PPT ON

“NATIONAL INCOME”
MANAGERIAL ECONOMICS(MBA 103)

DEPARTMENT OF MASTER OF BUSINESS ADMINISTRATION

HARYANA SCHOOL OF BUSINESS
GURU JAMBESHWAR UNIVERSITY OF SCIENCE AND TECHNOLOGY
HISAR – HARYANA(INDIA)

SUBMITTED TO: SUBMITTED BY:

DR.ANJU VERMA RAKESH(230101010055)
DEPARTMENTOF MBA ANIL(230101010056)
MBA GENERAL

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Mirjam Nilsson
 CONTENT
• Define National Income
• Basic Concepts OF National Income
1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Net National Product (NNP)
4. Economic and Non-economic products
5. Intermediate and Final Products
6. Transfer Payments

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• Methods of Measuring National Income
1. Net Output or Value Added Method
2. Factor Income Method
3. Expenditure Method
• Choice OF Methods
• Measurment 0f National Income in India

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 National Income

National income can be defined as the sum of money

value of all goods and services produced in a country over
a period of one year .

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Some Basic concepts of National income
1. Gross Domestic Product (GDP)

GDP is the measure of the total market value of all final

goods and services produced in the domestic economy during
a period of one year + income earned by the foreigners in the
country – income earned by countrymen from the abroad.

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2. Gross National Product (GNP)

GNP is the measure of the total market value of all

final goods and services produced in the domestic
economy during a period of one year + incomes
earned abroad by the citizens – income earned by
the foreigners in the country

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 3. Net National Product
NNP is defined as GNP less depreciation ,i.e
NNP = GNP – Depreciation

Depreciaton:
It is the part of total productive assets which is used to
replace the capital worn out in the process of creating GNP .

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NNP is the real measure of the national income . NNP =
NNI(net national income )
In other word NNP is the same as the national income at factor
cost .

NNP is measured at market prices including direct taxes.

Indirect taxes are not the part of actual cost of production

National income = NNP – indirect taxes

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4. Economic and Non-economic products

Economic products : Goods and sevices that are

produced to be sold at market price and are produced by
the government and public organizations are treated as
economic products
Non- Economic products:include services rendered to
self, to family ,to relations ,and to neighbours .

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5. Intermediate and Final products

Products that are used in the process of further

production are considered to be intermediate
products
and products that are consumed by the final
consumers are considered to be final products

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Example: when wheat produced by farmers are
consumed by themselves ,it is treated as final good ,but
when it is sold to bread companies ,it is treated as
intermediate product.
Likewise , when services provided by govt.
eg. Transport, telephonic, postal, railway services etc.are
used by the consumers ,they are treated as final goods
and when used in the process of production are treated
as intermediate products

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 6. Transfer payments
Payments made by the people to other
people ,organization or to the government without any
equal transfer in return are treated as transfer payments
For example: gift paid to relatives and friends ,
donation given to social organization and taxes paid to
government authorities, are transfer payments

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 METHODS OF MEASURING
NATIONAL INCOME

National income of a country is created by its people participating in different

kinds of economic activities and producing goods and services. For measuring
national income, an economy is viewed from three different angles

1. The national economy is considered as an aggregate of productive units of

different sectors such as agriculture, mining, manufacturing, trade and
commerce, services, etc.
2. The whole national economy is viewed as a combination of
individuals and households owning different kinds of factors of
production which they use themselves or sell factor-services to
make their livelihood.
3. The national economy may also be viewed as a collection of
consuming, saving and investing units (individuals, households,
firms and government).

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Following these notions of a national economy, national income
may be measured by three different corresponding methods:
1. Net product method—when the entire national economy is
considered as an aggregate of producing units.
2. Factor-income method—when national economy is considered
as combination of factor-owners and users.
3. Expenditure method—when national economy is viewed as a
collection of spending units.

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NET OUTPUT OR VALUE ADDED
METHOD

Product Method or Value Added Method is also called Industrial Origin method or
net output method.Value added method is defined as that method,which measures the
national income by estimating the contribution of each producing enterprise to
production in the domestic territory of the country in accounting year. This is also
called output method or production method. In this method the contribution of each
enterprise to the generation of flow of goods and services is measured
 Under this method, the economy is divided into different sectors such as
agriculture, industry, fishing, mining, construction, manufacturing, trade
and commerce, transport, communication and other services. Then the Net
Value Added at factor cost by each productive enterprise as well as by each
industry or sector is estimated. Measuring Net Value Added at factor cost
by each industry requires first to find out value of output. Value of output
of an enterprise is found only by multiplying the physical output with
market prices of the goods produced.

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 STEPS IN CALCULATION OF
NATIONAL INCOME UNDER VALUE
ADDED METHOD
1. Gross Value Added by Primary Sector within the domestic territory :
First of all economy is divided into different sectors such as agriculture,
fishing,mining,manufacturing,construction,transport,communication etc.
2. Gross Value Added by Secondary Sector within the domestic territory:
Value of output of each enterprise and sector is calculated. This is calculated by
multiplying their physical output with market prices of Goods produced.
3. Gross Value Added by Tertiary Sector within the domestic territory :
Net value added at factor cost by each productive enterprise as well as by each industry
sector is calculated by adding the value of their output.

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4. Depreciation : The following items are excluded while calculating the value of output:
 Intermediate consumption which is the value of goods such as raw material, fuel
purchased from other firms.
 Consumption of fixed capital i.e. depreciation
 Net indirect taxes
5.Net Indirect Taxes: Summing up the net value added at factor cost by all productive
enterprises of an industry or sector gives the net value added at factor cost of each industry
or sector. We then add up net value added at factor cost by all industries or sectors to get net
domestic product at factor cost.
6.Net Factor Income from Abroad:
Lastly, to the net domestic product we add the net factor income from abroad to get net
national product at factor cost which is also called national income

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National Income or Net National
Product at factor cost = Net Domestic
Product at factor cost + Net Factor
income from abroad

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Calculation of National Income by
Value Added Method:
1. Gross Value added in Primary Sector
2. Gross Value added in Secondary Sector
3. Gross Value Added in Tertiary Sector

Gross Value added at Market Price or Gross Domestic Product at

Market Price

Minus Depreciation=Net Value added at Market Price or Net

Domestic Product at Market Price

Minus Net Indirect Taxes=Net Domestic Income or Net value added at

Factor Cost

Add Net Factor Income from Abroad=National Income or Net National

Product at Factor Cost

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 Points to be considered for Calculation of
National Income by Value Added Method:
1. Value of Imputed Rent
2. Sale and Purchase of second hand goods
3. Value of Production for Self Consumption
4. Value of Services of Housewives
5. Value of Intermediate Goods
6. Census of Production

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 FACTOR-INCOME METHOD
This method measures the national income from the point of distribution
of income to the different factors of production. National Income
generated is paid or received by different factors of production .Thus
under this method the national income is calculated by summing up the
incomes of all individuals in the country. The individuals earn income by
contributing their own services or the services of their resources. Thus
under this method national income is calculated by adding up the rent of
land, wages and salaries of employees, interest on capital and profits of
entrepreneur and income of self-employed people. This method shows
the distribution of national income towards different individuals such as
landlords, owners of capital, worker and entrepreneur.

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According to Paul Studenski

“National income of a country can

be calculated either by taking the
sum of incomes paid out by
producing units or by income by
the factors.”

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National Income=Sum of Factor Income paid out
to residents only

National Income or NNP at Factor

Cost=Compensation of Employees +
Operating Surplus(Rent+ Interest+ Profit)
+ Mixed Income of Self Employed + Net
Factor Income from Abroad Steps in
calculation of national income under
income method
Steps in calculation of national income
under income method:
1.The first step under this method is to identify the productive enterprises and
classify them into various individual sectors such as agriculture, fishing,
forestry, manufacturing, transport, trade, commerce, banking etc.
2.The second step is classifying the factor payments. The factor payments are
classified into following categories:
 Components of employees which includes wages and salaries, employees
contribution to social security schemes

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Steps in calculation of national income
under income method:
 Rent
 Interest
 Profits including Dividends, Undistributed Profits and Corporate Income
Tax
 Mixed Income of Self Employed
3. The third step is to measure factor payments. Income paid by each
enterprise can be estimated by gathering information about the number of units
of each factor employed and the income paid to each unit of every factor. The
price paid to each factor multiplied by the number of units of each factor
employed will give the factor income.

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Steps in calculation of national income
under income method:
4. The next step is calculation g the factor payments by an individual sector.
This is done by adding up factor payments by all enterprises belonging to an
individual sector.
5. The next step is summing up the incomes paid out by all industrial sectors
will give domestic factor income which is called Net Domestic Product at
factor cost.
6. In the net domestic product at factor cost finally income earned from
abroad id added to obtain net national product at factor cost or national
income.

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 Meaning of Mixed Income of Self
Employed:
Mixed income of self-employed is the other category of factor
income. In a country like India many people are engaged in
household industries ,In family farms and other unorganized
enterprises. Because of self-employment nature of business it is
very difficult to separate wages for the work done by the self
employed from the surplus of profits made by them. Therefore
income earned by them are mixed of wages, rent, interest, and
profits and therefore called mixed income. These mixed incomes
are added in other factor incomes to calculate national income.

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 Calculation of National Income by
Income Method:
Net Domestic Product at Factor Net National Product at Factor
Cost Cost
•Dividends
•Net Factor Income from Abroad
•Undistributed Profits
•Profits( Undistribured Profits , Corporate
•Corporate Income Tax Income Tax
•Interest •Interest
•Rent •Rent
•Mixed Income of Self-Employed •Mixed Income of Self-Employed
•Compensation of Employees •Compensation of Employee

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Gross Domestic Product at Factor Gross Domestic Product at
Cost Market Price
•Consumption of Fixed Capital •Net Indirect Taxes
•Dividends •Consumption of Fixed Capital
•Undistributed Profits •Dividends
•Corporate Income Tax •Undistributed Profits
•Interest •Corporate Income Tax
•Rent •Interest
•Mixed Income of Self-Employed •Rent
•Compensation of Employee •Mixed Income of Self-Employed
•Compensation of Employees

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 Points to be considered for Calculation
of National Income by Income Method:
1.Transfer Payments are not considered in the calculation of
national income
2.Imputed Rent of Self Occupied House
3.Illegal Money not included in the calculation of National Income
4.Windfall gains not included in the calculation of national income

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5. Corporate Profit Tax not separately included

6. Death duties, Gift Tax are not included in calculation of national

Income

7. Receipts from sale of second hand goods not included

8. Value of Production used for self-Consumption

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 Expenditure Method
Expenditure method of measuring national income is also called
income disposal method or consumption and investment method.
Expenditure method is a method which measures the national
income from the final expenditure on gross domestic product at
market price during an accounting period. This method measures
the national income from the point of expenditure made on goods
and services during a year. Income earned can be spent either on
consumer goods or capital goods.

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Expenditure can be incurred by private individuals and
households or by government and other enterprises.
Further people of foreign countries spent on goods and
services which a country exports to them. Further people
of a country spend on imports of goods and services from
other countries. All these expenditures are added to obtain
national income by expenditure method.

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 Steps in calculation of national income
under Expenditure method:
1.First of all expenditure on consumer goods and services by individuals and
households is considered. This is called final private consumption expenditure
and is denoted by C.
2. Secondly, Government expenditure on goods and services is added. This is
called government final consumption expenditure and is denoted by G.
3. The expenditure by productive enterprises on capital goods and inventories
of stock. This is called gross domestic capital formation or gross domestic
investment and is denoted by GDCF.GDCF is divided into two parts:
 Gross Fixed Capital Formation
 Addition to stocks or Inventories

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4. In the next step Net Exports are added .Net Exports are the difference between
exports and imports. Exports are expenditure made by foreigners to buy goods and
services exported to other countries and are denoted by X. From this export
imports are deducted to get net exports.
The addition of above stated four steps result into Gross Domestic
Product at Market Price or GDPmp.
Gross Domestic Product at Market Price=
Private final Consumption Expenditure+ Government’s final
consumption expenditure+
Gross Domestic Capital Formation+ Net Exports.

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 Calculation Of Expenditure Method
Gross Domestic Product at Net Domestic Product at
Market Price Market Price
•Gross Domestic Capital Formation •Net Domestic Capital Formation
•Government Final Consumption =Gross Domestic Capital Formation
Expenditure Depreciation
•Private Final Consumption •Government Final Consumption
Expenditure Expenditure
•Net Exports(X-M) •Private Final Consumption
Expenditure
•Net Exports(X-M)

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 Net Domestic Product at Net National Product at
Factor Cost Market Price

•Net Domestic Capital Formation •Net domestic capital formation

=Gross Domestic Capital Formation- •Government Final Consumption
Depreciation Expenditure
•Government Final Consumption •Private Final Consumption
Expenditure Expenditure
•Private Final Consumption •Net Exports (X-M)
Expenditure
•Add: Net Factor Income from
•Net Exports(X-M) Abroad
•Less: Net Indirect Taxes.

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 Points to be considered for
Calculation of National Income by
Expenditure Method:
1. Second Hand Goods
2. Purchase of shares and bonds
3. Expenditure on Transfer Payments
4. Expenditure on intermediate Goods

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 Choice of Method

Two main considerations on the basis of which a particular method is chosen

are:

1. The purpose of national income analysis

2. Availability of necessary data

If the objective is to analyze the net output or value added, the net output
method is more suitable .

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In case the objective is to analyze the factor-income distribution ,the
suitable method for measuring national income is the income method
If the objective to find out the expenditure pattern of the national
income, the expenditure method should be applied .
Nevertheless , the most common method is the net product method,
this method requires classification of the economic activities and
output which is much easier than classifying income or expenditure .
 

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 Measurement of the National
Income in INDIA
The first attempts to estimate India’s national income was made by Dadabhai Naoroji in 1867-68.

The first systematic attempts was made by prof.V.K.R.V. Rao to estimate India’s national income
for the year 1931-32.

In 1949 , a national income committee (NIC) was appointed with P.C Mahalanobis as its
Chairman . The NIC not only highlighted the limitations of the statistical system odf that time but
also suggested ways to improve data collections .

In 1967 , the task of estimating national income was assigned to the the central Statistical
Organization (CSO). Currently output and income methods are used by CSO to estimate the
national income of the country.

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09/09/2023 PRESENTATION TITLE 45