Methods to Estimate National Income

 According to Simon Kuznets, national income of a country is calculated by following

mentioned three methods :

 Product Method : S. Kuznets gave a new name to this method, i.e., product service
method. In this method, net value of final goods and services produced in a country
during a year is obtained, which is called total final product. This represents Gross
Domestic Product ( GDP ). Net income earned in foreign boundaries by nationals is
added and depreciation is subtracted from GDP.
Methods to Estimate National Income

 Income Method : In this method, a total of net incomes earned by working people
in different sectors and commercial enterprises are obtained. Incomes of both
categories of people – paying taxes and not paying taxes are added to obtain
national income.

 GDP=WAGES/SALARIES+RENT+INTEREST+PROFIT
Methods to Estimate National Income

 The components of factor income are: (i) Employees‘ Compensation, (ii)

Profits, (iii) Rent, (iv) Interest, (v) Mixed Income, and (vi) Royalty.

 Profit, rent, interest and other mixed income are jointly known as operating
surplus. Thus, National Income = compensation of employees + operating
surplus.
Methods to Estimate National Income

 Through Income method, the sum of such factor payments equals Net
Value Added at Factor Cost (NVAfc) by that sector. Then we take sum
total of NVAfc by all the sectors to arrive at NDPfc.

 ∴ NDPfc = Compensation of employees + operating surplus + mixed

income (if any)

Methods to Estimate National Income

 Consumption Method : It is also called expenditure method. Income is either

spent on consumption or saved. Hence, national income is the addition of total

consumption and total savings. For using this method, we need data related to
income and savings of the consumers.

 Generally reliable data of saving and consumption are not easily available.

Therefore, expenditure method is generally not used for estimating national

income.
Methods to Estimate National Income

 These expenditures are classified into following types:

1. Private consumption expenditure (C)

2. Government expenditure (Government purchases of goods and services) (G)

3. Investment expenditure (I)

4. Net exports (X-M)

 Thus, GDP = C + I + G + (X - M)
Difficulty in Estimating National Income

 Transfer Income

 Unpaid Services

 Income from Illegal activities

 Production for self-consumption

 Changing Price value and Money Value

 Problem in Double Counting

Difficulty in Estimating National Income

 Existence of Non-monetized sector

 Inadequate and unreliable data

 Non-Uniformity in Depreciation rates

 Illiteracy and Ignorance.

National Income: Shortcuts

 Net= Gross-Depreciation

 Gross = Net+ Depreciation

 National = Domestic+ NFIA

 Domestic = National- NFIA

 Market Price = Factor Cost+ Taxes- Subsidies (NIT= Taxes-Subsidies)

 Factor Cost = Market Price-Taxes+ Subsidies

National Income: Shortcuts

 Net Factor income from abroad = income earned by the domestic factors of

production employed in the rest of the world – Factor income earned by the
factors of production of the rest of the world employed in the domestic economy.

 For example, in case of India, Net Factor Income from abroad will be = income

earned by Indian resident in foreign countries – Income earned by foreign

resident in India.
National Income: Numerical

 Suppose the GDP at market price of a country in a particular year was Rs 1,100

crores. Net Factor Income from Abroad was Rs 100 crores. The value of Indirect
taxes – Subsidies was Rs 150 crores and NNP@FC was Rs 850 crores. Calculate
the aggregate value of depreciation.
National Income: Numerical

 NNP@FC = GDP@mp - Depreciation + Net factor income from abroad –

[Indirect Taxes - Subsides]

 850 = 1100 – Depreciation +100 - 150

 Depreciation = 1100 + 100 – 150 - 850

 Depreciation = Rs 200 Crore

National Income: Numerical

 From the following data, calculate Personal Income and Personal Disposable Income
National Income: Numerical

 Personal Income = NNP@FC + NFIA + Transfer Income + (Interest Received –

Interest Paid by Household) – Undistributed Corporate Profits

 Personal Income = 8000 + 200 + 300 + 300 – 1000

 Personal Income = 7800 crores.

 Disposable Income = Personal Income – Corporation Tax – Personal Tax

 Disposable Income = 7800 – 500 – 500

 Disposable Income = 6800 crores.

 National Income: Numerical

 Calculate National Income (NNP@MP)?

Items (INR in thousand crores)
Compensation of Employees 250
Mixed Income of Self-Employed 600
Profit 80
Rent 30
Interest 40
NFI to Abroad -10
Net Exports 15
Net Indirect Taxes 10
Net Current Transfers to abroad 8
 National Income: Numerical

 NDP@FC = Compensation of Employees + Mixed Income + Rent(Royalty) + Interest + Profit

 NDP@FC = 250+600+30+40+80 = INR 1000

 NNP@MP = NDP@FC + NFIA + NIT = 1000 + (-(-10)) + 10 = INR 1020

 National Income: Numerical

 Calculate GNP@MP?
Items (INR in thousand crores)
Compensation of Employees 2500
Mixed Income of Self-Employed 7500
Profit 700
Rent 400
Interest 350
NFIA 50
Net Exports 40
Depreciation 70
Government Final Consumption Expenditure 3000
Net Indirect Taxes 150
Net Current Transfers to abroad 100
 National Income: Numerical

 NDP@FC = Compensation of Employees + Mixed Income + Rent(Royalty) + Interest + Profit

 NDP@FC = 2500+7500+350+400+700 = INR 11450

 GNP@MP = NDP@FC + NFIA + NIT + Depreciation

11450 + 150 + 70 + 50 = INR 11720

 National Income: Numerical

 Calculate NNP@MP?
Items (INR in thousand crores)
Income accruing to government 60
NFIA 20
Net Exports -20
National debt interest 70
Private final consumption expenditure 500
Government Final Consumption Expenditure 100
Net Indirect Taxes 120
Current transfers from Government 30
Net Domestic Investment 80
Net Current transfers to abroad 10
 National Income: Numerical

 Gross Domestic Investment = Net domestic Investment + consumption of fixed capital formation

 Gross Domestic Capital Formation = 80 + 0 = ₹80

 GDP at MP = Private Final consumption expenditure + Government Final Consumption Expenditure + Gross

domestic Investment + Net Exports (Exports – Imports)

 GDP at MP = 500 + 100 + 80 + (- 20) = ₹660

 NNP at MP = GDP at MP – consumption of fixed capital + NFIA

 NNP at MP = 660 – 0 + 20 = ₹ 680 crore