MACROECONOMIC

ANALYSIS FOR
MANAGEMENT 1
Class: SYBBA
Term: V
Academic Year: 2020-21
Lecturer In charge : Twinkle Fernandes
UNIT THREE: NATIONAL
INCOME
( 5 Hrs)
Objectives
After studying this unit, students will be able to :
Understand the concept of national income.
Discuss the concepts and components of National
Income: GDP, GNP, NNP, Per Capita Income, Nominal
and Real GNP
 Understand the measurement of national income.
 National Income
• National income is defined as the money value of all
the final goods and services produced in an economy
during an accounting period of time, generally one
year.
Concepts of National Income

• Gross Domestic Product (GDP)

• Gross National Product (GNP)
• Net Domestic Product (NDP)
• Net National Product (NNP)
• Per Capita Income , Personal Income and Personal
Disposable Income
 Gross Domestic Product
• Gross Domestic Product (GDP): GDP is the sum of
money values of all final goods and services produced
within the domestic territories of a country during an
accounting year.
GDP= C+I+G+(X-M)
•
where “C” equals spending by consumers, “I” equals investment by
businesses, “G” equals government spending and “(X-M)” equals net
exports, that is, the value of exports minus imports.
•
• GDP at market price: includes the final value of goods
and services also includes indirect taxes and excludes the
subsidies given by the government.
• GDP at factor cost is the money value of final goods and
services based on the cost involved in the process of
production.

• Gross Domestic Product at factor cost

• = GDP at Market Prices –Indirect Taxes+ Subsidies
 Gross National Product
• Gross National Product (GNP): GNP is the aggregate
final output of citizens and businesses of an economy in
a year.
• GNP may be defined as the sum of Gross Domestic
Product and Net Factor Income from Abroad (NFIA).
GNP = GDP + NFIA
GNP = C+I+G+(X-M)+NFIA

• Net Factor Income from Abroad: difference between

income received from abroad for rendering factor
services and income paid towards services rendered by
foreign nationals in the domestic territory of a country.
Net Domestic Product and Net National Product

• Net Domestic Product = GDP-Depreciation

Net National Product (NNP) = GDP–Depreciation +NFIA
• Or =GNP–Depreciation
Thus NNP is the actual addition to a year’s wealth and is the sum of
consumption expenditure, government expenditure, net foreign
expenditure, and investment, less depreciation, plus net income earned
•
from abroad.
= C+I+G+(X–M)–Depreciation + NFIA
NNP at Factor Cost is the sum total of income earned by all the people
of the nation, within the national boundaries or abroad
• It is also called National Income.
NNP at Factor Cost = NNP at Market Prices –Indirect Taxes+ Subsidies
 Real and Nominal National Income
• National income estimated at the prevailing prices, is called national
income at current prices or Nominal National Income, or Money
National Income or national income at current prices.
• National income measured on the basis of some fixed price, say
price prevailing at a particular point of time, or by taking a base year,
is known as national income at constant prices, or Real National
Income or national income at constant prices.

Nominal GDP
Real GDP =
GDP deflator

•GDP deflator is the ratio of nominal GDP in a year to real GDP of that year
•GDP deflator measures the change in prices between the base year and
the current year.
 Per Capita Income and
Personal Income
• Per capita income is the average income of the people of a
country in a particular year.
National Income
Per Capita Income =
Total Population

• Personal income is the total income received by the

individuals of a country from all sources before direct taxes
in one year.
Personal Income = National Income –Undistributed Corporate Profits –
Corporate Taxes – Social Security Contributions + Transfer Payments
+ Interest on Public Debt
• Personal Disposable Income is the income which can be
spent on consumption by individuals and families.
Personal Disposable Income = Personal Income – Personal Taxes
Methods of measuring National Income
• The methods are:
1. The Product (Output) Method
2. The Income Method
3. The Expenditure Method.
Product ( or output) method
• In this method, national income is measured as a flow of goods
and services.
• We calculate money value of all final goods and services
produced in an economy during a year.
• Final goods here refer to those goods which are directly
consumed and not used in further production process.
• The most direct method of arriving at an estimate of a country’s
national output or income is to add the output figures of all
firms in the economy to get the total value of the nation’s
output.
• The outputs can be grouped into certain product categories
corresponding to industries or to sectors (such as the primary
sector, secondary sector and the tertiary sector).
• Process
• The economy is divided on basis of industries, such as
agriculture, fishing, mining and quarrying, large scale
manufacturing, small scale manufacturing, electricity,
gas, etc.
• The physical units of output are interpreted in
money terms The total values added up. (GDP at
market price)
• The indirect taxes are subtracted and the subsidies
are added. (GDP at factor cost)
• Net value is calculated by subtracting depreciation from
the total value (NDP at factor cost).
Limitations of Product Method

• Problem of Double Counting:

– unclear distinction between a final and an
intermediate product.
• Not Applicable to Tertiary Sector:
– This method is useful only when output can be
measured in physical terms
• Exclusion of Non Marketed Products
– E.g. outcome of hobby or self consumption
• Self Consumption of Output
– Producer may consume a part of his production.
 Income Method

• The net income received by all citizens of a country in a particular

year, i.e. total of net rents, net wages, net interest and net profits.
(GDP at factor cost).
• It is the income earned by the factors of production of a country.
• Add the money sent by the citizens of the nation from abroad and
deduct the payments made to foreign nationals (individuals and firms)
(GNP at factor cost) or Gross National Income (GNI).
Process:
• Economy is divided on basis of income groups, such as
wage/salary earners, rent earners, profit earners etc.
• Income of all the gruops is added, including income from abroad
and undistributed profits.
• The income earned by foreigners and transfer payments made in
the year are subtracted.
GNI = Rent + Wage + Interest +Profit + Net Income from Abroad-
Transfer payments
 Limitations of Income Method

• Exclusion of non monetary income: Ignores the non-

monetized section of economic activities.
– Economic activities that contribute to national income, but due to
their non monetary nature, they go unrecorded. For e.g. a farmer
and family working in their own field.
• Exclusion of Non Marketed Services: People
undertake a particular activity that are difficult to ascertain
in money value. E.g. mother’s services to the family.
Expenditure Method of Measuring
National Income
• This method measures the total domestic expenditure of
the economy. It consists of two elements, viz.
Consumption expenditure and Investment expenditure.
• Consumption expenditure includes consumption
expenditure of the household sector on goods and
services and consumption outlays of the business sector
and public authorities.
• Investment expenditure refers to the expenditure on the
making of fixed capital such as Plant and Machinery,
buildings, etc.
 Uses of National Income Data
• National income is the most dependable indicator of a
country’s economic health.
• Difference between GDP and GNP indicates the
contribution of net income earned abroad
• Necessary for Economic planning: useful aid in judging
which sectors should be given more emphasis
• A measure of economic welfare.
– higher aggregate production implies more and more goods and
services being available to people
• Helps in determining the regional disparities, income
inequality and level of poverty in a country.
• Helps in comparing the situations of economic growth in
two different countries.
 Difficulties in Measurement of National
Income
• Non monetized transactions: Exchange of goods and services
which have no monetary payments, like services rendered out of
love, courtesy or kindness are difficult to include in the computation
of national income.
• Unorganized sector: Contribution of unorganized sector are
unrecorded. It is very difficult to identify income of those who do not
pay income tax.
• Multiple sources of earnings: Part time activity goes
unrecognized and such income is not included in national income.
• Categorization of goods and services: In many cases
categorization of goods and services as intermediate and final
product is not very clear.
• Inadequate data: Lack of adequate and reliable data is a major
hurdle to the measurement of national income of underdeveloped
countries.
 Summary
• GDP is the sum of money values of all final goods and services produced
within the domestic territories of a country during an accounting year. It can be
measured at current or constant prices.
• GNP is the aggregate final output of citizens and businesses of an economy in
one year. NNP is GNP less depreciation.
• The average income of the people of a country in a particular year is per capita
income for that year.
• National income can be measured by product method, income method and
expenditure method.
• National income accounting data are of utmost importance for the economy of
any country; such data reveal the aggregate production of the economy and
also help to determine the total expenditure and total income of that country.
• Difficulties in measuring national income include multiple counting, exclusion of
non market transacted services, self consumption of output, inflation or
deflation, confusion about informal sector, etc.
• National income is considered as a measure of economic welfare. As national
income rises, the aggregate production of goods and services rises. Therefore,
there is a positive relation between increase in national income and welfare.