National Income

Topics
• Definition of National Income
• Measurements of National Income
• Methods of computing National Income
• Factors determining National Income
• Difficulties in measurement of National Income
• Limitations of National Income
 NATIONAL INCOME
National income is the total value a country's final output of all new
goods and services produced in one financial year.

It is the monetary value of all goods and services produced in an

economy during a financial year.

Final Goods & Services

Economy
Financial year
 Features of National Income

• It is a macro-economic concept
• It is a realized flow of goods and services
• It includes all the goods and services produced in the
economy
• It is the money valuation of goods and services
• It includes the value of final goods and services
• It is the net aggregate value
• Financial Year
Concepts underlying measurements of
National Income
• Gross Domestic Product(GDP)
• Gross National Product(GNP)
• Net Domestic Product(NDP)
• Net National Product(NNP)
• Personal Income(PI)
• Disposable Personal Income
2 Important Questions

• WHERE?

• WHO?
GDP
• The total value of goods and services produced in a country within a
financial year.

Domestic

• Focus is on WHERE???
 Gross National Product(GNP)
• It is the aggregate money value of the final goods and services
produced in a country in a given year.
• Only final goods and services are included

Nation/Nationality

• Focuses on who?
Gross National Product includes
• Aggregate consumption ( C )
• Investment ( I )
• Govt Expenditure ( G )
• Net receipts from abroad ( E-I )
• Net Income transfers from abroad (R-P)
• Indirect taxes ( IT )
• Subsidies ( S )
Focus is on WHO???
Lets understand GDP and GNP clearly
• Group A NR,DT
• Group B NR, Abroad
• Group C NRI,DT

GDP=A+C
GNP=A+B
• NFIA=B-C(Net factor income from abroad)
• GDP+NFIA=GNP
Gross Vs Net
• Gross-Depreciation=Net
 Important points
• Gross Vs Net
• National Vs Domestic
• Factor cost vs Market Price(Land,Labour,Capital,Entre/org)+Indirect
• Current vs Constant Price

• why?? Depreciation(Gross-Depreciation)
• National+Domestic+NFIA
Factor cost Vs Market cost/prices
• LAND
• LABOUR
• Capital
• Entrepreneur/Organization

• Factor cost+Net indirect taxes=Market Price

Net Indirect taxes=Indirect taxes-Subsidy
Net Domestic Product
• NDP at market prices = GDP at market prices-D

• NDP at Factor cost = GDP at factor cost-D

Net National Product
• The gradual wear and tear of capital equipment
• Depreciation

• NNP at market prices=GNP at market prices-(D)

• NNP at factor prices=GNP at factor prices-(D)

NDP=GDP-Dep
NNP=GNP-Dep
Personal Income
• It refers to the income which is received by individuals of a country
during a year.
• It is the amount of money received by all individuals of a nations.
• The sources would include money earned from employment,
dividends and other distributions, rents, profits from business etc.

• PI is subject to taxation
Disposable Income
• It refers to the income which individuals have after payment of direct
taxes.
• It is the aggregate of the money incomes which remain at the disposal

• DI = Consumer expenditure + saving

Purchasing power parity(PPP)
• It is a metric to compare economic productivity and standards of
living between countries..

• It allows the economist to compare SOL in different countries

Methods of computing national income
• Output method/Value added method? Production M

• Income method

• Expenditure method
Output method/value added method/PM
• It is the most direct method of arriving at an estimate of country's
national output or income

• It involves adding the output figures of all firms in the economy to get
the total value of the nations output

• Services & Distribution, Agriculture, Manufacturing, construction,

Energy & water
Income Method
• Incomes drawn by all individuals and business houses in an economy

• Is added up and the aggregate income is called national income.

• In simple words the aggregate of incomes received from factor

agents..
Expenditure Method
• The aggregate expenditure incurred on goods and services during a
given year is viewed as national income

• The expenditure may be for regular consumption or for investment

purpose

• It is measured by adding up all the items of final consumption

expenditure and final investment
• House Holds-Income Producers/Manufacturers-Output

Government(Expenditure)
Factors determining national income
• Factors of production

• Technical knowledge

• Political & economic stability

• Trade Policies

• Social harmony
 Importance of National Income
• To measure the size of economy and level of country’s economic
performance
• To trace the trend or the speed of the economic growth in relation
to previous year(s) also in other countries
• To know the composition and structure of the industries in terms
of various sectors and the periodical variations in them
• To make projections about the future development trend of the
economy
• To help government formulate suitable development plans and
policies to increase growth rates
• To fix various development targets for different sectors of the
economy on the basis of the earlier performance
Difficulties in measurement
• Double counting
• Inaccurate data
• Lack of occupational specialization
• Illiteracy &….
• Non-monetized sector
• Black money
• Geographical variations
Limitations of national income
• Changes in general price level
• Economic welfare
• Social inequalities
• Human development index
Thank You