National Income: Measuring the

Production, Income and Spending of

Nations
 MEANING

National Income Accounting represents the

tools and methods by which economists and
policy-makers measure economic activity and
economic growth over time.
It measures the total value of the goods and
services(output) produced by an economy over a
period of time (normally a year).It is also a
measure of the income flown from production,
and/or the sum total of all spending involved for
the production of output.
Definition:

National Income can be defined as the money

value of all final goods and services produced by
a nation in a period of one accounting year
 Standard Measures of Income and Output:

• Gross National Product (GNP)

• Gross Domestic Product (GDP)
• Net National Product (NNP)
• Net Domestic Product (NDP)
• Per Capita Income (PI)
• Personal Disposable Income (PDI)
• GNP : the total value of output (goods and
services) produced and income received in a
year by domestic residence of a country

• Includes the profits earned from capital

invested abroad
• GDP : the total value of output (goods and
services) produced by the factors of production
located with in the country’s boundary in a year

• Factors of production (labor, capital, land) may

be owned by any one (citizens or foreigners)

GNP - Net income earned from abroad = GDP

• Per Capita Income (National Income per
person) : an indicator to show the living
standards of the people of the country.

• PI is the total income received – whether it is

earned or unearned – by the households of the
economy before the payment of personal taxes.
 Need for the study of National Income :

1. To measure the size of the economy and level

of country’s economic performance

2. To trace the trend or speed of the economic

growth in relation to previous year(s) as well
as to other countries
3. To know the structure and composition of the
national income in terms of various sectors and
the periodical variations in them

4. To make projection about the future

development trend of the economy
5. To help Govt. to formulate suitable development plans and
policies to increase growth rates.

6. To fix various development targets for different sectors of

economy on the basis of there performance.

7. To help business firms in forecasting future demand for there

products

8. To make international comparison of people’s living standards.

Methods of calculating National Income

There are three approaches to the

measurement of national income:
Spending or Expenditure Method

Income Method

Production or Output Method

• Income = Expenditure = Output
•Y = E = O
 Spending or Expenditure Approach

The spending approach divides GNP into four areas:

• Households (Consumption expenditures) (C)

• Businesses (Domestic Investment) (I)

• Government (Govt. expenditures) (G) and

• Foreigners (Export (X) and Imports (IM)of Goods and

Services) (X-M).

GNP = C + I + G + (X–M)
 The Income Approach

• The measure of GNP are calculated by adding all the income

earned by various factors of production which are engaged in
the production of output.

• In addition to aggregate income, national income and personal

income are also used as measures of income.
It includes…

– Wages and salaries

– Farm income
– Rent
– Sales taxes
– Depreciation (the amount of capital that has worn out during
the year)
 The Production Approach
• The measures of GNP are Calculated by adding the total
value of the output (of goods and Service) produced by
all activities during any time period, such as a year.

• The production approach looks at GNP from the

standpoint of value added by each input in the
production process.

• major challenge – problem of double counting

 Real vs. Nominal GDP

GDP is the value of all final goods and services produced

domestically.

Nominal GDP measures these values using current prices

Real GDP measure these values using the prices of a base

year.
 Problems in calculating National Income

• Black Money : It has created a parallel economy - unreported economy

which is equivalent to the size of officially estimated size of the economy

• Non-Monetization : In most of the rural economy, considerable portion of

transactions occurs informally

• Double counting: Some commodities can be termed as Intermediate goods

as well as Final goods and hence their values may be doubly counted
• Growing Service Sector : growing faster than Agricultural and
Industrial sectors… value addition in legal consultancy, health
service ,financial and business services is not based on accurate
reporting.

• House Hold Services : It ignores domestic work and house

keeping services

• Social Services : It ignores volunteer and unpaid social services.

(Mother Teresa’s social service)

 National Income series in India
• National Accounting system was initiated in the mid-sixties

• Indian System of National Accounting statistics follows the

UN system of national accounts (1968)

• Based on the National Income Committee’s

recommendation(1954), the Central Statistical
Organization(CSO) has been estimating the NI

• The CSO revised its national accounting series by shifting

the base year to 1970-71 … again to 1980 – 81 and then to
1993-94.. recently by improving the database and extended
coverage and the base year shifted to 1999-2000
 Trends in national Income
Growth of National Income in India

9.2% 9%
8.3% 8.4%

7.4%

6.2%

4.3%
2010f