National Income

The sum total of the values of all goods and

services produced in a year.

It is the money value of the flow of goods and

services available in an economy in a year.

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National Income
National Income Committee of India 1951 defines

National Income as follows:

“ A national income estimate measures the

volume of commodities and services turned

out during a given period counted without
duplication.”

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National Income
National Income refers to-

The income of a country

to a specified period of time, say a year

includes all types of goods and services

which have an exchange value

counting each one of them only once

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Importance of national income
It indicates the prosperity of a nation. Growth in
national income indicates economic prosperity
It indicates the standard of living of people of a
country
It indicates the per capita income with which we can
compare the levels of development of all the countries
Countries can be classified as ‘developed’ and
‘developing’ and ‘under developed’ based on their per
capita income only

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Importance of national income
NI estimates are very helpful to the Finance Minister.
It guides him to make proper and right decisions in
regard to taxation and budgets
It is useful to compare the prosperity of a country at
different times
It provides an instrument of economic planning
It indicates the trends of inflation and deflation.
Proper corrective action can be taken against them

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Importance of national income
It helps to know the progress of various sectors in the
economy. Imbalanced growth, if any, can be solved
It helps in forecasting the economic future and
preplanning is possible
It indicates the economic status of a country among
the nations of the world

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Difficulties in the computation of
National Income
Conceptual Difficulties

Statistical Difficulties
1) Lack of reliable information

2) Information is not available from small & cottage industries

3) Large number of illegal black money

4) Problems of diversity

5) Change in price level

6) Lack of systematic classification

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National Income
Double counting
If steel has been evaluated in industrial production,
it should not be included while calculating the value
of steel products, viz, machines and motor cars.
To avoid double counting or multiple counting, two
methods are used
Final products method

Value added method

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National Income
Final Products method:
Adding the value of final products only

Value added method:

Go on adding the values created at each stage in the
manufacture of a commodity
Then all such values created are added up together to
arrive at the national income of the country

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National Income concepts
The following are the concepts of national income
Gross National Product – GNP
Net National Product – NNP
Personal Income – PI
Per capita Income – PCI

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National Income concepts
Gross National Product
National Income is the sum total of values of all
goods and services produced during a year
The money value of this total output is known as
Gross National Product – GNP

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National Income concepts
Gross National Product
Example:
If A,B,C,D,… are goods and services and
If a,b,c,d,…are their prices respectively
The GNP is calculated as follows
GNP= Axa+Bxb+Cxc+Dxd….

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National Income Concepts
GNP is most frequently used national income concept

It is statistically a simpler concept as it takes no

account of depreciation and replacement problems

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National Income concepts
Net National Product - NNP:
This refers to the net production of goods and
services in a country during a year
NNP is also called National Income at Market Prices
We get NNP, by deducting the depreciation from
GNP

Therefore NNP = GNP - Depreciation

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National Income concepts
Personal Income - PI:
Income earned by all the individuals and institutions
during a year in a country
The entire national income does not reach individuals
and institutions
A part of it goes by way of corporate taxes
Undistributed profits
Social security contributions

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National Income concepts
Personal Income – PI
People sometimes get incomes without any
productive activity
They are called Transfer Payments
Example: Unemployment benefits, old age pensions
etc.
Such transfer payments are not included in the
National Income
However they are added to Personal Income

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National Income concepts
Personal Income – PI:
PI is computed by using the following formula

PI = National Income –(Corporate taxes,

undistributed profits, social security
contributions) + Transfer Payments

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National Income concepts
Per Capita Income – PCI:
If the national income is divided by the total
population, we get per capital income

 PCI = NI/Population

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National Income concepts
Per capita income
PCI may be expressed either in money terms or in
real terms

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NI – Methods of computation
Three methods to measure the national income
They are-
Production method or Census method
Income method
Expenditure method

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Production method
In this method
The total products produced in the economy are
calculated for the year and the value is added without
double counting
The economy is classified into sectors like
Agricultural, industrial, fisheries, forest, direct
services and foreign transactions etc
In each sector, we can find the value of final goods
and services

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Production method
In the international transactions, net foreign income

is calculated by subtracting the total imports from the

total exports and added to the national income
The results of these sectors, when combined, gives the

national income or national product

The census or product method can be expressed

through the formula

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Production method
 O=C+I

Where O stands for output,

C stands for consumption of goods
I stands for investment goods

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Income Method
According to this method
Net incomes of individuals and business houses
during a year are added to know the national income
Only those incomes earned and received for
producing goods and for rendering services are to be
counted
Transfer payments such as old age pensions , widow
pensions and unemployment benefits etc should not
be counted as these are the incomes received without
contributing to the production
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Income Method
People get incomes in the form of
Rents, wages or salaries, interest and profit
The formula is

 Y=C+S

Here Y stands for Total Income

C stands for consumption and S stands for Savings

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Expenditure method
One man’s income is another man’s expenditure

Therefore national income can be arrived at by

adding the total expenditure of individual and

business firms during a year
Expenditure or outlay on final products takes place in

three ways
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Expenditure method
Expenditure or outlay on final products takes place in

three ways
Expenditure by consumers on goods and services

Expenditure by entrepreneurs on capital or investment

goods
Expenditure by government on consumption and

capital goods
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Expenditure method
The formula for this method is

 Y=C+I

Here Y stands for total expenditure

C stands for consumption expenditure
 I stands for investment expenditure

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Trends of national income of India
During the plan periods, national income and per
capita income are increasing steadily
But the rise in the per capita income is rather slow
due to population growth
Agricultural sector is the most important sector as it
is the single largest contributor to the national
income
In the recent years, the share of the government
sector in national income is steadily increasing
indicating the increased efficiency of the public sector
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