UNIT II: National Income

Concepts & Measurement

 Unit II : Outline

• Meaning and definitions of National income

• Various concepts of National income: GDP, GNP, NNP,
Personal income, Disposable Income, and Per Capita
Income
• Real and Nominal GDP, GNP
• Methods of computing National Income: Income
method, Expenditure method, Value added method,
• Difficulties in the measurement of National income
• Importance of National income analysis.
2.1 Meaning: What is national income?

• National income is the total income of the citizens

of the country whether earned within the
geographic boundary of the country or abroad.
• It is the total income earned by the factors of
production owned by the country’s citizens.
 2.1.1 Definitions of National Income

• According to Marshall: “the labor and capital of a country acting upon its
natural resources produce annually a certain net aggregate of commodities;
material and immaterial including services of all kinds. This is net annual
income or revenue of a country or national dividend.”

• A. C. Pigou : “The national dividend is that part of the objective income of

community including income derived from abroad, which can be measured
in money.”

• Fisher : “ The true national income is that part of annual net produce which
is directly consumed during that year.”
2.2 Concepts of National Income and National
Product

• The different concepts of national income / product are:

• Gross Domestic Product (GDP) =
• Gross National Product
• Net National Product
• National Income
• Personal Income
• Disposable Income
2.2.1 Gross Domestic product (GDP)

• It is the total market value of all currently produced final goods and
services within the geographical boundary of a country, generally in
one year.
• Suppose an economy produces x1, x2, x3,….. Xn types of goods and
services with prices p1, p2, p3... Pn respectively
• Then GDP = p1.x1 + p2.x2 + p3.x3 … Pn.xn
• GDP = Σpi.xi
• Where pi = price of ith commodity and xi is quantity of ith
commodity
2.2.1 cont… Gross National Product (GNP)
• GNP refers to the total value of all the final goods and services
produced during the period of one year plus the net factor incomes
earned from abroad during the year.

• GNP includes the economic activities of all the residents of a nation

whether operating within the country or outside it.

• It takes into account the incomes which the residents get from rest
of the world and at the same time it excludes those incomes which
arise from the economic activities within the country but have to
paid out to the non-residents.
GNP = GDP + Net factor income from abroad (X-M)

GNP being the monetary measure of all final goods and services
produced, is widely used as an index for judging the performance of
an economy.
 2.2.3 Net National Product (NNP)

• NNP at market price is equal to GNP minus the charges of

depreciation and replacements, where depreciation
represents the values of fixed capital consumed during
the process of production.

• NNP mp = GNP mp – Depreciation.

• The concept of NNP is important because it gives an
estimate of the net increase in the output of final goods
and services.
 2.2.4 Net National Product at Factor Cost
(NNP fc) or National Income

• NNP fc or national income is equal to the sum total of

factor incomes received by the factors of production
during the year. It is equal to the sum of rent, wages,
interests and profits in a given year.
• The sum total of incomes of the factors of production is
known as national income or net national product at
factor cost.
• Thus, the national income is equal to the NNP at mp minus
revenue of the government by way of indirect taxes plus
subsidies provided by the government to the business
sector.
NNP fc = NNP mp – {Indirect taxes + Subsidies}
 2.2.5 Personal Income (PI)
• Personal income in the national income account is the
measure of the income received by citizens (persons) of a
country from all sources.
• PI = NI – corporate retained profits – corporate taxes –
social security contributions + transfer payments from
government
• Disposable personal income (DI) is equal to personal
income minus personal taxes.
• DI = PI – direct taxes
Particulars $ 000
1. GDP 10,0000
Less Depreciation (10% CCA) - 1000
2. NNP (Net Domestic Product ) 91000
+ Net Factor income from abroad +500
3. NNP (Net National Product) 91500
Less indirect taxes -250
4. National Income (NI) 91250
Less corporate profit not distributed -50
Less social security contribution -50
Less corporate tax -50
+ transfer received 100
5. Personal income (PI) 92000
Less direct tax -200
 2.2 cont.. What is excluded in GDP?

• Intermediate goods

• Transfer payments

• Home Production

• Pollution/environmental damage

• Illegal Goods
 2.2 cont.. GDP vs. GNP

• GDP is the sum value of all goods and services produced within a

country.
• GNP is the sum value of all goods and services produced by
permanent residents of a country regardless of their location.
• GDP of a particular country, production by foreigners within that
country is counted and production by nationals outside of that
country is not counted.
• For GNP, production by foreigners within a particular country is not
counted and production by nationals outside of that country is
counted.
• GDP is the value of goods and services produced within a country.
• GNP is the value of goods and services produced by citizens of a
country.
 GDP GNP

Definition: An estimated value of the total GDP (+) total capital gains from
worth of a country’s production overseas investment (-) income
and services, calculated over the earned by foreign nationals
course on one year domestically

Stands for Gross Domestic Product Gross National Product

Formula GDP = consumption + investment GNP = GDP + NFA (Net income

for + (government spending) + from assets abroad (Net Income
Calculation (exports − imports) Receipts))

Layman Total value of products & Services Total value of Goods and
Usage: produced within the territorial Services produced by all
boundary of a country nationals of a country (whether
within or outside the country)

Application To see the strength of a country’s To see how the nationals of a

local economy country are doing economically
 2.2.6 Types of GDP
• Nominal GDP is the sum value of all produced goods and
services at current prices. 
• Real GDP is the sum value of all produced goods and
services at constant prices (price from a specified base year)

• Real GDP = Nominal GDP / GDP deflator x100

• GDP deflator is the price index of measuring changes in the

overall prices of all newly produced final goods and services
within the geographical territory of a country
• It is an indicator of average prices; % change in value of GDP
deflator is one of the measures of rate of inflation in a
country
2.3 Methods to measure National
Income
• To measure the national income of a country, we use three

different methods, such as:

(a) The expenditure method

(b) The income method

(c) The product method

 2.3.1 Expenditure method
• Expenditure method measures national income as an aggregate of all final
expenditure made by different agents of the economy during a year. The
components of expenditure method are:
• GDP = C + I + G + (X – M)
• Where,
• C = consumption expenditure
• I = investment expenditure
• G = government expenditure
• X = export
• M = import
• 1. Consumption Expenditure (C): It includes all the expenditure made on
final goods and services by individual and households, produced
domestically and abroad, of a country during one year.
• 2. Investment Expenditure (I): It includes expenditure made by private
enterprises on capital goods like machinery, plants, equipments, tools, etc.
produced both domestically and abroad. Investment expenditure considers
new capital investment, replacement of old capital and change in
inventories.
2.3.1 Cont… expenditure method
• 3. Government Expenditure (G):
• expenses made by government on final goods and services
produced both domestically and abroad during one year.
Expenditure made on transfer payment like pension,
unemployment allowance, old age allowance, etc. are not
included as government expenditure as these payments
are not for buying goods and services.
• 4. Net Export (X–M): Net export is defined as the amount
which foreigners spend on domestic goods and services
minus the amount which domestic people spend on
foreign goods and services. It is because exported goods
are produced within the country and imported goods are
produced outside the country.
 2.3.2 Income method
• This method is based on the estimation of income of various factors
of production in the form of wage, interest, rent and profit. But to
estimate GDP using income method which is also called gross
national income (GNI) it needs adjustment with depreciation and
net indirect tax.
• GDP* = Σr + Σw + ΣI + ΣΠ
• Where,
• GDP* = gross domestic product which needs adjustment
• Σr = sum of all rental income
• Σw = sum of all wage income
• Σr = sum of all interest income
• ΣΠ = sum of all corporate profit
• * Subtract NFIA and add depreciation & net indirect tax
• GDI = wage + rent + interest + profit + depreciation + net indirect tax
 2.3.2 Cont….
• Components for measuring national income using income approach are:
• 1. Wage Income: It includes income in the form of wage and salary paid by
government or business houses to the labor. It also includes other benefits like
bonus, commission, tips, etc.
• 2. Rental Income: It is the income received by property owners in the form of
rent. Rent includes rental income from land, houses, factories, etc.
• 3. Interest Income: It is the income received by the people from lending
money to business firms. It includes all the incomes in the form of interests by
lending money.
• 4. Corporate Profit: Corporate profit includes corporate tax, undistributed
corporate profit, social security contribution and dividends.
2.3.2 Cont…

• 5. Depreciation: Depreciation made by each firm for the repair and

maintenance of capital goods is included in GDP or GDI calculation. It
is because corporate profit is calculated after deducting depreciation.
Depreciation is also called consumption of fixed capital or capital
consumption allowance.
• 6. Net Indirect Tax: Net indirect tax is the difference between
indirect tax and subsidies. The income generated from net indirect
tax is also included in GDP or GDI calculation at market price.

• Statistical discrepancy
• Net factor income from abroad
 2.3.4 roduct Method
• In product method, product in each economic sector like
agriculture sector, industrial sector and service sector are
identified and money value of all these products are
estimated and added together to calculate GDP. Under
product method, national income can be measured either by
Final Product Method or by Value Added Method.
• GDP = ΣPiQi
• Where,
• GDP = gross domestic product
• Pi = price of ith goods or services
• Qi = quantity of ith goods or services produced domestically
in one year
2.3.4 Cont…. Product method

• a. Final Product Method

• In final product method, national income is
computed by adding together the market value of
final goods produced in different sectors in the
economy in one year.
• GDP = = ΣQaPa + ΣQiPi + ΣQsPs
• Where Qa, Qi and Qs are the final outputs and Pa,
Pi and Ps are the prices of agriculture, industry and
service sectors respectively.
 2.3.4 Cont… product

• b. Value Added Method

• In this method, the value added at different stage of
production is estimated first. The difference between the
money value of output and inputs at each state of
production is called value added. If all such value added is
added together, it gives national income.
• GDP = = ΣVAa + ΣVAi + ΣVAs
• Where VAa, VAi and VAs are the value added in
agriculture, industry and service sectors respectively.
 2.3.4 Cont…
• Value added method involves the following steps:
• 1. Classification of economy into various sectors and generally
economy is classified into three sectors – primary, secondary
and tertiary (agricultural, industrial and service sectors)
• 2. Computation of Gross Value Added (GVA) of each producing
unit is obtained which is subtraction of intermediate goods
(cost of inputs) from revenue of final output.
• GVA = value of output – value of input
• 3. Gross value added of different economic sectors are
obtained by adding gross value added of each producing unit
of related sector. Then value added of these sectors are added
which gives GDP.
• 4. Other NI variables are obtained accordingly.
 2.3.4 Cont…

• The next step in the production method is the estimation

of net product of each sector.
• This comes from the Gross products minus the
intermediate products minus the depreciation during the
process of production.
• NNP = GNP – Intermediate products – Depreciation.
• The total estimates would give us Net Domestic Product
at factor cost.
• The addition of net income from abroad to this total
would give us net national income at factor cost or
National Income.
 2.3.5 Cont…
Comparison of three Methods:
• The product method is very suitable for the primary sector such as
agriculture, industries etc.
• The income method is appropriate for the tertiary and service
sectors.
• The Expenditure method is only for the calculation of identical
relationship between three methods. It is because we may not get
the details of all expenditure correctly. Neither it is possible nor it is
desirable to reveal all types of expenditure.
• In fact, the expenditure method is only to complete the identical
relationship i.e.
GNP=GNI=GNE=NI
 2.3.6 GDP Deflator

• The GDP deflator (implicit price deflator for GDP) is a

measure of the level of prices of all new, domestically
produced, final goods and services in an economy. In most
systems of national accounts the GDP deflator measures the
ratio of nominal (or current-price) GDP to the real (or chain
volume) measure of GDP.
The formula used to calculate the deflator is:
Dividing the nominal GDP by the GDP deflator and
multiplying it by 100 would then give the figure for real GDP,
hence deflating the nominal GDP into a real measure.
2.3.7 Difficulties in Measuring NI

• Non-monetary Transaction
• Underground or Black Economic Transaction
• Estimation of Depreciation
• Price change
• Data deficiency
 2.3.8 Importance of National Income
Accounting

• a. National income gives information on overall production performance

of the economy for the year.
• b. Comparing national income statistics of various year, it gives
information whether the economy is growing, stagnant or declining.
• c. NI statistics shows the contribution made by various sectors of the
economy
• d. NI statistics gives information on income distribution among different
classes, i.e. wage income, rental income, interest income and profit
income receiving groups.
• National income statistics of various compares the living standard and
welfare of the people in those countries.
• f. National income gives information on total consumption, total saving
and total investment which helps to make economic policy.