In The Name of Allah, The Most Beneficent, The Most Merciful

Basic Economics
National Income

Dr. Sayyid Salman Rizavi

 Background
• National Income gauges the economic performance of a
country (across countries as well)
• National income measures the aggregate output of a country
• In 1665 William Petty (1623-1687) tried to measure England’s
National Income
• 1930s: US congress instructed Department of Commerce to
collect data on National Income
• Simon Kuznets has contributed a lot and published National
Income data with the help of Department of Commerce (USA)
• Planning requires collection of such data
National Income Defined
• “National Income is the money measure of overall annual
flow of goods and services in an economy.”
(Paul A. Samuelson)
• National Income is the total monetary value of goods and
services produced in/by a country during a year.

• we can measure national income in three ways:

– (a) By looking at production,
– (b) By looking at incomes, and
– (c) By looking at expenditures.

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National Income: Concepts
• Gross Domestic Product (GDP)
• Gross National Product (GNP) or Gross National Income
(GNI)
• Net National Product (NNP) (i.e. national income at
market price)
• National Income (NI) (i.e. national income at factor cost)
• Personal Income (PI)
• Disposable Income (DI)
• Per Capita Income (PCI) and
• Real and Nominal Income

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Gross Domestic Product (GDP)
• GDP is the market value of all final goods and services
produced during a year within the geographical boundaries
of a nation.
• Income earned by resources in foreign countries is not
included
• Income of foreigners working in an economy is included
• The value of GDP is an indication of the production and
employment situation in the country.
• USA’s GDP was US $ 20.5 trillion (WB 2018)
• China’s GDP was US $ 13.7 trillion (WB 2018)
• Pakistan’s US $ 0.31 billion (not trillion) (WB 2018)

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Gross National Product (GNP) or
Gross National Income (GNI)
• GNP or GNI is the market value of all final goods and
services produced by a nation during a year, in and outside
the nation.
• GNP = GDP – income of foreigners working in a
country + income of countrymen working abroad
• GNI is a good measure of a country’s economic
performance both in the short and log run.
• GNI does not count:
– Good produced but not sold in any market
– Illegal goods and services and paperless transactions
– Financial transactions and government transfer payments
– Sale of used goods
– Unpaid labor or labor at home
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Net National Product (NNP)
• NNP = GNP minus depreciation
• Net addition to production
• We may know about the productive capacity of a nation
• GDP, GNI and NNP are all measured at the market price

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National Income at factor cost (NIfc)
• It is defined as “the income earned by the factors of
production”.
• Income side of NI may be different from the Production
Side
• Factor Income: Wages + Interest + Rent + Profits
• NI = NNP – indirect business taxes + subsidies
• Indirect taxes are reflected in the market price but do not
reflect in factor income
• Subsidies are not reflected in the market price but become
the factor income.

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Personal Income (PI)
• All income earned is not received
• The income received by the factors of production in a
country is called Personal Income
• PI = NIfc minus
– undistributed corporate profits
– Corporate taxes
– Social security contributions
– Government and business
– transfer payments (interest, dividend income, etc.)

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Personal Disposable Income (PDI)
• All the income received can not be spent

• The income that the factors of production can spend is

called PDI

• PDI = PI – direct income tax payments

• Factors of production may spend or save PDI

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Per Capita Income (PCI)
•• The
  ratio of income to population (not labor force only) or
Income Per Person is called PCI

• For example

Per Capita GDP pa (US $, WB 2018)

Monaco: 185,771 Rank 1
USA: 62,795 Rank 10
Pakistan: 1480 Rank 157

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Real Vs Nominal Income
•• Income
  measure in the prices of some base year is called
real income.

Example: Suppose two goods are produced in 2019 for Rs. 10

and 20 each. The quantity of first item is 3 and that of the
second is 5. Same production level is maintained in 2020 but
the prices are Rs. 15 and Rs. 25 respectively.

Year Goods Price Quantity Nominal Real National Income

National Income (prices of 2019)
2019 Good 1 10 3 10*3+20*5
Good = 130 130
Good 22 20
20 55
2020
2020 Good
Good 11 20
20 33 20*3+40*5
20*3+40*5 130 if price of 2019 is used
Good 2 40 5 =
= 260
260
Good 2 40 5
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 PPP Income
• Purchasing Power Parity Dollar
• The exchange rate that is determined by looking at a
specific basket of goods
• In how much of your currency you can purchase in your
country that can be purchased per dollar in USA
• LCU (local currency unit) per international dollars
• They are estimates using a basket of goods and averages
• Pakistan: 33.6 LCU per international dollars in 2018

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 Data Sources

You can google for the following and download data

• WDI: World Development Indicators
• IMF: International Monetary Fund
• CIA fact book
• Local websites: like finance.gov.pk or sbp.org.pk
• Bureau of Statistics of different countries

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 Selected Data: GDP
GDP of Selected Countries by World Bank 2018
  Country GDP Rank Per Capita Income
# (US $ Million) (by GDP) ($ US pa)
1 USA 20,494,100 (20.5 trillion) 1 62,795 (Rank: 10)
2 China 13,608,152 (13.7 trillion) 2 9,771 (Rank: 72)
3 Japan 4,970,916 (4.97 trillion) 3 39,290 (Rank: 27)
4 India 2,726,323 (2.7 trillion) 7 2,010 (Rank: 146)
5 Saudi Arabia 782,483 (0.7 billion) 18 23,339 (Rank: 39)
6 Turkey 766,509 (7.7 billion) 19 9,370 (Rank: 74)
7 Israel 369,690 (0.3 billion) 32 41,715 (Rank: 25)
8 Pakistan 312,570 (0.31 billion) 39 1,480 (Rank: 157)
9 Egypt 250,895 (0.25 billion) 43 2,549 (Rank: 135 )
10 Iceland 25,882 (0.025 billion) 103 73,191 (Rank: 7)
11 Brunei 13,567 (0.014 billion) 124 31,628 (Rank: 31)
12 Bhutan 2535 (0.0025 billion) 159 3,243 (Rank: 126)

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 Selected Data: GDP per capita
Per Capita GDP of Selected Countries by World Bank 2018
  Country Per Capita GDP Rank
# (US $ pa)  
1 Monaco 185,741 1
2 Switzerland 82,797 4
3 Norway 81,697 5
4 Iceland 73,191 7
5 USA 62,795 10
6 Israel 41,715 25
7 Brunei 31,628 31
8 Saudi Arabia 23,339 39
9 China 9,771 72
10 Egypt 2,549 135
11 India 2,010 146
12 Pakistan 1,480 157
13 Ethiopia 772 174
14 Burundi 272 190 16