy
GVAMP or GDPMP =Value of output = sales + change in stock
= 1000 +(closing stock – opening stock)
= 1000 +( 100-200)
= 900 Crores
ii) NVAMP OR NDPMP= GDPMP – intermediate consumption – consumption of fixed
capital
=900-300-150 Depreciation
=450 Crores
iii) NI(NNPFC)=NDPMP -Net indirect taxes + net factor incomes from abroad
=450-(50-10) +10
= 420 Crores