National Income and Related

Aggregates

Dr. Roopali Srivastava

Department of Management
ITS, Ghaziabad
 Circular Flow Of Income
The process of production is a continuous process. In it,
various FOP such as land ,labor, capital &
entrepreneurship are combined together for the
production of goods & services.
The supply of these FOP come from these FOP from
households. These factors offers their services to the
producers (also known as firms) who in returns produce
goods &services & make payments as reward in the form
of rent, wages, interest & profits.
The households spend this money on goods & services
produced by the firms. Thus income or money first flows
n he firms to the households in the form of factor
payments & then from the firms to the households in the
form of consumption expenditure.
The income continue to flow in a circular way so it is
called circular flow of income.
 Two Sector Model

Goods & Services

Factor Services

Households Producers

Factor Payments
Payment For Goods & Services
 In the previous model ,it is assumed that household
sector and firms do not save at all. But in actual practice
it does not happen so. Households save some part of
their income for various reasons like precautionary
reasons, transactionary reasons &speculative reasons.
Similarly firms also save some of their receipts for
reasons like-expansion of their business etc.
All the banking institutions, insurance companies &
financial houses taken together constitute capital market
of the economy.
From capital market these savings flow to firms as loans
for investment.
Two Sector Model With Savings

Goods & Services

Factor Services

Savings Borrowings
Capital
Households Market Producers
Savings
Borrowings

Factor Payments
Payment For Goods & Services
Three-Sector Model With Savings

Government

Borrowings
Savings
Savings Borrowings
Capital
Households Market Producers
Savings
Borrowings

Factor Payments
Payment For Goods & Services
 Four-Sector Model
Pay.re.on
gov.a/cf E
Factor Services Rest of the world
Government p.made
g.a.

Borrowings

PfE
Savings

PfI
Savings Borrowings
Capital
Households Market Producers
Savings
Borrowings

Factor Payments

Payment For Goods & Services

 Withdrawals & Injections

In reality, however, there are leakages from and

additions to the circular flows of income and expenditure
The leakages and additions are also called withdrawals
and injections, respectively.

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 Withdrawals
Withdrawal is the amount that is set aside by the
households and the firms and is not spent on the
domestically produced goods and services over the
period of time . Example a household sets aside a part of
income for old age or against the loss of job.
Saving is a withdrawal.
When savings are invested, they take a form of injections
Firms may also withhold a part of their total receipts and
may not return it to the circular flows in the form of
factor payments in anticipation of depression
Suchwithdrawals reduce the size of circular flows
S+T+M

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 Injections
Amount that is spent by households and firms in addition
to their incomes generated within the regular economy
Injection by the household may be in the form of
spending inherited savings or the hoarding
Firms can inject money by spending their retained
earnings or borrowing from outside
Injections increase the size of circular flows
I+G+X

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 The circular flow of income

INJECTIONS

Export
expenditure (X)
Investment (I)
Government
Consumption of expenditure (G)

Factor domestically
BANKS, etc GOV. ABROAD
payments produced goods
and services (Cd)
Import
Net expenditure (M)
Net taxes (T)
saving (S)

WITHDRAWALS
 National Income
Refers to the money value of all final goods & services
produced by residents of a country while working both
within or outside the domestic territory in an accounting
year.
NI is expressed in monetary terms.
It reflects the value of final goods & services.
NI Is expressed over 1 financial year.
National Income -Excluded Items
NI excludes sale & purchase of second hand goods.
It excludes income from illegal activities smuggling,
black marketing, gambling etc.,
It does not includes transfer payments old age
pension, scholarship to students etc.,
Transfer payment are those earning for which no
contribution is made to the flow of goods & services.
In other words they are not earned but received only.
T.P are received without doing or producing any
commodity or services.
 Concepts of National Income
GDP
GNP
NDPMP
NDPFC
NNPMP
NNPFC
Private Income
Personal Income
Personal Disposable Income
National Disposable Income
 GROSS & NET : DEPRECIATION
Gross Product =Net Product + Depreciation
NATI0NAL PRODUCT & NET PRODUCT -:NFIA
National Product=Domestic Product+ NFIA
PRODUCT at MARKET PRICE & FACTOR PRICE-:NIT
Product at Market Factor =Product at Factor Cost+
Net Indirect Tax
Net Indirect Tax=Indirect Taxes - Subsidies
 Concepts related to National
Income(NNPFC)
GDP : Value of all final goods and services
produced within the domestic territory of a
country during an accounting year.

GNP = GDP + Net factor income from

abroad
Gross Domestic Product (GDP) Gross National Product (GNP)
It refers to the money value of all It refers to the money value of all
final goods & services produced the final goods & services by the
within the domestic territory of a normal residents of a country.
country .
It is a domestic concept as it is It is a national concept because it
concerned with the domestic is concerned with the normal
territory of a country. resident of a country.
GDP = P(G) + P(S) GNP = GDP + NFIA
If we add net factor income from If we subtract NFIA from it we get
abroad to it, we get GNP. GDP.
GDP would be greater that GNP, if GNP>GDP if NFIA is positive.
NFIA is negative.
Net Domestic Product at Net National Product at
Market Price (NDPMP) Market Price (NNPMP)

It refers to the money value of all It refers to the money value of all
final goods & services produced the final & services by the normal
within the domestic territory in a residents of a country.
year.
It is a domestic concept as it does It is a national concept because it
not include NFIA. includes NFIA

NDPMP = GDPMP Depreciation NNPMP = GNPMP Depreciation

= NNPMP - NFIA = NDPMP + NFIA
National Domestic Product National Domestic Product
(NDPMP) (NDPFC)/ Domestic income

It refers to the market value of all It is the income received by the

final goods & services produced factors of production while working
both by residents or non-residents within the domestic territory of the
within the domestic territory of a country in a year.eg-Rent , Inerest
country in an accounting year. , Wages , Profits

Net Indirect Taxes are included in Net indirect taxes are not included
it. in it.

NDPMP = NDPFC + Indirect Taxes - NDPFC = NDPMP Indirect Taxes

Subsidies + Subsidies
 Calculation of National Income
There are three successive phases in the
circular flow

Income

Production Expenditure
 Methods of Measuring NI
Value added method/Product Method
Income method
Expenditure method
 Steps involved in Product
Method
Identification of product units
1. Primary Sector Agricultural, Forestry, Fishing, Mining
2. Secondary Sector Manufacturing Sector
3. Tertiary Sector This sector is also called service sector
Banking, Insurance etc.,
GDPMP = 1+2+3+Net Indirect Taxes+ Depreciation
NDPMP = GDPMP Depreciation/Consumption of Fixed
Capital
NDPFC = NDPMP Net Indirect Taxes
NNPFC = NDPFC + NFIA
STEPS INVOLVED IN INCOME METHOD
Identifying the producing units
Classifying the factor income

Compensation Operating Mixed Income

of Employees Surplus of the Self
Employed
1.Wages & 1. Income from 1. Profession of
Salaries in Cash property Doctors, Lawyers
(Rent , Interest,
2. Compensation Royalty)

3. Private 2. Income from

Pension Entrepreneur--
-ship (Profits)
 Factor income from all the three sectors are
added(NDPFC )
GDP =Compensation of employees + Rent +
MP

Interest+ Profits + Mixed Income + NIT +

Depreciation
GDP = GDP NIT
FC MP

NDP = GDP Depreciation/Consumption of

FC FC

Fixed Capital
NNP = NDP + NFIA
FC FC
 Steps involved in Expenditure Method
To identify economic units incurring final expenditure.
Classification of final expenditure.
Private final consumption expenditure
Govt. final consumption expenditure
Gross fixed capital formation
Change in stocks
Net Exports
GDPMP = PFCE + GFFCE + GFCF + Change in Stocks +
Net Exports
GDPFC = GDPMP NIT
NDPFC = GDPFC Depreciation/Consumption of Fixed
Capital
NNPFC = NDPFC + NFIA
Steps involved in the calculation of
National Income
All economic units incurring expenditure are
classified into:
Households

Business sector
Government Sector
Rest of the world
Final Expenditure is divided into:
Consumption Expenditure : It is incurred by
the households.
Expenditure by the households is divided into
three categories:
Expenditures on durables
Expenditure on non durables
Expenditure on services like transport,
medical, etc.
Expenditure is calculated by multiplying
volume of sale in the market by the price.
Investment Expenditure
Investment is an addition to the existing stock of
capital goods such as machinery, factories,
residential houses and firms inventories..
Investment expenditure is made on the capital
goods
Expenditure on the purchase of new plants,
machines, equipment, factories, etc.
Inventory expenditure includes the change in
inventories
Expenditure on the purchase of new houses by
households are included.
 Estimation of Government Expenditure:

Defence expenditure
Expenditure on the maintenance of law and order
Expenditure on the social welfare activities
Expenditure on health and education

Estimation of net exports:

Exports represents spending of foreigners on our goods

Imports represents our expenditure on the purchase of
foreign goods.
The difference between the two give us net exports
 Thus,

National Income = Consumption expenditure +

Investment Expenditure + government expenditure +
Net Exports.

Personal Income : It is the income which an individual

earns from all the sources.

Personal Disposable Income : Personal Income Direct

Taxes

Per Capita Income = National Income

Total Population