 National income

National income refers to the market value of all

final goods and services resulting from the
productive activities by the residents of the nation
during the accounting year.

NI  x1 p1  x2 p2  x3 p3  ...  xk pk  ...
Intermediate vs. final goods
 Intermediate goods (goods used for further
production)
 Final goods (goods that flow for ultimate
consumption)

Caution: The value of intermediate goods is not

considered in computing national income since it
leads to the problem of double counting.
Final Goods and Services

In calculating GDP, we can sum up the value added at each

stage of production or we can take the value of final sales.
We do not use the value of total sales in an economy to
measure how much output has been produced.

TABLE: Value Added in the Production of a Gallon of Gasoline

(Hypothetical Numbers)
Stage Of Production Value Of Sales Value Added
(1) Oil drilling $3.00 $3.00

(2) Refining 3.30 0.30

(3) Shipping 3.60 0.30

(4) Retail sale 4.00 0.40

Total value added $4.00

 Measures of National Income

Gross National Product (GNP)

GNP belongs to the nation, and thus, it must be
produced by its owned factors of production only.

If an Indian professor takes up a four month

Visiting Professorship in a US University, his
income in USA is the part of India’s GNP and
similarly the profit that a MNC makes in India, is
a part of US GNP and not that of India’s.
 Gross Domestic Product (GDP)

 GDP is the total market value of a country’s output. It

is the market value of all final goods and services
produced within a given period of time by factors of
production located Within political boundaries of
nation:
 Further Clarification on GDP-1/2
 Ships and aircrafts owned and operated by the residents
between two or more countries. For Instance, Indian ships
moving between UK and Pakistan regularly or passenger
planes operated by Air India between Russia and Japan are
parts of domestic territory of India.

 Fishing vessels, oil and natural gas rigs and floating

platforms operated by the residents of a country in the
international waters or engaged in extraction in areas
where the country has exclusive rights of operation. For
example, fishing boats operated by Indian fishermen in the
international waters of the Indian Ocean will be
considered as a part of domestic territory of India.
 Further Clarification on GDP- 2/2

 Embassies, consulates and military establishments of

the country located abroad. To illustrate, Indian
embassies in Russia, America and other countries will
form parts of domestic territory of India. Similarly,
embassies of other countries like Japan, Russia,
America located in India are parts of domestic
territories of their own countries and not of India.
 What domestic territory does not include:
 Territorial enclaves (like embassies) used/administered by
foreign governments.
 International organisations which are physically located
within geographical boundaries of a country. Their offices
form part of international territory.
 Normal residents of India include:
 Citizens (and institutions) of India,
 Citizens of other countries (i.e., non-citizens) who
normally reside in India for more than a year and whose
centre of economic interest lies in India,
 Citizens of India working in (a) international bodies like
I.M.F., (b) foreign bodies like banks, enterprises operating
in India and (c) foreign embassies located in India.
Gross Domestic Product (GDP)

GDP = GNP - Net Factor Income from Abroad (NIA)

 NIA= Income earned by residents in foreign

countries– Income earned by foreigners in India
 ‘Net Income from Abroad’

 Net income is the difference between the income earned from abroad
by normal residents of a country and the factor income earned by non-
residents (foreigners) in the domestic territory of that country.

 The normal residents of a country earn factor income not only within
the domestic territory of a country but outside it also.
 Income from outside can be earned mainly in two ways, namely (1)
income from work and (2) income from property and

 NIA=factor income earned from abroad by residents - factor

income of non residents in domestic territory

 Components of net factor income from abroad:

(1) net compensation of employees
(2) net income from property and entrepreneurship (Rent, Interest,
Profit)
(3) net retained earning of resident companies abroad
 Net National Product (NNP)
NNP is equal to: Gross national Product (GNP) less
Allowances for Capital Consumption.

Capital Consumption Allowances: are the total or aggregate

costs of the wear and tear or depreciation of the capital stock
i.e., machinery, tools, plants, roads, power grids, buildings,
bus fleet, trains, railways etc within an economy usually
within a given year. Another name for the CCAs is the
depreciation of capital stock or its depreciation costs.

NNP = GNP –Depreciation

 Net Domestic Product (NDP)

NDP, or Net Domestic Product, unlike GDP, takes account

of capital depreciations, capital goods or part of capital
goods that have been consumed over the year in forms of
housing, vehicle, machinery deterioration and so forth.

NDP = GDP –Depreciation

NDP is more accurate in measuring economic output.

The reason we use GDP rather than NDP: The capital

depreciation is too difficult to spot from capital goods
investments.
Gross National Products at Market price and Factor cost

 GNP at Market Price (GNPMP)

 GNP at Factor Cost(GNPFC)

 GNPMP = Market value of all domestically produced goods and

services + incomes earned by the residents of a country in foreign
countries - incomes earned by the foreigners in the country.

 GNPFC = GNP at factor cost is the net of indirect taxes, but

includes the subsidies as it values the goods at the prices paid by
the end users.

GNPFC= GNPMP + Subsidies (S) - Indirect Taxes (IT)

GNPMP = GNPFC– Subsidies (S) + Indirect Taxes (IT)

Note here that Factor costs are really the costs of all the factors of
production such as labor, capital, energy, raw materials like steel etc
that are used to produce a given quantity of output in an economy.
 Gross Domestic Products at Market price and
Factor cost

 GDP at Market Price (GDPMP)

 GDP at Factor Cost(GDPFC)

GDPFC= GDPMP + Subsidies (S) - Indirect Taxes (IT)

GDPMP = GDPFC– Subsidies (S) + Indirect Taxes (IT)

 Worked Out Example
National income and related aggregates
Item National income aggregate Value as on
no. March 2004-05
1 GNP at market price 31,03,498
1.1 Indirect taxes 3,66,643
1.2 Subsidies 89,126
2. GNP at factor cost (1-1.1+1.2)
2.1 Net factor income earned abroad - 17,916
3. GDP at factor cost (2-2.1)
3.1 Capital consumption 2,94,758
4. NNP at factor cost (2-3.1)
5. NDP at factor cost (3-3.1)
 Worked Out Example
You have following information (Rs. Crore)

Indirect Taxes 2,47,528

Subsidies 55,383
Net factor Income from Abroad -17,414
Capital Consumption/Depreciation 1,98,447
GDP at Factor Cost 18,95,843
Calculate:
(i) GNP at Factor Cost,
(ii) GNP at Market Price
(iii) NNP at Factor Cost
(iv) NDP at Factor Cost
 Solution
 GDPMP = GDPFC- S + IT = 18,95,843 - 55,383
+2,47,528=20,87,988

 GNPMP= GDPMP+ NIA = 20,87,988 + (-17,414) =

20,70,574

 GNPFC= GNPMP + S- IT= 20,70,574 + 55,383 –

2,47,528=18,78,429

 NNPFC= GNPFC - D = 18,78,429 – 1,98,447 = 16,79,982

 NDPFC= GDPFC - D = 18,95,843 – 1,98,447 = 16,97,396

 Private, Personal and Disposable income
 Private income:
Private income= NNPFC – Income from property
and entrepreneurship accruing to government
administration departments (railways, posts and
telegraph departments)– Savings of non-
department enterprises (public sector units) +
National Debt Interest + Transfers from
Government Administrative Departments + Other
Net Transfers from abroad
Personal Income
It is the sum of all incomes actually received by all
individuals or households during a given period.
PI = Private income–corporate tax – undistributed
corporate profits

Personal Disposable income

Disposable Income for individuals is the part of total
earnings deprived of all taxes paid and profit reserved for
companies, which is the amount available for spending or
saving.
PDI = PI - Personal Taxes- Miscellaneous Payments to
government departments (fees, fines, penalties, etc.)
 Worked Out Example
National income and related aggregates
Item no. National income aggregate March 2004-05
1. NDP at factor cost 8000
2 Net factor income earned abroad 200
3 NNP at factor cost (1+2)
4. Undistributed profits 1000
5. Corporate tax 500
6. Interest received by households 1500
7. Interest paid by households 1200
8. Transfer income 300
9. Personal tax 500
10. Private income (3+(6-7)+8)
11. Personal income (10-5-4)
12. Personal Disposable income (11-9)
Methods for Measuring Income
 Production approach
 GDPMP= P1 Q1 + P2 Q2 +…+ Pn Qn
 Income approach
 NDPFC =Wages+Rent+Interest+Profits+Misc. Income of
self employed= W+R+I+P
 Profits=Dividends+ Retained Earnings+ Corporate tax

 Expenditure approach
 GDPMP = Consumption Expenditure+Government
expenditure + Gross private domestic investment +
Exports-Imports
OR
C+G+I+X-M
Production approach
Sector 1990-91 (in crores) 2004-05
PRIMARY 33.5 22.1
1) Agriculture 28.3 17.6
2) Forestry & Fishing 2.7 1.9
3) Mining & Quarying 2.5 2.6
SECONDARY 26.9 24.7
4) Manufacturing 18.7 15.8
5) Electricity, gas and water 2.2 2.6
6) Construction 6.0 6.1
TERTIARY 39.7 53.3
7) Trade, hotels and restaurant 13.0 16.2
8) Transport 7.1 8.5
9)Banking and insurance 4.4 5.8
10)Real estate, dwellings 3.7 8.5
11) Public adm. And defense 5.7 6.1
12) Other services 5.8 8.2
GDP at Market price 33.5+26.9+39.7 22.1+24.7+53.3
Calculating GDP
The Expenditure Approach
There are four main categories of expenditure:

Personal consumption expenditures (C): household spending

on consumer goods

Gross private domestic investment (I): spending by firms

and households on new capital, that is, plant, equipment,
inventory, and residential structures, and change in business
inventories

Government consumption and gross investment (G)

Net exports (EX - IM): net spending by the rest of the

world, or exports (EX) minus imports (IM)
Calculating GDP
The Expenditure Approach
TABLE Components of U.S. GDP, 2007: The Expenditure Approach
Billions Of Dollars
Personal consumption expenditures 9,734.2
(C)
Gross private domestic investment (l) 2,125.4
Government consumption and gross 2,689.8
investment (G)
Net exports (EX – IM) -708.0
Exports (EX) 1,643.0
Imports (IM) 2,351.0
Gross domestic product 13,841.3

GDPmp = C + I + G + (X - M)
Find NDP at factor cost from the following data. (amount in
crs.)
(i) Gross domestic fixed investment 10000
(ii) Inventory investment 5000
(iii) Depreciation 2000
(iv) Indirect taxes 1000
(v) Subsidies 2000
(vi) Private Consumption expenditure 9000
(vii) Government Consumption exp. 11000
(viii) Net Exports 1200
Calculating GDP

Where Does eBay Get

Counted?
So do any of eBay’s services
count as part of GDP? eBay’s
business is to provide a
marketplace for exchange. In
doing so, it uses labor and
capital and creates value. In
return for creating this value,
eBay charges fees to the sellers that use its site. The value of
these fees do enter into GDP. So while the old knickknacks
that people sell on eBay do not contribute to current GDP,
the cost of finding an interested buyer for those old goods
does indeed get counted.
Income approach
Calculate Domestic and National income using the
following data
Items Amount in crs.
Wages 10000
Rent 5000
Interest 400
Dividend 3000
Mixed income 400
Undistributed profits 200
Social Security contributions 400
Corporate Profit tax 400
Net factor income from abroad 1000
(a) Domestic income= Wages+ Rent+ Interest+ Dividend+
Mixed income + Undistributed profits+ Social Security
Profits+ Corporate profit tax= 19800

(b) National income=(a)+ NFIA= 20800

Nominal GDP (NGDP)
 So far GDP measured in current prices we pay for
goods and services
 Nominal GDP: GDP measured in current prices

 However it is not a good measure of aggregate output

over time
 Because it does not strip out pace of rising prices
NGDP: Example
Year Price ($/slice) Quantity NGDP
2014 $1 100 $1*100 = $100
2015 $1.1 100 $1.1*100 = $110

 Assume there is only one good – pizza

 NGDP has increased by $10 even though production was
same
 But what has happened here is a rise in price level
(inflation)
Real GDP (RGDP)
 To account for inflation we would consider RGDP
 RGDP: Nominal GDP adjusted for inflation
 It is calculated using prices of a selected base-year

 Assume two time periods: 1990 and 1995

 If 1990 were chosen as base-year then

 RGDP1995 = Quanity1995*Price1990
RGDP: Example
Year Price Quantity Price of Quantity of NGDP
of Balls of Balls Burgers Burgers
2009 $1 100 $2 50 $1*100+$2*50 = $200
2010 $2 150 $3 100 $2*150+$3*100 = $600
2011 $3 200 $4 150 $3*200+$4*150 = $1,200

 To calculate RGDP, first choose a base-year

 Assume 2009 as base-year
Year RGDP
2009 $1*100+$2*50 = $200
2010 $1*150+$2*100 = $350
2011 $1*200+$2*150 = $500
GDP Deflator
 GDP Deflator: Implicit index of price-level for a year
 GDP Deflator = (NGDP/RGDP)*100

Year NGDP RGDP GDP Deflator

2009 $200 $200 ($200/$200)*100 = 100
2010 $600 $350 ($600/$350)*100 = 171
2011 $1,200 $500 ($1200/$500)*100 = 240
Calculating inflation/deflation from GDP Deflator

 GDP Deflator: Implicit index of price-level for a year

 GDP Deflator = (NGDP/RGDP)*100

Year GDP Deflator Inflation/deflation

2009 100 -
2010 171 [(171-100)/100]*100 = 71%
2011 240 [(240-171)/171]*100 = 40%

 Prices in 2010 compared to base-year (2009) has increased

by 71%
 Prices in 2011 compared to 2010 has increased by 40%
 Chapter 21, Case et al.
 Chapter 4, Dwivedi
Items to be included Items not to be included
 Government or private expenditure
 Gifts and grants
on defense and Security
 Free services by the government  Services of housewives
 EPF  Expenses on electricity for
 Rent received by Indian residents commercial use
on buildings rented out to foreign  Purchase of vegetables by
embassies
restaurant
 Profits earned by a branch of an
Indian bank in London
 Dividends received by an Indian
resident from his investment in a
foreign firm
 Wages received by the India
employees