National Income: Concept of National Income: Objectives

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National Income: Concept of National Income

CONTENTS
Objectives
Introduction
2.1 Concept of National Income
2.2 Measurement of National Income
2.3 Some Related Aggregates
2.4 Components of National Disposable Income
2.5 Summary
2.6 Keywords
2.7 Review Questions
2.8 Further Readings

Objectives
After studying this unit, students will be able to :
 Understand the concept of national income.
 Understand the measurement of national income.
 Explain some related aggregates.
 Discuss components of national disposable income.

Introduction
A person will be considered to live in a country, when he does not live outside the country, for
one year. But students who go abroad for study or patients who go for treatment, these terms and
conditions are not applied on them. If any person, suppose any Indian lives in foreign for more than
one year then he will not be considered as normal dissident of India, rather he will be considered as
an NRI–Non-Resident Indian.

2.1 Concept of National Income


The common factor between domestic income and national income is that in the range of both
concepts only production factor’s income is included, means revenue (to land), interest (to capital)
profit (to entrepreneur) and wages to employees (to labour). Those factors which are not common
to both concepts, they are as follows:
(i) Whereas domestic income necessarily created in domestic border of the country, but
national income can be created in any part of the world.
(ii) Whereas national income is created by both dissidents of a country and NRIs, national
income is created only by dissidents of a country, who are called the “Normal Residents” of
a country.
Unit-2: National Income : Concept of National Income

LOVELY PROFESSIONAL UNIVERSITY 13


Unit-2: National Income : Concept of National Income

Who are Normal Residents? Notes


Normal residents of a country are those
(i) Who generally live in that country, and
(ii) Whose economic interests are centred to that country.
A person living near by border, goes daily to earn livelihood, crossing border, but his centre of
interest remains his own country, because he returns to his family daily. Such a person will be
considered normal resident of his own nation.
This matter should be understood, that the persons who are citizens of a country, necessarily not
that they are the normal residents of that country. For example, if an Indian citizen resides in U.S.A
for more than one year then he will be considered a normal resident of U.S.A, not of India, rather by
birth he is an Indian. Similarly, a person like Sonia Gandhi, however, by birth a citizen of Italy,
rather than she will be considered a normal residents of India because generally she resides in India
and her centre of interest is India also.
This matter is also important that “Normal resident” term, person and his rights are also included.
State Bank of India like financial institutions branch may be situated in London. That branch’s
economic interest will be associated to India. As much profit that branch will earn that profit will be
considered a part of State Bank of India’s whole part.

National Income is an Attribute to Normal Resident only


A country’s national income’s relationship is only to normal resident of that country. Its meaning is
that all foreigners residing in India and institutions, earn factor income will not be considered a
part of India’s national income, if that person and institutions are not the normal resident of India.
Repeating this fact, the earnings of non-residents of India, being a part of domestic income of India,
it will not be considered a part of India’s national income. Therefore, the earnings of Indian, who
are staying in foreign not being a part of India's Domestic Income is considered as a part of India's
National Income. Therefore, if the earnings of Indians who are staying in foreign is added to the
domestic income and subtracted from the earnings of Indians who are staying permanently India
then the domestic income will be converted into national income. This relationship of domestic
income and national income is explained by following equation.
Domestic income: [(Net Domestic Product at Factor cost (NDPFC)] + (i) Factor income earned by our
residents from rest of the world – (ii) Factor income earned by residents of rest of the world in our
country
= [National Income (Net National Product at Factor Cost)]
(i) – (ii) is called net factor income obtained from foreign.
Accordingly, above equation can be written as follows.
Domestic Income (Net Domestic Product at Factor Cost) + Net Factor Income obtained from Foreign
= National Income (Net National Product at Factor Cost)
Or
Net National Product at Factor Cost – Net Factor Income obtained from Foreign = Domestic Income

Notes A country’s national income relationship is only to normal residents of that


country.

LOVELY PROFESSIONAL UNIVERSITY 14


Notes
Now we Define National Income by Following Terms
National income is the total addition of income during a period of one financial year by normal
residence of a country. This income in form of emolument (as rent, interest, profit and wages of
employees) we get due to usages of own factor service.
Using the concept of value added, it can be defined by following type.
During a period of a financial year total summation of value added by normal residents of a country
as a result of factor services is called national income. Keep in mind that value added and income
generated are identical.

 In Dernberg's words, “National income is the factor income accuring to the


residents of the country during a year. It is the sum of domestic factor income and net
factor from abroad."

Gross and Net Concepts of National Income


National income have gross and net concepts. “National income” term is a pure concept.
Necessarily, it is Net National Product at Factor Cost (NNPFC). Rather, to change (NNPFC) into
GNPFC depreciation or consumption of permanent capital is added to it.
Hence:
Net National Product at Factor Cost + depreciation = Gross National Product at Factor Cost
NNPFC + Depreciation = GNPFC
Or
Gross National Product at Factor Cost – depreciation = Net National Income at Factor cost
GNPFC – Depreciation = NNPFC

National Income at Basic Price (or Factor Cost) and National Income at
Market Price
The actual meaning of concept of national income is national income at factor cost. But if in it, value
of net indirect tax (indirect tax-subsidy) is added then it will be national income at market value.
By following equation this relationship can be expressed:
Net National product at Factor cost + Net Direct Tax (Indirect Tax – subsidy) = Net National Product
at Market value.
Or
Net National Product at market value – Net Indirect Tax = Net National Product at Factor Cost.

National Income is Linked with the Level of Product Activity


It is clear from above explanation that national income of a country is linked with that country’s
production activities level. The high level of national income shows high production activities level
of country and vice versa. Production means “value added” and meaning of value added is
“Generation of income”. In an economy total sum of derived income due to value added is generally
called national income. In developed countries the production level is high, consequently their
national
income level is high too. Just its contrary, in underdeveloped countries production level is low also.
Notes
In the form of economic transition, development process means rising from “underdevelopedness
to developedness.” In national income’s level being sustained rise or finding in the long period of
time in the production level of economy sustained rise. A nation’s national income at different time
related data is the indicator of their growth. Different countries such a group of data is helpful in
international comparison of economic growth.

 Why it is important to compute depreciation?


Due to investment the loss that occurs in the value of permanent capital is called depreciation. It
is called the consumption of fixed capital. In whole economy level it is called current replacement
cost also.
In depreciation following three types of expenses are included:
(i) Normal Wear and Tear: Its mean from those expenses that are to do for the continuous
use of fixed capital (as machinery).
(ii) Obsolescence: It refers to those expenditures that producers have to invest when
machinery get older (due to change in technique or demand). Change in technique or
demand obsolescence is called expected obsolescence. This expected obsolescence is
different from natural calamities like flood, fire etc. Keep in mind that only expected
obsolescence is included in depreciation computation.
(iii) Sudden Damage: It means sudden out of order of machinery and plant.
To take these three types of depreciation a producer is to establish Depreciation Reserve
Fund. It is necessary for replacement of depreciated capital otherwise depreciation in
his production capacity (in the form of his fixed capital) will found. At national level if
attention is not paid on current replacement then country’s production capacity will be
decreased and its flow of goods and services will fall. Calculating replacement cost we
keep in mind only present production capacity (or capital stock). Depreciated capital
stock’s again replacement related expenses is called investment expenditure of
replacement investment.
Replacement investment is done only for depreciation related damages, by that means there is no
increment in capital stock of a country. When besides replacement investment, more investment
is done then there is rise in capital stock (or production potentialities) of nation and it is called
net investment (net investment = gross investment – depreciation).
By calculation of depreciation we explain following:
(i) Importance of replacement cost
(ii) Difference between gross and net investment
(iii) Net investment’s (extra investment besides replacement cost) capital stock (or nation’s
production capacity) rise related importance.

Key Points
 Gross Domestic Product— An economy’s under domestic border, produced final goods and
service flow measurement is called gross domestic product. In this, depreciation is also
included.
 Value Addition— Change of input into production is called value addition.
 Final Goods— Final goods are called those goods which cross production’s line and are
ready for final consumer.
Notes  Intermediate Goods— Intermediate goods are those goods which are under production line
and which value addition is to be done. These goods are purchased by firms so that it can be
used as raw material or it can be sold.
 Domestic Territory— Under this besides political border, under country water region and for
residents in different countries for earning operation of aeroplane and ships are also
included.
 Primary Inputs— In it factors of input are included—land, labour, capital and entrepreneur.
 Secondary Inputs— Besides primary inputs, raw materials, fuel etc. used for production are
included.
 Normal Residents— Normal residents of a country are those people who generally reside in
that country, their economic interest is centred to that country.
 Market Price and Bank Price— Market price is that price on which final goods are purchased
by consumer. Basic price is called that price that is obtained by producer. Basic price =
Market price – indirect tax + subsidy.

Self Assessment
Fill in the blanks:
1. A nation’s national income relationship is only with that country’s.....................residents.
2.......................generation of income is done only by residents of the country.
3. The normal residents of a country are those whose economic interest is centred to that
............... .

2.2 Measurement of National Income


A country’s national income or national product is measured at three different levels (1) Production
Level (2) Income or Distribution Level and (3) Expenditure Level. Such is due to three aspects of
circular flow, production of goods and services, distribution of income in honours of factors of
production and at purchase of final goods and services doing expenditure of income. They are
following:
The techniques which are used to measure the three aspects of circular flow of income are called
methods of measurement of national income.
1. Product or Value Added Method
2. Income Method
3. Expenditure Method

(1) Product or Value Added Method


Product Method: It is also called Value Added Method, Industrial Origin Method or Net Out Put
Method.
According to this method, in an economy in a financial year adding final goods produced and
services to the market value, national income is estimated. As far as enterprise relationship is
concerned, this assumes its sell as final sell. For example, a farmer produces one ton of wheat and
selit to a flour mill at ` 400. As far as farmer’s relationship is concerned, for him sell of wheat is his
final sell and he gains
` 400 exchange of it. But purchasing wheat for flour mill is intermediate goods. Mill converting it to
flour sells to a bakery at ` 600. For flour mill, flour is a final product, but bakeryman will assume it
an intermediate product and will use it for making bread. Bakeryman sells it to bread shopkeeper
at ` 800. For bakeryman bread is a final product but for shopkeeper it is an intermediate product.
Shopkeeper sells double bread to final consumer at ` 900. As far as question of farmer, flour mill,
Notes
bakeryman and shopkeeper are concerned any person for estimation of final product will add `
400,
` 600, ` 800 and ` 900, which will be ` 2700. But in economy, by this method GDP or total
production is not estimated. In the above estimation of production, a producer /firm value of
production is reflected in other producer’s product value, because product one’s is used as inputs
for others. Hence in value flour's value of wheat is included and in value of bread of flour. In total
value of production ` 2700, uses of ` 1800 value goods in form of intermediate goods or middle
consumption. The value of final production’s value, we do mistake of double counting, to escape
from it is necessary.

Problem of Double Counting


In the estimation of national product, when the value of any goods is calculated more than once,
then it is called mistaking of double counting. Clearly, due to this reason country’s Gross Domestic
Product (GDP) is increased unnecessarily. In above example in the estimation GDP value of wheat
is added four times. First time, when it is produced by farmer, second time when it is converted to
flour, third time when it is converted to bread and fourth time when it is sold to final consumer.
Only that time when bread is sold to final consumer, then in the form of bread it makes a final
product. Before this it revolves from one producer to another producer as an intermediate product
whose role in production process is intermediate consumption. Double counting is done when
those goods which are used now as intermediate products are included in the estimation of GDP.

Two Ways of Solving the Problem of Double Counting


By following two methods, double counting problem can be solved. Firstly, in the estimation of
GDP, we add only the value of final goods not intermediate goods. We have given already the
description of difference of final goods and intermediate goods in chapter repeat it again that:
(i) The use of intermediate goods as raw material in production of other goods or by firm and
producer, it can be sold again. Just its contrary final goods are not used as raw materials in
the production of other goods or resold producer and firms.
(ii) Intermediate goods are under the line of production. In these goods now the adding of
value remains. Just its contrary final goods are the outside of production line and in them
no value is added.
We can avoid problem of double counting only keeping in mind the final product. During the
estimation
of GDP not a single product is counted two times.

What is Value Addition?


The increase in the cost of production due to addition of intermediate goods to the production
process is called value addition.
In Beckerman's words,“The term value added implies that it is the value added by each industry to
the raw material or other goods and services that it buys from other industries before passing the
product to the nest link in whole chain of production.” In previous example farmer did ` 400 value
addition (assumption on that, that intermediate consumption is zero) flour mill ` 600 – ` 400 = `
200 value addition, and bakeryman making bread value addition of ` 800 – ` 600 = ` 200.
Shopkeeper sold bread, ` 900 – ` 800 = ` 100 is value added. Total value addition ` 400 + ` 200 +
` 200 + ` 100
= ` 900. This is equal to the market value of bread, which is final product or sum of value addition
of various stages of production. Using value addition problem of double counting can be solved.
Due to this property of value addition, it can be used widely in dates of national income. To find out
Notes the value addition by a firm the cost of intermediate goods is subtracted from total production value
of that firm.

Value Addition = value of Production – cost of intermediate goods

Table 1.1 clarifies the concept of value addition

Table 1.1: Value Added Approach

Stages of Production Value of Output Cost of Intermediate Value Added


goods
1. Wheat 400 - 400
2. Flour 600 400 200
3. Bread 800 600 200
4. Sell of bread 900 800 100
Total 2,700 1,800 900

It has been assumed in above table that at wheat producing time, there is no cost of intermediate
goods. Therefore, farmer value addition is equal to his value of product means ` 400. flour mill
buys wheat in ` 400 and making it flour, sells in ` 600. Flourman ` 600 – ` 400 = ` 200 value
addition. Bakeryman bays flour in ` 600 and making it bread, sells it to shopkeeper in ` 800.
Bakeryman value added ` 800
` 600 = ` 200 and sell bread to shopkeeper in ` 800. Shopkeeper sells bread to consumer in ` 900.
Thus value addition by shopkeeper ` 900– ` 800 = ` 100. Therefore total value addition is equal to
` 400 +
` 200 + ` 200 +` 100 = ` 900. If in each step of production value addition is added then it will be `
400
+ ` 600 + ` 800 + ` 900 = ` 2700. The value of wheat and flour will be double counted. To escape
from
double counting value addition method is followed.
GDPMP IS estimated by adding up Value Addition by all the producing units in the economy. Thus
GDPMP = GVAMP
Generally, value addition has been done by primary, secondary and tertiary sectors of economy, we
estimate separately. Therefore, in the whole context of economy these sectors' relative importance
can be found out.
After the estimation of GDPMP following adjustment find out NNPFC (National income)
GDPMP – Net Indirect Taxes = GDPFC – Depreciation = NDPFC + Net Factor Income from Abroad =
NNPFC or Nation Income.

(2) Income Method


For the calculation of national income by income method, factors of production for their producer
service get emolument or total sum of income is added. Broadly, in its emoluments of labour in the
form wage, land emolument on tax, capital emolument in interest and entrepreneurship
emolument in profit. If factor income can not be recognized separately then by Mixed Income (i.e.,
combination of rate, interest, profit and wages) national income is find out. Such is in economy’s
non-organised sector (or non-corporation sector ) where factor of production is self owned. Its
service can not obtained from market on rent. Income method is called Distributed Share Method
of Factor Payment Method.
Components of Factor Income Notes
Components of factor income are as follows:
1. Wages and salaries or Compensation of Employees. The income that gets from work is called
compensation of employees also. According to Central Statistical Organisation, “Compensation
of Employees means all payments by producer, wages and salaries to their employees in cash
and in kind and contribution paid in respect of their employees to social security schemes,
private pension, family allowance, causal insurance, life insurance and similar schemes."
Thus, in employees, compensation (i) wages and salaries, bonus, commission and dear
allowance
(ii) Information of impute of payment, as a free residence, dress and medical facilities,
(iii) contribution of proprietor in social security scheme and (iv) Retired employees pension
etc., are included.
2. Rental Income: Rental income is that income which mainly gets from honourship of land or
buildings. Therefore, the honour of land and buildings, for a fixed period of time, to give
right to other persons for using them, gets income in the form of rent. Buses, tractors,
machines etc. durable goods facilities of using for a fixed period can be given to other
persons on rent. Thus accruing income will be understood as income from rent means those
buildings in which their honour resides themselves their imputed rent is also part of income
from rent and that is included in national income. Royalty is also included in income that
gets from rent. People get royalty from the right of copyright, patent right and natural
resources as mines.
3. Interest: Interest is that income that gets from bank deposit and loan given to firm.
Remarkable thing is that the interest given by government and consumers are not included
in national income because it is not considered payment for current economic production.
4. Profit: The income that gets from entrepreneurship is called profit. Here entrepreneur
means corporation. An entrepreneur or corporation does not divide his total profit among
his shareholders. He divides some parts of his profit. Profit of this divided part is called
dividend. Companies keep undistributed profit in his hand as corporate savings. Some parts
of profit go to government as corporate profit tax. Hence, corporate profit is divided into
three parts means it has three components:
(i) Dividend – This is that part of profit which is distributed among shareholders.
Shareholders getting income as dividend depends upon total profit of firms or corporates.
Distributed profit is only called dividend.
(ii) Corporate Savings – This is that undistributed profit of firm, that he keeps in his hands as
corporate savings.
(iii) Corporate profit tax – This tax by corporate or firm is paid to government on their profit.
5. Mixed Income or Income of Non-Corporate Sector: Mixed Income of the self employed like
doctors, engineers, retailers is the total income of own account workers as well as profit
generated in the unincorporated enterprise. Income from employment and property as well
as entrepreneurship is included in mixed income. Those persons get mixed income that gives
his service in the form of households and as a producer uses his factor and services in the
production of goods and services. These all are self-employed persons and earn self-
employed income, in which wages, rent, interest, and profit are included. Those enterprises
in which self-employed person’s mixed income concept is used, thereby net value added at
factor cost is equal to mixed income of self-employed persons.

 We get domestic income from total summation of rent, interest, profit, compensation of
employees and self-employed person’s mixed income. Hence, domestic income = compensation of
employee
+rent + interest + profit + mixed income of self-employed persons. To convert domestic income
into national income net factor income from abroad is added.
Notes For the measurement of national income, following factors of income are kept in mind.
6. Net Factor Income from Abroad: Getting income in exchange of giving factor service in
abroad and in domestic boundary of a country by non-resident giving factor service paid
income’s difference is called Net Factor Income from Abroad.
Net National Income = Compensation of employees + obsolescence (rent + interest + profit) + mixed
income + net factor income from abroad.
(Note: Total addition of rent, interest and profit are called obsolescence surplus.)

(3) Expenditure Method


Expenditure method is that method by with in a financial year the total expenditure of domestic is
measured in market value, this method is called Income disposable method or consumption
investment method. This method calculates final expenditure or expenditure on gross domestic
product.

Components of Final Expenditure


1. Final Consumption Expenditure: Its two main components are as follows:
(i) Private Final Consumption Expenditure: In domestic market for calculation of private final
consumption expenditure, consumer households and private non-profit institutions,
durable consumption goods, half-durable consumption goods and destructible goods and
service final selling, their total quantity is multiplied to retail price. From it every
purchase made by non-residents is subtracted and every purchase made by residents is
added. Resulting data will be equal to private final consumption expenditure.
Product for Self-Consumption is also a part of Private Consumption expenditure. For self
consumption quantity of production is necessary to multiply with producer’s neighbour
market uses cost. Similarly, owner occupied house rent is also included domestic market’s
final consumption expenditure.
(ii) Government Final Consumption Expenditure: To calculate government's final consumption
expenditure made by enterprises total sells to government is multiplied by retail price.
Purchase from abroad is added also.
2. Gross Domestic Capital Formation: (Capital formation of following two types is included in it):
(A) Gross Domestic Fixed Capital Formation.
a. Expenditure on Construction – For the calculation of expenditure on construction,
construction materials such as cement, steel, bricks, labour, capital factor quantity is
multiplied with their prices. This type of expenditure calculation is called commodity
flow approach. Following items are included in expenditure on construction – (i) self
accounting, production of fixed capital, (ii) consumer households purchasing of new
building, (iii) construction place going work and (iv) Capital repairs as main change
in old buildings.
b. The Final Expenditure on Machinery and Equipment – The expenditure on machinery
and equipment can be estimated by two methods — (i) The quantity of final selling
is multiplied with market in use value, (ii) according to commodity flow approach in
current year finding total quantity of machinery produced and equipment in it cost
paid by buyers is multiplied. By these two methods get equal sum. In it also purchase
cost of machines and equipment for self-pupose is added.
(B) The Expenditure on change in Stock or Inventories: To calculate of expenditure on physical
Notes
change in stock, quantity of physical change is multiplied with market value. We add in gross
national product the cost of those goods and services which is produced in a financial year, but does
not sell.
3. Net Exports Finally the cost of those calculated the value of net export (export-import) from
abroad is calculated. The difference in value of export and import is called net export. Export
production is done on the basis of production sources of the country. Sells of exporting goods
have no effects on the income of domestic factor of production. Due to this reason export
values is considered a part of national income. The expenditure on imports is deducted from
national income, because this expenditure is not done on domestic produced goods.
Gross Domestic Product at Market Price = Final private consumption expenditure + Final
government consumption expenditure + Gross domestic capital formation (Gross domestic
permanent capital formation + change in stock) + Net export (Export – Import)

At factor cost to find out the national production or national income at market cost from domestic
product, net indirect tax and depreciation is deducted and from abroad net factor income is added.

Did You Know? Production for self-consumption is also a part of private consumption
expenditure.

Self Assessment
Multiple Choice Questions:
4. National income can be created
(a) in any part of world (b) only in own country
(c) only in abroad (d) none of these
5. If an Indian resides in abroad for more than one year then he will be considered
(a) foreigner (b) non-resident Indian
(c) domestic resident (d) none of these
6. In ‘Normal Resident' term, both person and rights are ....................... .
(a) pioneer (b) included
(c) separate (d) none of these

2.3 Some Related Aggregates


We have studied already in chapter 2, about domestic product and national income. We have
known domestic product’s gross and net concepts also. Besides this, at market cost and at factor
cost / basic price, domestic product and national income’s concepts have been described in short.
In this chapter we will repeated measurement of concepts and other related aggregates.

(i) Gross Domestic Product at Market Price (GDPMP)


Using value addition method, it can be measured by following type:
Notes Gross domestic product at market price (GDP MP) = During one financial year, under the domestic
border of a country, total summation of value addition by all production units. = During a financial
year under the domestic boundary of a country produced final goods and services value.
Using Income Method GDPMP is measured by following type:
Gross Domestic Product at market price (GDP MP) = compensation of employees + Rent + Interest +
Profit + Mixed income of self employed + Net indirect tax + depreciation or consumption of
permanent capital.
Using Expenditure Method, Gross Domestic Product at Market Price is measured by following methods
Gross Domestic Product at Market Price (GDPMP) = private final consumption expenditure +
Government final consumption expenditure + Gross domestic permanent capital Formation +
changing in producer’s stock (Final stock – initial stock) + net export (export – import).

(ii) Gross Domestic Product at Factor Cost (GDPFC)


Attain of gross domestic product at factor cost, from Gross domestic product at market price, net
indirect tax (indirect tax – subsidy) is deducted.
Gross Domestic Product at Factor cost = Gross Domestic Product at Market Price – Net Indirect Tax
(Indirect Taxes – Subsidy)
GDPFC = GDPMP – Net Indirect Taxes (Indirect Tax – Subsidy)

(iii) Net Domestic Product at Market Price (NDPMP)


Deducting depreciation from Gross Domestic product at Market Price (GDP MP), Gross domestic
product at market price (NDPMP) is got. Therefore
Net Domestic Product at Market Price = Gross Domestic Product at Market Price – Depreciation
(Consumption of Fixed Capital)
NDPMP = GDPMP – Depreciation (Consumption of fixed capital)

(iv) Net Domestic Product at Factor Cost (NDPFC)


If from net domestic product at market price, net indirect taxes are deducted then we will get net
domestic product at factor cost. Hence
Net Domestic Product at Factor Cost = Net Domestic Product at Market Price – Net Indirect Taxes
NDPFC = NDPMP – Net Indirect Taxes

Self Assessment
State whether the following statements are True or False:
7. The real meaning of concept of national income is national income at factor cost.
8. High level of national income shows low level of production of a country.
9. ‘National Income’ word is pure conceptual.
10. During a financial year, by normal resident of a country as a result of factor services did
value addition’s sum is called national income.
Net Domestic Product at Factor Cost (NDPFC) = Compensation of employees Notes
+ Rent
+ Interest
+ Profit = operating surplus
+ Mixed income of selfemployed
In this adding net indirect taxes, we will get Net Domestic Product at Market Price (NDP MP)
means
NDPMP = NDPFC + Net Indirect Taxes
In this (NDPMP) adding depreciation, we will get Gross Domestic Product at Market Price (GNP MP)
means
GDPMP = NDPMP + Depreciation
(v) Gross National Product at Market Price (GNPMP)
Using value addition, it is the market value in a financial year of final product and services produced
in domestic boundary, in which abroad net factor income is included. Hence
Gross National Product at Market Price = Gross Domestic Product at Market Price + Net Factor
Income from Abroad
GNPMP = GDPMP + Net factor income from abroad

(vi) Gross National Product at Factor Cost (GNPFC)


When net indirect taxes are deducted from gross national product at market prices, then we get
gross national product at factor cost.
Gross National Product at Factor Cost = Gross National Product at Market Price – Net indirect
taxes
GNPFC = GNPMP – Net indirect taxes

(vii) Net National Product at Market Price (NNPMP)


When depreciation is deducted from gross national product at market price, then we get net national
product at market price.
Net National Product at Market Price = Gross National Product at Market Price – Depreciation
NNPMP = GNPMP – Depreciation

(viii) Net National Product at Factor Cost (NNPFC)


When net indirect taxes are deducted from net national product at market price then we get net
national product at factor cost.
Net National Product at Factor Cost = Net National Product at Market Price – Net indirect taxes
NNPFC = NNPMP – Net Indirect Taxes
Notes Net national income at factor cost = National income = Compensation of employees
+ Rent
+ Interest Operating Surplus
+ Profit = Domestic income = Net Domestic Product at Factor
Cost
+ Mixed income of self employed

+ Net factor income from abroad


In short
Net National Product at Factor Cost = Net Domestic Product at Factor Cost + Net Factor Income
from Abroad
NNPFC = NDPFC = Net Factor Income from Abroad
(ix) Income from Net Domestic Product Accruing to Private Sector
Two sectors have found in each economy:
(i) Private Sector — In this all those corporate and non-corporate enterprises are included
whose ownership and control are in private hands. The income of this sector is called
income from net domestic product accruing to private sector.
(ii) Government or Public Sector – In this administrative departments, departmental
enterprise (as Railway and Postal department) and non-departmental enterprise (as Air
India and Indian Airlines) are included.
Income from domestic product to government (or public) is included, (1) Income from property
and entrepreneurship accruing to administrative departments and, (2) Savings of non-
departmental enterprises. Hence, the income form domestic product accruing to private sector is
that income which only accruing to private sector.
In Dernburg’s words, “Factor income from net domestic product accruing to private sector is that
part of factor cost of net domestic product generated in the form of compensation of employees,
operating surplus and mixed income which is accured to the private sector.”
For the estimation of factor income from net domestic product accruing to private sector, from net
domestic product at factor cost, (i) income accruing to government from departmental properties
and entrepreneurship and, (ii) savings of non-departmental enterprises are deducted.
Factor income from net domestic product accruing to private sector = Net Domestic Product at
Factor Cost – Income accruing from departmental enterprise’s property and entrepreneurship –
Savings of non-departmental enterprises.

(x) Private Income


Private income means that income which accrus to private sector from all sources, productive or
others
during a financial year. Private sector’s factor income and transferable payment are included in this
also.
According to Central Statistical organisation, “Private income is the total of factor income from all
sources and current transfers from the government and rest of the world accruing to private
sector.”
In private income, factor income from net domestic product, net factor income from abroad, and
transfers of payment are included to private sector. Consequently, in private income factor income
and transfers payment both are included.
Private Income = Factor Income from net domestic product accruing to private sector + Interest on Notes
National loan + Net factor income from abroad + Current transfers from government + Current
transfers from rest of the world.
Or
Private Income = National income + Transfers payment from government + Current transfers from
abroad + Interest on national loan – Government accruing income from property and
entrepreneurship – Savings of non-departmental enterprises.

(xi) Personal Income


Personal income is the total of accruing from factor income from all sources and current transfers
payment of residents and household of a country, during a financial year.
In peterson’s words, “Personal income is the income actually received by persons from all sources in
the from of current transfer payments and factor income.”
Personal income deals person’s actually received income from all sources. For example, profit
accrued by firms and corporates, some part of that are not distributed to persons. That
undistributed profit which is called corporate saving in that form remain to firms.
It uses, (a) paid corporate tax and (b) for doing corporate saving (reserved fund). Therefore, it is not
included in personal income.
Personal Income = Private income – Corporate tax – Savings of corporates (less Foreign companies’
paid income)

(xii) Personal Disposable Income


To get personal disposable income from personal income direct taxes and miscellaneous receipts of
government administrative departments means fees, fines etc. are deducted. Households are free
to expense or saving only this income. Personal disposable income is the indicator of household’s
purchasing power.

Personal Disposable Income = Consumption of households + Saving of family


According to Peterson, “Disposable income is the income available to persons from all sources and
remaining with them after deduction of all taxes levied against their income and their property by
the government.”
Disposable Income = Personal income – Direct tax (income tax and wealth tax) – Miscellaneous
receipt of government administrative departments (By person, paid to government fees and fine)

(xiii) National Disposable Income—Gross and Net Concepts


National disposable income is the income accrued from all sources (earned income and from
abroad accruing transfers payment) that is available for a country’s residents for consumption or
saving during a year.
In gross national disposable income, current replacement cost is included whereas in net disposable
income (in short disposable income), it is not included.
Notes
 What is current Replacement cost?
This is by a country using in a year, property become useless by their replacement cost. This is
depreciation cost (or consumption of permanent capital) of whole economy.

Net National Disposable Income (in short, disposable income) = Gross national disposable income –
Current replacement cost (which is depreciated at whole economy level)

Task Express your views on total related aggregates.

2.4 Components of National Disposable Income


National disposable income is estimated by following types:
National disposable income = Net domestic product at factor cost (or domestic income) + net indirect
tax + net factor income from abroad + receipts net current transfers from rest of the world.

 Difference between Personal Disposable Income and National Disposable Income


(i) Personal disposable income relationship is only a nations’s residents and households’
disposable income, whereas national disposable income relationship is whole country’s
disposable income.
(ii) For estimation of national disposable income, net domestic product at factor cost, net
indirect tax, net factor income accuring from abroad, and net current transfer accruing
from rest of the world is added. On the other hand, in personal disposable income, a
country’s domestic consumption and domestic savings are added.
National Income and Related Aggregates – A Glance

1. Gross Domestic Product at Market Price


= In a financial year, produced by all producer
(GDPMP)
final goods and services market value in
domestic boundary of a country.
2. Gross National Product at Market Price
= DPMP + Net factor income from abroad
(GNPMP)
3. Net National Product at Market Price
= GNPMP – Consumption of permanent capital or
(NNPMP) depreciation
4. Net Domestic Product at Market Price = NNPMP – Net factor income from abroad
(NDPMP)
5. Net Domestic Product at Factor cost
= NDPMP – Indirect tax + Subsidy or net domestic
(NDPFC) income
6. Gross Domestic Product at Factor Cost = NDPFC + Depreciation Notes
(GDPFC)
7. Gross National Product at Factor Cost = GDPFC + Net factor Income from abroad
(GNPFC)
8. Net National Product or National = GNPFC – Depreciation
Income at Factor Cost (NNPFC)
9. Net National Disposable Income = Net domestic Income + Net factor income
from abroad + Net indirect tax + Net current
transfers from rest of the world
10. Gross National Disposable Income = Net national disposable income + current
replacement cost
11. Factor income from net domestic product = Net domestic product at factor cost
accruing to private sector – departmental enterprises property and
entrepreneurship accruing income – saving of
non-departmental enterprises
12. Private Income = Income from domestic product accruing to
private sector + Net factor income accruing
from abroad + Current transfers from
government + Current transfer from rest of the
world + Interest on national loan
13. Personal Income = Private income – Corporate profit tax –
Savings
of enterprises
2.5 Summary
14. Personal Disposable Income
= Personal income – direct personal tax (or
 A country’s national income relationship is only to normal
income tax) –residents of that country.
Miscellaneous fees andItfines
means
that all foreigners and institutions those reside
paidinbyIndia their earned factor income will not
households
be considered, a part of national income. Repeating this fact, income earned by non-
residents of India, rather a part of domestic income of India, but it is not considered a part
of national income of India.

2.6 Keywords
 Economic Interest: Interest related to wealth.
 Obsolescence: Out of operation.
 Expenditure Method: Process of expenses.

2.7 Review Questions


1. What are the gross and net concept of national income?
2. What is meant by ‘Measurement of National Income’?
3. What do you mean by 'Total related Aggregates'?
4. Explain components of national disposable income.
Notes Answers : Self Assessment
1. normal 2. National 3. in country 4. (a)
5. (b) 6. (b) 7. True 8. False
9. True 10. True.

2.8 Further Readings


Books 1. Macroeconomics : Economic Growth, Fluctuations and Policy
—Report
E. Hall and David H. Paipal, Vaina Books, 2010.
2. Macroeconomics : Theory and Policy—H.L. Ahuja, S. Chand
Publishers, 2010.
3. Necessity of Macroeconomics—H. S Nath, Cyber Tech
Publications, 2010.

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