HUM- 2229

National Income

Farhana Afroj, Lecturer, Humanities Department, KUET. 1

 National Income
National income is the final outcome of all economic activities of a nation valued in terms of
money. National income is the most important macroeconomic variable and determinant of the
business level and economic status of a country.
The national income of a country can be measured by three alternative methods:
(1) Income Method,
(2) Expenditure Method and
(3) Value added Method or Production Method. Let’s briefly look at each method.
1. Income Method:
The income method of calculating national income focuses on the production perspective. Income
is generated from the factors of production (land, labor, capital, entrepreneur) those are rent, wages
and salaries, profits, and interest. We can calculate the national income by adding all these types of
income.
According to the income method:
• National Income = Rent + Wages + Interest + Profit + Mixed Income

Mixed-income refers to the income generated by self-employed professionals and sole proprietors.
Farhana Afroj, Lecturer, Humanities Department, KUET. 2
2. Expenditure Method: Expenditure method arrives at national income by adding up all
expenditures made on goods and services during a year.
The expenditure method takes the following elements into consideration:
• Purchase of consumer goods and services by residents and households (C)
• Business enterprises’ expenditure on capital goods and stocks (I)
• Government expenditure on goods and services (G)
• Net exports (exports-imports) (NX)
• So the Calculation Process is
1. GNP = GDP + Net factor incomes form abroad ............. (1)
2. NNP = GNP - depreciation ............................................. (2)
3. NI = NNP – Net Indirect Taxes .............................................. (3)
Where,
• GDP= C+I+G+NX(Export-Import)
• Net Indirect tax = Taxes – Subsidies
• Net factor income from abroad = Factor income from abroad - Factor income to abroad
Farhana Afroj, Lecturer, Humanities Department, KUET. 3
 3. Product method or Value added Method:
Under this method, we add the values of output produced or services
rendered by the different sectors of the economy during the year in order
to calculate the National Income.
We calculate money value of all final goods and services produced in an
economy during a year.

If in each step of production market value is added then it will be Tk. (400 + 600 + 800
+ 900) = Tk. 2700. The value of wheat and flour will be double counted. To escape from
double counting value addition method is followed. 4
Farhana Afroj, Lecturer, Humanities Department, KUET.
• Some of these difficulties involved in the measurement of national income are
described below:
1) Non-Monetary Transaction
The first problem in national income accounting relates to the treatment of non-
monetary transactions such as the services of housewives to the member of their
families teaching their own child, working in own farm, fruits and vegetables
produced and consumed by households, etc.
2) Problem of Double counting
Only final goods and services are included in the national income accounting. But it
is very difficult to distinguish between final goods and intermediate goods.
Intermediate goods may be used for final consumption.
3) Inadequate and unreliable statistics
Due to lack of required data on various economic activities, national income
accounting has become quite a difficult task in developing countries. Even the
available has become quite a reliable due to various factors such as geographical
condition, etc. Farhana Afroj, Lecturer, Humanities Department, KUET. 5
4) Petty Production
There is a large number of petty production and it is difficult to include their production in
national income because they do not maintain any account. Family members are engaged in the
work and they should not maintain any account.
5) Transfer Payments
Individual gets a pension, unemployment, allowance and interest on public loans, but these
payments create difficulty in the measurement of national income.
6) Environment damages
No nation prepares account related to the depletion of natural resources in terms of mining
minerals, the erosion of soil, the pollution of air, water and soil and so on..
7) Second-hand Transaction
The transaction of second-hand goods only changes the ownership. They do not reflect additional
production. They are excluded from national income because goods were included in national
income when they were newly produced and sold first.
8) Illiteracy and Ignorance
If the majority of people are illiterate and ignorant, they cannot keep the records of production
activities accurately. Hence, it is difficult to get the correct information about the production. 6
Farhana Afroj, Lecturer, Humanities Department, KUET.
 Other methods of measuring National Income Accounting
1. Gross domestic product GDP
2. Gross National product GNP
3. Net National product NNP
Gross domestic product (GDP)
GDP is the market value of all final goods and services produced within the
economy in a given period of time. In other words, Gross domestic product is the
total value of everything produced in the country. It doesn’t matter if it’s produced
by citizens or foreigners.
GDP= Consumption + Investment + Government + Trade balance(Export-Import)
So, GDP = C + I + G + (X – M)
Nominal GDP: When GDP or the value of goods and services are measured at
current prices, classified as nominal GDP.
• Real GDP: When GDP or the value of goods and services are measured using a
constant set of prices (prices of a given year), classified as real GDP.
Farhana Afroj, Lecturer, Humanities Department, KUET. 7
However, if the Japanese firm sends £50m in profits back to shareholders in Japan, then this outflow of profit is subtracted
from GNP. UK nationals do not benefit from this profit, which is sent back to Japan.

Commodity Current Year Quantity Current Year Price Base Year price (TK. per unit)
Produced (unit) (TK. per unit) (2013) =2012
(2013)

X 10 12 10
Y 12 8 6
How to calculate nominal and real GDP:
Equation for Nominal GDP =Current Year Quantity*Current Year price
=PX1X1+Py1Y1 =12*10+8*12 = 216
Where,
PX1= Current year price of Good X
X1= Current year quantity of Good X
Py1 = Current year price of Good Y
Y1= Current year quantity of Good Y
Equation for Real GDP = Current Year Quantity*Base Year price
= Px0X1+Py0Y1= 10*10+ 6*12 = 172
Where,
PX0= Base year price of Good X
X1= Current year quantity of Good X
Py0 = Base year price of Good Y
Farhana Afroj, Lecturer, Humanities Department, KUET. 8
Y1= Current year quantity of Good Y
 Gross National Product (GNP)
Gross National Product or GNP is the total market value of everything (i.e.
goods and services) produced by the residents of the country during a
particular year.
• GNP includes the income earned by the country’s nationals within and
outside the country, but it excludes the income earned by the foreign citizens
and companies within the country.
GNP = GDP + factor payments from abroad – factor payment to abroad.

Net National product (NNP)

Net national product equals GNP less replacement investment (Capital
consumption allowances). Each year, some of the economy’s capital stock
wears out.
• NNP= GNP- Depreciation Farhana Afroj, Lecturer, Humanities Department, KUET. 9
 Calculating GDP, Net Exports, and NNP
Government purchases $120 billion
Depreciation $40 billion
Consumption $400 billion
Business Investment $60 billion
Exports $100 billion
Imports $120 billion
Income receipts from rest of the world $10 billion
Income payments to rest of the world $8 billion

Step 1. To calculate GDP use the following formula:

GDP = Consumption + Investment + Government spending + (Exports – Imports)
= C + I + G + (X – M)
= $400 + $60 + $120 + ($100 – $120)
= $560 billion
Farhana Afroj, Lecturer, Humanities Department, KUET. 10
• Step 2. To calculate net exports, subtract imports from exports.
Net exports = X – M
= $100 – $120
= –$20 billion
Step 3. To calculate NNP, use the following formula:
NNP = GDP + Income receipts from the rest of the world – Income payments to the rest
of the world – Depreciation
= $560 + $10 – $8 – $40
= $522 billion

Farhana Afroj, Lecturer, Humanities Department, KUET. 11