NATIONAL INCOME

SUBMITTED TO: Dr. HIRANMOY ROY

1. ABHISHEK CHOPRA 2. ADITYA BARTWAL 3. ADITYA V. KUMAR 4. AMIT SHARMA 5. ANKIT BIJALWAN 6. ANKIT CHADDHA 7. ANKUR LOOMBA 8. ARCHIT DHASMANA 9. ASHEESH TYAGI 10.AYUSHI ARORA 11.CHETNA GURUNG
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Measures of National Income?( What are the different methods of calculating National Income? What are the difficulties in calculating National Income with special reference to developing countries?)

National Income is defined as the value of all final goods and services

produced by the normal residents of the country, weather operating within the domestic territory of the country or outside, in a year
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CONTD.
The level of National Income determines the level of

aggregate demand for goods and services.

National Income concept has three interpretations: a) It represents total value of production b) It represents total receipts and; c) It represents total expenditure

CONTD.
NATIONAL OUTPUT = NATIONL EXPENDITURE = NATIONAL INCOME

Output: the total output of goods and services becoming

available to the nation in the course of one year

Expenditure: the sum of expenditures on consumption

goods and services and investment goods

Income: the sum of factor incomes paid out for services

rendered in producing the national output.

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1) Household sector: - These are the owners of the factors of production- land, labour, capital. They sell the services of these factors to producers and in return receive their income. They spend a large part of income in purchasing of goods and services from the producers. 2) Producer sector:-This sector is engaged in the production of goods and services. In economics we use the terms business sector, producers and firms interchangeably. This sector is the principal buyer of factors of production and main producers of commodities and services.
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CONTD
3) Government: - This sector performs a wide variety of economic functions in a modern economy. Government can act as both Producers and Consumers. It gets its income largely from taxes imposed on households and business sector and in return buys the goods and services from producers and factor services from households. 4) Rest of the world: - Different sectors of the economy have transactions not only with each other but also with foreign countries, i.e. Rest of the world. A country exports goods and other services to other countries and similarly it imports goods and services from other countries.
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CONTD
5)Financial Institutions: - This sector is engaged in the activity of borrowing and lending of money. It refers to the money market and capital market in the economy along with various financial institutions like commercial banks, insurance companies and stock exchange.

 It is defined as the flow of payments and receipts for goods and

services and factor services between different sectors of the economy. Real Flow: - It implies the flow of factor services, like services of land, labour, capital and entrepreneurship, from the household sector to the producing sector and the corresponding flow of goods and services from the producing sector to the household sector. Money Flow: - Money flow refers to the flow of factor income, viz. rent, interest, profit and wages from the producing sector to the household sector as monetary rewards for their factor services. The households spend their incomes on the goods and services produced by the producing sector. Accordingly, money flows back to the producing sector.
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 In this we imagine a hypothetical situation where there is no

government and which has no relation with the rest of the world . this sector sells the factor services to the firm and receives income from them in the form of wages, rent, interest and profits. The money payments made by the firms to households are the cost-expenditures for the firms and factor inputs for the households. Firms or the production units use these factors inputs to produce goods and services which are sold to the households. The interaction of the firms and household sector pays for these goods in the form of money and thereby firms receive money payments from the households. Households in reality do not spend the entire part of their income on consumption. Instead, they save part of their income in the form of savings in financial institutions (mainly commercial banks, institutions etc). These institutions use these savings for further investments in producer sector. The producer sector uses these savings to produce goods and services. Thus in a two sector model there is a vital role of the financial institutions in providing loans to the producer sector.
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FOUR SECTOR MODEL

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1) Gross Domestic Product at market price ( GDPmp):- It is the value of all final goods and services at prices prevailing in the market produced in the domestic territory of a country during a given year. Being gross, it includes depreciation i.e. the consumption of fixed capital in the process of production.
2) Gross National Product at market price (GNPMP): - It is the aggregate market value of all final goods and services produced by nationals of a country during a year. It is the total value of final goods and services produced in the domestic territory of a country plus net factor income from 14 abroad.

3) Net Domestic Product at market price (NDPMP): - It is the value of all final goods and services at prices prevailing in the market produced in the domestic territory of a country during a given year after making allowance for depreciation. 4) Net National Product at market price (NNPMP): - It is the market value of all final goods and services produced by residents of a country during a year after making allowance for depreciation plus net factor income from abroad. 5) Gross Domestic Product at factor cost (GDPFC): - It is the sum total of earnings received by various factors of production on account of wages, interest, rent, profits, etc. Within the domestic territory of a country in a year. It measures factor incomes generated within the domestic territory irrespective of whether generated by residents or nonresidents.
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6) Gross National Product at factor cost( GNPFC): - It is the sum total of earnings received by various factors of production in terms of wages, rent, interest, etc. by normal residents of a country in a year. It differs from GNPMP to the extent of net indirect taxes. 7) Net Domestic Product at factor cost (NDPFC): - It is the estimate of the domestic product in terms of earnings of factors of production within the domestic territory of a country in a year. It differs from GDPFC to the extent of depreciation. 8) Net National Product at factor cost ( NNPFC): - It is the factor income according to the residents of a country. It is the sum total of domestic factor income and not factor income earned from abroad.

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 Step 1: - Classification of Production units - Primary,

Secondary and Tertiary Sector

Step 2: - Estimation of Gross Value Added by each enterprise

Gross Value Added (GVA) = Output/Sales - Intermediate Cost + Change in Stock

Step 3:- Estimation of Net Value Added by each enterprise

Net Value Added (NVA) = Output/Sales - Intermediate Cost + Change in Stock - Depreciation
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CONTD.
Step 4: - Estimating Net Domestic Product (NDPMP)

- NVA of all sectors collectively would give NDPMP

Step 5: - Estimating Net Factor Income from Abroad

- It is added to the net domestic product at factor cost to arrive at National Income National Income = NVAFC of Primary + Secondary + Tertiary Sector
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 Value of goods produced for self consumption should be

included Own account production of fixed asset should be included Imputed rent of owner occupied houses should be included Services of housewives will not be included Sale and purchase of existing commodities or second hand goods and services are not included; but any commission on their sale and purchase is included Sale and purchase of bonds and shares are not included but any commission on their sale and purchase is included
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.Step 1: Grouping of factor income under different categories; viz. land, labour, capital and enterprise. I. Compensation of Employees (COE): -Wages and Salaries, Bonus, Commission +Contribution of Employers to Social Security Schemes +Allowances except travelling allowance + Subsidised food +Medical facilities +Free accommodation

Note: Not included in COE: Compensation paid to injured worker Salaries and wages of Armed Personnel Interest free loan Travelling Allowance

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II. Operating Surplus (OS): - Is the income paid for the ownership and control of capital Includes Rent, Royalties, Dividends, and Undistributed Profits III. Mixed Income (MI): Mixed Income is composed of labour income and capital income of those people who provide both labour and capital services in the production process. Step 3: - Domestic factor income is estimated by adding NDPFC = Compensation of employees + Operating surplus + Mixed income Step 4: - Estimating Net Factor Income from Abroad It is added to Domestic factor income to arrive at National Income. National Income (NNPFC) = COE + OS + MI + NFIA
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 Value of goods produced for self consumption should be

included Imputed Rent of owner occupied houses should be included Imputed value of services provided by the owners of production units should be included Transfer payments are not included Illegal incomes are not included Sale and purchase of second hand goods, shares and bonds is not included but commission there of is included
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EXPENDITURE METHOD
Step 1: -Identification of economic units which incur expenditure

on final products and their division into four groups: 1. Households 2. Business sector 3. Government sector 4. Rest of the world Step 2: -Final expenditure is divided into four categories: 1. Consumption Expenditure 2. Investments Expenditure 3. Government Expenditure 4. Net Exports

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Step 3: -Measurement of Components of final expenditure: 1. Estimation of Private final consumption expenditure 2. Estimation of government expenditure - Current and Capital expenditure 3. Estimation of Net exports Step 4: - Estimate total final expenditure which gives NDPMP. By deducting Net Indirect taxes, we get NDPFC. Step 5: - Add NFIA to NDPFC to find NDPFC or National Income National Income (NNPFC) = PFCE + GFCE + GDCF + NE PFCE = Private final consumption expenditure GFCE = Govt. final consumption expenditure GDCF = Gross Domestic Capital formation NE = Net Exports
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1.
2. 3. 4. 5. 6.

Goods meant for self-consumption is included Imputed value of owner occupied houses is included Expenditure on Intermediate products is not included Expanses on second hand goods not included Expanses on financial averts like shares and bonds is not included Transfer payments of government is not included

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1). The informal/underground economy is much larger in developing nations, making estimates of GDP/GNP difficult. 2). Often data collected from developing nations are unreliable or incomplete, making any estimate of national income biased. 3). Developing nations also generally have large non-monetary economies, goods are exchanged with means other than cash- these transactions are not recorded in GDP 4). GDP does not account for non-market transactions, which tend to represent a great deal of economic activity in developing nations.
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CONCLUSION

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