National Income

National Income

• National Income refers to the total

incomes of residents of an economy in a
given period after providing for capital
consumption.

• National Income is the money value of

all goods and services produced in a
country during a year
The Circular Flow of Income
Payment of Resources
(National Income)

Factor Services (Land, Labor, Capital

and organization
Household Firms
(Consumption Sector) (Production Sector)

Goods and Services

(National Product)

Money Payments of Firms for Consumption

(National Expenditure)
 Three Measures Of National
Income
• National Product
• Sum of outputs in several sectors of a nation’s production

• National Income
• Sum of all incomes accruing to factors of production in a
given time period

• National Expenditure
• Sum of consumption expenditure.

National Product = National income = National Expenditure

 Important Concepts of National
Income
• Gross Domestic • Gross National Product
Product (GDP) at Market Prices
(GNPMP)
• Gross Domestic
Product at Market Price • Gross National Product
(GDPMP) at Factor Cost (GNPFC)

• Gross Domestic • Net National Product

Product at Factor Cost (NNP)
(GDPFC)
• National Income (NI)
• Net Domestic Product
(NDP)
 Important Concepts of National
Income
• National Income at • Private Income
Current Prices
• Personal Income
• National Income at
Constant Prices • Disposable Income

• Nominal National • Per Capita Income

Income (NNI)

• Real National Income

 1. Gross Domestic Product
(GDP)

• GDP is the aggregate money value of all

final goods and services produced in an
economy during a year before
depreciation and indirect taxes.

• (Only final goods are included,

intermediate goods are excluded)
 2. Gross Domestic Product at
Market Price (GDPMP)
• GDP is expressed in the form of money value.

• To find the money value of all final goods and services

produced in an economy during a year, we multiply each
of these goods and services by their respective market
prices, i.e., the prices at which these are sold in the
market.

• The resultant aggregate is known as GDP MP (Market

price of a product includes the different taxes levied on it
by the government, for example excise duties etc.)
 3. Gross Domestic Product at
Factor Cost (GDPFC)
• GDPFC can be derived from GDPMP as
follows

• GDPFC = GDPMP – Indirect Taxes + Subsidies

(OR)
• GDPFC = GDPMP – Net Indirect Taxes

• (Net Indirect Taxes = Indirect Taxes – Subsidies)

 4. Net Domestic Product (NDP)
• NDP refers to the money value of all the
final goods and services net of
depreciation produced annually in the
domestic territory valued at market price
before net indirect taxes. Thus,

• NDP = GDP – Depreciation

 5. Gross National Product at
Market Prices (GNPMP)
• GNPMP is estimated by adding net factor
income from abroad to GDPMP.

• (Net factor income from abroad =

Income earned by Indian residents abroad
in the form of wages, rent, interest and
profits - Income earned by foreigners in
India in the form wages, rent, interest and
Profits)
 6. Gross National Product at
Factor Cost (GNPFC)

• GNP FC can be derived as follows,

• GNPFC = GNPMP - Net Indirect Taxes

7. Net National Product (NNP)
• NNP equals GNP minus the cost of
depreciation.

• NNP = GNP – Cost of Depreciation

• NNP can be estimated either as NNPMP or

NNPFC and can be derived from respective
gross estimates.
 8. National Income (NI)

• NI is the same as NNPFC. Thus

• NI = GDPMP + Net Factor Income from

Abroad – Cost of Depreciation – Net
Indirect Taxes.
 9. National Income at Current
Prices
• National Income at Current Prices is estimated
when the output of different products is multiplied
by the respective prices obtaining in the year for
which the estimates are prepared.

• Thus, if we estimated the money value of all

goods and services produced in the year 2007-
08 by multiplying the products by the prices that
obtained in the same year i.e., 2007-08, the
resulting estimate is known as the national
income at current prices.
 10. National Income at Constant
Prices
• Here, we can obtain national income estimates
for a year by making use of prices prevalent in
some other (i.e., the base year).

• Thus if we estimate national income for year

2013-2014 with the help of the prices that
prevailed in the year 2012-2013, the estimates
would be know as national income at constant
prices (base year : 2012-2013)
 11. Nominal National Income
(NNI)

• National income estimated at current

prices is referred to as nominal national
income.
 12. Real National Income (RNI)
• National income estimated at constant prices
also knows as real national income. For
purposes of comparison over a period of time
(called inter-temporal comparison), we make use
of real national income.

• But for purposes of comparison between

different regions for the same year (called inter-
spatial comparison), we make use of national
income. Symbolically,
 12. Real National Income (RNI)

National Income for Current year × Base Year Index

Real Income = ___________________________________________
Current Year Index
 13. Private Income (PI)
• Private income refers to the income of the
private sector generated within the
domestic territory and abroad by private
enterprises and transfer of payments.
Thus,
 13. Private Income (PI)
• Private Income =
» National Income + Transfer Payment + Interest
on Public Debt – Social Security – Profit of Public
Undertaking.

• (Transfer Payment includes pensions,

unemployment allowances, gifts and
payments form abroad, lotteries, horse
racing earning from illegal activities etc.)
 14. Personal Income
• Personal Income is the total income received by
all the individual of a country from all sources
before direct taxes during a year. Thus,

• Personal income =
» National Income + Transfer Payment + Interest on
Public Debt – Social Security – Profit of Public
Undertaking – Profit of Private Enterprises – Profit
Taxes.
OR
• Personal Income = Private Income – Profit of Firms – Profit
Taxes.
 15. Disposable Income

• Disposable income refers to actual income

which can be spent on consumption by
individuals. Thus

• Disposable Income = Personal Income

– Direct Taxes
 16. Per Capita Income

• The average income of the people of a

country in a particular year is called Per
Capita Income for the year. Thus
 16. Per Capita Income

National Income (Year 2014)

Per Capita Income (year 2014 ) = __________________________
Population during the year 2014
 16. Per Capita Income

• Likewise, nominal per capita income is

calculated from nominal national income
while real per capita income is calculated
form real national income.
 Methods of Measuring National
Income
• There are three approaches are employed for
calculating National Income. They are

• Income Method

• Expenditure Method

• Value Added Method or Output Method

 1. Income Method
• The income approach to GNP consists of
remuneration paid in terms of money to the
factors of production annually in a country.

• According to this method, the factor earnings of

the economy is equal to the sum total of the
products produced by them.
 Income Method includes the
following for its calculations
• (i) Wages and Salaries
• (vii) Direct Taxes
• (ii) Rents

• (iii) Interest • (viii) Indirect Taxes

• (iv) Dividends
• (ix) Depreciation
• (v) Undistributed Corporate
Profits
• (x) Net income earned from
• (vi) Mixed incomes (profits of abroad.
incorporated businesses, self
employed persons and
partnerships)
 2. Expenditure Method
• From expenditure point of view, GNP is the sum total
of expenditure incurred on final goods and services
during one year in a country.

• It includes the following items:

• (i) Private consumption expenditure
• (ii) Expenditure by consumers on goods and services
• (iii) Expenditure by Government on consumption as well
as capital goods
• (iv) Money received from exports and incomes received
on foreign investments.
 3. Value Added Method
• Here the money value of final goods and services
produced at current prices during a year is taken into
account.

• Since it is difficult to distinguish properly between a final

product and an intermediate product of an industry, the
value of intermediate products used in manufacturing
final products must be subtracted form the value of total
output of each industry in the economy.

•
 3. Value Added Method
• Thus, the difference between the value of material outputs
and inputs at each stage of production is called the value
added.

• If all such differences are added up for all industries in the

economy, we arrive at the GDP by value added.

• The value added method for measuring national income is

more realistic that the product and income method because
it avoids the problem of double counting by excluding the
value of intermediate product.

• Further, through this method, we can also know the

contribution of each production sector to the value of GNP.
 Factors Determining National
Income
1. Quality and quantity of factors of
production
2. The state of technical know how
3. Political stability
Uses of National Income Data
• It helps to study the rate of growth of an economy

• It helps to estimate inter sectoral growth

• It helps to study inter-class income distribution

• It helps to make international comparisons about

standards of living

• It helps govt in planning, policy making, preparation of

budgets and forecasting the level of economic activity.