National Income

National Income
 Working of two sector economy

Consumption Expenditure
Goods & Services

Business Sector House Hold sector

L,LA,K,O

R,W,I,P
 Capital Market

Investment Saving

Consumption Expenditure
Goods & Services

Business Sector House Hold sector

L,LA,K,O

R,W,I,P
 Working of Three Sector Economy

Govt. Purchase Govt. Sector Taxes

Transfer Payments
Investments Capital Market Saving Social Services

Consumption
Expenditure
Taxes

Product market

Household
Business
Sector
Sector
L,LA,K,O

R,W,I,P
 Exports, Investments & Service Receipts
Imports, investments & service
Payments Foreign Sector

Govt. Purchase Govt. Sector Taxes

Transfer Payments
Investments Capital Market Saving Social Services

Consumption
Expenditure
Taxes

Product market

Business Household
Sector Sector
L,LA,K,O

R,W,I,P
National Income

Definition

1. N.I. can be defined as the aggregate value of all final goods and
services, created in all economic sectors during a year.
2. N.I. can be viewed as a sum of income earned by factors of
production for their contribution to the economic activity 
includes all factor incomes
3. N.I. is defined as the sum of the expenditure on goods and
services produced during the given year.
National Income at Current and
Constant Prices
 N.I. is calculated for one year. This is known as Fiscal year, financial
year or accounting year.
 In India, our accounting year starts from April 1st of one year to
March 31st of the next year.
National Income at Current
Prices
 This is the production of current year multiplied by the prices of the
current year.
National Income at Constant
Prices
 This is the production of the current year multiplied by the prices
of a base year or standard year.
 There are two basic rules about selecting the base year:
a. It should not be very far off.
b. It should be a normal year with normal prices. If there is a war or
famine in a particular year, it will lead to inflation and hence it is
not selected as the base year as it will not give us the correct
picture.
Gross Domestic Product [GDP]

Gross Domestic Product is the aggregate money value of all final goods
and services produced by the people in the domestic territory of a country
during an accounting year.

According to Prof. Hansen, “By gross domestic product we mean the value
of all the final goods and services produced in any given period, usually a
year in the domestic territory of a country.”

 The concept of domestic territory has a special meaning in national income

accounting. It includes the following aspects:

 territory lying with in the political boundaries including territorial waters of

the country.

 ships and aircrafts operated by the residents of the country between

different nations.
fishing vessels, oil and natural gas rigs and floating platforms
operated by the residents of the country in the international waters or
engaged in extraction in areas in which the country has exclusive
rights of exploitation.

embassies, consulates and military establishments of the country

located abroad.

GDP = (C+I+G)
 C-consumption goods
 Perishable goods milk vegetables etc…
 Durable and Semi durable goods - T.V, house, clothes Etc:
 Consumer services such as doctors,teachers Etc:

 I-Investments goods(gross domestic private

investment)
 1.newly constructed fixed capital assets-machinary,vehicles Etc:
 2.Inventories of raw materials unfinished goods.
 3.Residential construction

 G- Government goods
 Education, public health, infrastructure,judiciary,defence public administration
Market Prices
 Market prices refer to the current prices of goods and services in the
concerned year or period.
 Market prices give nominal values of the total national output.
 Market prices include elements of indirect taxes and subsidies.
 Factor Cost
 Factor refers to the factors of production such as land, labour,
capital and organization.
 Factor cost refers to rewards in terms of rent, wages, interest and
profit.
GDP at Factor Cost and Market Price
GDP at factor cost is estimated as the sum of net value added by the
different producing units and the consumption of fixed capital.

GDP at factor cost = (R + W + I + P) + Depreciation

When we have to multiply the total output produced within the country with
their market prices, prevalent during that year, then we can get the GDP at
market prices.

GDP(MP)=P(G+S)
 Relationship between market price & factor cost

 Market price is based on factor costs. But, indirect taxes lead to

price above the factor cost. Similarly, subsidies cause market price
to be below the factor cost.
 In the national income analysis, thus, a distinction is made
between N.I. at market prices and N.I. at factor costs.
 A simple example will illustrate this point.
 Let us suppose that the price of a bottle of syrup is Rs.16. In this
case, the N.I. at market price is Rs.16. But there is some element
of tax in the above price.
 Let us suppose, the tax is Rs.2. Then the N.I. at factor cost is
Rs.14, because the factors of production which have contributed to
the production of one bottle of syrup will get only Rs. 14 and the
balance of as tax Rs. 2 as tax will go to the government.

GNPmp = GNPfc+IT…..(1)
 Let us now examine the implications of the elements of subsidy.
 Let us suppose the fair price of a kilogram of sugar is Rs.10, but it’s actual
cost of production is Rs.12. The difference of Rs.2 between the actual cost
of production (Rs.12) and the fair price shop price (Rs.10) is borne by the
state.
 In this case, the N.I. at market price is Rs.10, but it is Rs.12 at factor cost
because the factors of production would receive Rs.12 for the production of
one kilogram of sugar.
 Hence, in measuring GDP at market price subsidies are to be subtracted.
 GDPmp=GDPfc-Subsidies…..(2)
 PUTTING 1 & 2
GDPmp=GDPfc+IT-S
GDPfc=GDPmp-IT+S
Net Domestic Product [NDP]
NDP refers to the market value of all final
goods and services turned out in an economy
during a given period of time after making
allowance for depreciation charges.

NDP = GDP – Depreciation Charges

 NDP at Factor Cost and Market Price.
NDP at factor cost is the net output evaluated at factor prices
NDP at factor cost = GDP at factor cost – depreciation
or

NDP at factor cost = NDP at market price – indirect taxes + subsidies

NDP at market price is the net value of final goods and services
evaluated at market prices in the course of one year in the country.
NDP at market price = GDP at market price – depreciation
or
NDP at market price = NDP at factor cost + IT - S
Gross National Product (GNP)

It is the most important concept in national income

accounting system. It is a national concept.

In the words of W.C Peterson, “GNP may be defined as

the current market value of all goods and services
produced during an income period.”
GNP of a nation includes the following items:

•Value of all consumption goods produced in a year.

•The value of all the capital assets created and used in one year
including their wear and tear.
•The value of all the goods and services generated in the government
or public sector.
•The value of net exports. Hence, we take the difference in the value
of total exports in a year. The difference in the value between the two
may be either positive or negative.
•The value of the net foreign earnings. We take into account the
difference in the value of all payments made to foreigners and all
kinds of receipts by nationals. The difference here also maybe
positive or negative.

GNP==(C
GNP (C++II ++ G)
G) +
+ (X
(X-+M)M)+ +
(R(R
- P).
- P).
 GNP at Factor Cost and Market Price
It includes the total value of all final goods and services
produced in a year’s time plus net income earned from
abroad. GNP at market prices always includes indirect
taxes levied by the government on goods and services,
which raise their prices.

GNP at market price = GNP at factor cost + indirect taxes – subsidies.

GNP at factor cost is the sum of all factor incomes earned

by factors of production in an accounting year.
GNP at factor cost = GNP at market price – indirect taxes + subsidies.
Net National Product (NNP)
Net National Product is the market value of
the net output of all final goods and services
produced by the country during a year’s time.

NNP = GNP Or
– depreciation
 NNP at Market Prices and Factor Cost
NNP at market prices is the net value of all final goods
and services evaluated at market prices existing in the
course of one year in a country.

NNP at market price = GNP at market price – depreciation

NNP at factor cost is the net output evaluated at factor

prices.
NNP at factor cost = NNP at market prices – indirect taxes + subsidies.
 Per Capita Income and Per Capita Real
Income
P.I. = National Income/Total Population.

The concept of per capita real income is expresses in terms of goods and
services available per head of population. In other words, the amount of
goods and services that could be purchased with the help of per capita
income is called as P.R.I.

P.R.I = Real National Income/Total Population.

Estimation of National Income

I. Value of the product method (Output

method)
II. Income method
III. Expenditure method
Value of the product method (Output method)

 Five items are included –

 Consumer goods and services
 Gross Domestic Investment which includes – (i) Inventories. (ii)
Capital Formation. (iii) Construction of houses etc.
 Production in the government sector
 Export minus import
 Receipts - Payments
This method may be represented in the following equation:

Y = (P - D) + (S - I) + (X - M) + (R - P)

Where,
Y = total national income
P = total domestic product
D = depreciation
S = subsidy
I = indirect taxes.
X = exports.
M = imports.
R = total receipts from all kinds of exports.
P = total payment to the other nations due to all kinds of exports.
Deduct this amount.

In India, this method is used in agriculture and allied activities like

animal husbandry, sericulture and horticulture, forestry and logging,
fishing, mining and manufacturing (regd.) and quarrying, etc.
 Value added by manufacture is the difference between the raw materials and
finished product.

Industry Selling Cost Value

Stage price price adde
In Rs. In Rs. d

1. A 80.00 00.00 80.00

2. B 150.00 80.00 70.00
3. C 250.00 150.00 100.00
480.00 230.00 250.00

Industry A stands for wood seller.

Industry B stands for manufacturer of chairs.
Industry C stands for dealer in chairs.
This method is used to avoid the errors in taking values of inputs more than
once in calculation of national income.
Precautions
 Care should be taken that there is no double
counting. For this, value of intermediate
consumption has to be deducted from the final
output.
 Care should be taken to include imputed rent of
owner occupied houses and production for self-
consumption.
 Care should be taken not to include second-hand
goods because these goods have already been
calculated in the year that they were produced.
 Income Method
National output is the result of the combined and co-operative efforts put
in by all factors of production. After employing them, we have to
remunerate them in the form of rent, wages, interest and profits. If we
add all these factor incomes, then we get national income at factor cost.
While adding incomes, the following items are included –
 Wages and salary, bonus, compensation to employees, etc.
 Employer’s contribution to ESI, PF, social security, etc.
 All supplemental incomes of working class.
 Earnings of all self employed persons like lawyers, doctors, estate
agents, consultants and contractors, etc.
Dividends from all sources.
Undistributed profits.
Interest earned from all sources.
Rents from land buildings, etc
Public sector earnings.
Net flow of income from abroad.
Royalties.

This method may be represented in the following

equation:
Y = (R + W + I + P) + (X – M) + (R - P)
 In India, this method is used in the service sectors like -
• Transport and communication and storage
• Electricity and gas and water supply
• Banking, finance, insurance and trade
• Real Estate
• Public administration and defense

For the organized sector, almost complete data is

available and from annual accounts and for unorganized
sector, indirect approach is followed.
Precautions
 Imputed rent of owner occupied houses has to be
included.
 Production for self-consumption has to be include.
 Windfall gains should not be included.
 Any transfer payments should not be included.
 Illegal income should not be included.
 Wealth tax, capital gain tax and such should not be
included.
 If profit is added, care should be taken not to include
corporation tax as it is part of profit. In the same way if
operating surplus is given, rent and royalty should not
be added separately.
Expenditure Method
 Incomes earned by factor inputs will be spent on buying different goods
and services by the people. If we add the total expenditure incurred by
all people in a year’s time, then we get total income of the people.
Income determines the expenditures. All kinds of expenditures are to be
taken into account while calculating the national income. They are:
 Personal consumption expenditure of all people on all kinds of goods
and services.
 Gross domestic investment or investment expenditure in a year’s time.
 Government expenditure on all kinds of goods and services.
 Net foreign investment, ie, Exports – imports.
This method may be presented in the following manner -

Y = (C +I +G) + (X - M) + (R – P)

Where,
C = Consumption expenditure
I = Investment expenditure
G = Government expenditure

This method is used in India in the construction sector like

construction of houses, bridges, roads and repairs, etc.
Final Consumption By General
Government
 General government consumption expenditure is defined as the
current expenditure on goods and services incurred in providing
services of government departments less sales.
 The value of intermediate consumption is also a part of final
consumption expenditure. It consists of:
(i) Compensation of employees.
+(ii) Intermediate consumption expenditure in the domestic tertiary.
-(iii) Sales of goods and services.
+(iv) Direct purchase made abroad is done by embassies,
consulates or military establishments in ROW.
Private Final Consumption
expenditure
 Consumer households’ final consumption expenditure includes
the expenditure on all new durable, non-durable goods and
direct purchases made abroad less net sales of second hand
goods and scraps and wastes.
 We can have the following categories:
(i) Durable goods include cars, refrigerators, television sets etc.
They’re expensive and have a long life.
Consumer semi durables include the goods which are not very
expensive and have a life of around 1 year. Examples can be
electric iron, clothes, furniture, etc.
Non-durable goods are those which lose their identity as soon as
they are consumed. They can be food items, matchsticks,
fuels and so on.
Services can be of a C.A, doctor, architect, domestic services or
any such service.
 +(ii) Direct purchase made abroad as is done by tourists, crew
members, diplomats or military personnel posted abroad.
-(iii) Consumer households are continuously bringing and selling
second hand goods.
-(iv) Sale of scraps and wasted, example old newspapers,
magazines, old bottles, etc also has to be deducted.
+(v) Imputed rent of owner occupied houses where the owner is
taking the services of the house
+(vi) Wages and salaries received in kind. Examples can be rent
free accommodation, medical benefits, free food, clothes, etc.
+(vii) Food and other items produced for self consumption, e.g. a
farmer producing for himself and his family.
-(viii) Goods and services received as gifts from government,
corporate sector or ROW less than similar gifts given to all the
above.
GROSS DOMESTIC CAPITAL
FORMATION
 We can define gross domestic capital formation as the sum of gross
domestic fixed capital formation and change in stocks.
 It consists of the following:
 Purchase of new assets in the domestic market
 Buildings, residential as well as non-residential buildings like offices, shops or
godowns.They can either be bought in the market or have own account
production. This activity is taken up by all sectors.
 Roads, bridges, dams, etc. This activity is mostly taken up by the government
as their expensive and normally do not give any tangible returns quickly.
 Other construction works, this includes parking areas, footpaths, airstrips and
irrigation canals which are again mostly taken up by the government. Both
buying in the market or own account production is possible.
 Transport equipments, machinery, etc. This includes machines, trucks,
coaches, and transport animals like horses, oxen and camel.
 Livestock, this includes breeding, stock, diary cattle and cattle raised for wool
clippings, etc. Own account production is very commonly taken up in the
villages. You can also buy them in the market.
Import of new assets
• There is one more way of acquiring new assets, i.e. by importing
them. This leads to increase in capital formation of an economy.

Sale and Purchase of second hand assets from abroad

• If Indian government buys any second hand machinery from
USA worth Rs.100 crores, our capital formation goes up.
• At the same time, when we sell second hand machinery worth
Rs.80 crores to Bangladesh, our capital formation goes down.
• The net capital formation in this case will be 100-80=20 crores.
Change in Stock (Inventory)
 This is the second component of gross domestic
capital formation.
 Every enterprise private as well as govt. is left out
with some stock at the end of the accounting year.
 This stock has neither been used for production nor
has it been sold.
 This is thus used in the next year during the
production process.
change in stocks= closing stock – opening stock.
Precautions
 All the expenditure on second hand goods should be excluded because
they have already been calculated and are not currently produced
goods.
 All the expenditure on shares and bonds should not be calculated
because they are only paper transactions.
 All transfer payments as payments made by government on old-age
pensions, unemployment benefit are to be excluded because no
production has taken place.
 All expenditure on intermediate goods and services should be excluded
because that will only lead to double counting.
 All production for self-consumption should be included. The volume can
be multiplied by the market prices of those commodities.
 The imputed rent of owner occupied houses also has to be included.
 Any work in progress at the site of construction and own account
production of fixed assets should be included.
Difficulties in estimating
India’s National Income
 Estimation of N.I. of a country is not an easy task. Appropriate
and reliable data for accomplishing this work are not available
even in developed countries. As compared to advanced where
the whole economy is monetised and a very high proportion of
working population pays income tax, in developing countries like
India, there are many gaps in data, on account of a large
unorganized sector.
 Though during the planning periods, conscious efforts are made,
the data available is not fully satisfactory. There are two types of
problems:
 (i) Conceptual Problems
 (ii) Practical problems
(i) Conceptual Problems
 These are debated not only in India but also at the
international level.
 The basic conceptual problem is whether services
are to be included or not. Certain household
activities which are excluded would be counted
when performed on a commercial basis.
 The second problem pertains to administrative
services. It is often difficult to distinguish between
the services rendered by the administration to the
producers and that to the consumers.
(ii) Practical Problems
 Pertain to the Indian economy.

• Presence of a large non-monetised sector

Use of money is still restricted. According to the RBI, about one-third of the
productive activities are still outside the purview of money.

• Lack of appropriate and reliable data

In the unorganized sector like agriculture, small-scale industries, and the
like, data on production, capital formation,etc. are not satisfactory.

• Unreported illegal income

Productive activities are either concealed or under reported. So here also it
is rather difficult to estimate this income.
Limitations of national income as a measure of
national welfare
•Leisure

•Quality of life

•Non market transactions

•Nature of production

•Standard of living

•Externalities
Alternative Methods to GDP
 Physical Quality of Life Index (PQLI)
 The Physical Quality of Life Index (PQLI) is an attempt to measure the
quality of life or well-being of a country.
 It was developed for the Overseas Development Council in 1979 by
Morris Davis Morris
 PQLI is a combination of three indicators
1) Adult literacy rate
2) Infant mortality
3) Life expectancy
 It is calculated as a simple average of the three, after each is
expressed in index form.
 Human Development Index
(HDI)
 Since 1990 the United Nations Development
Programme has been presenting the measurement of
human development in terms of human development
index in it’s annual Human Development Report.
 It is a composite index of three social indicators, life
expectancy, adult literacy and years of schooling. It also
takes into account real GDP per capita.
 Thus HDI is a composite index of achievements in three
fundamental dimensions a long healthy life, knowledge
and a decent standard of living.
 The HDI value of a country is calculated by taking into account three
indicators.
1. Longevity, as measured by life expectancy at birth, 25 years and 85
years.
2. Educational attainment as measured by a combination of adult
literacy and combined primary, secondary, tertiary (2/3 weight),
enrollment ratio (1/3 weight) that is adult literacy 0% to 100%.
3. Standard of living as measured by purchasing power based on real
GDP per capita adjusted for the local cost of living (purchasing
power parity or PPP).

HDI establishes a minimum and a maximum for each dimension and

then shows where each country stands in relation to these scales
expressed as values between 0 and 1.
 The Top Ten Countries That
Figure In The HDI For 2008
1. Iceland
2. Norway
3. Canada
4. Australia
5. Ireland
6. Netherlands
7. Sweden
8. Japan
9. Luxembourg
10. Switzerland
This revision of the index was released on December 18, 2008.
The Top Ten Asian Countries That
Figure In The HDI For 2008
1. Japan
2. Hong Kong
3. Israel
4. South Korea
5. Brunei
6. Singapore
7. Kuwait
8. United Arab Emirates (UAE)
9. Bangladesh
10. Nepal
Standard Of Living Index (SOLI)
 The standard of living refers to the quality and quantity
of goods and services available to people, and the way
these goods and services are distributed within a
population. It is generally measured by standards such
as real (i.e. inflation adjusted) income per person and
poverty rate. Other measures such as access and quality
of health care, , educational standards.
 Gender Empowerment Measure
 The Gender Empowerment Measure (GEM) is a measure of
inequalities between men's and women's opportunities in a
country. It combines inequalities in three areas: political
participation and decision making, economic participation and
decision making, and power over economic resources. It is one
of the five indicators used by the United Nations Development
Programme in its annual Human Development Report.
 Calculating the GEM involves several steps. First percentages
for females and males are calculated in each area. The first area
is the number of parliamentary seats held. The second area is
measured by two sub-components: a) legislators, senior officials,
and managers, and b) professional and technical positions. The
third area is measured by the estimated earned income (at
Purchasing Power Parity US$).
 BHUTAN – A HAPPY EXISTENCE
 Bhutan is emerging as a global leader in
the promotion of “Gross national
happiness”- a concept embraced by them
three decades ago.
 The term was first coined by Bhutan's king
Jigme Singye Wangchuck in response to
the comments made on Bhutan's poor
economy.
 Meant for an economy that would serve
Bhutan's Buddhist spiritual values.
 Today this concept stands to define prosperity in
a more overall terms and to measure actual well
being instead of consumption.
 It is a contrast to the conventional concept of
measuring material production-Gross National
Product .(GNP)
 According to Frank Dixon ,a Harvard business
graduate working with Innovest Strategic Value
Advisors ,the evolving concept of GNH is possibly
the most significant advancement in economic
theory over the last 150 years
 The book “ Treasures of the Thunder Dragon”
written by the queen of Bhutan explains the
King’s theory as follows :
“ In a most simplistic way, the theory of GNH is
based in the belief that man can neither be
happy nor gain a sense of accomplishment by
means of material wealth alone, and that
economic development and modernization
should not be attained at the sacrifice of the
quality of life or traditional values”.
The Centre for Bhutan Studies in Thimpu has identified nine
provisional GNH indicators these are :
1. The Standard of Living
2. Health of Population
3. Education
4. Ecosystem
5.Vitality and diversity
6. Cultural vitality and diversity
7. Time use and balance
8. Good governance
9. Community vitality and emotional well being of
the people
 A second-generation GNH concept, treating happiness as a
socioeconomic development metric, was proposed in 2006 by Med Yones,
the President of International Institute of Management. The metric
measures socioeconomic development by tracking 7 development area
including the nation's mental and emotional health.[2] GNH value is
proposed to be an index function of the total average per capita of the
following measures:
 Economic Wellness: Indicated via direct survey and statistical
measurement of economic metrics such as consumer debt,
average income to consumer price index ratio and income
distribution
 Environmental Wellness: Indicated via direct survey and
statistical measurement of environmental metrics such as
pollution, noise and traffic
 Physical Wellness: Indicated via statistical measurement of
physical health metrics such as severe illnesses
 Mental Wellness: Indicated via direct survey and statistical
measurement of mental health metrics such as usage of
antidepressants and rise or decline of psychotherapy patients
 Workplace Wellness: Indicated via direct survey and statistical
measurement of labor metrics such as jobless claims, job
change, workplace complaints and lawsuits
 Social Wellness: Indicated via direct survey and statistical
measurement of social metrics such as discrimination, safety,
divorce rates, complaints of domestic conflicts and family
lawsuits, public lawsuits, crime rates
 Political Wellness: Indicated via direct survey and statistical
measurement of political metrics such as the quality of local
democracy, individual freedom, and foreign conflicts.
 The above 7 metrics were incorporated into the first Global
GNH Survey