NATIONAL INCOME

National Income (N.I.) N.I. Means total income of a country expressed in terms of money N.I. Is the aggregate money value of goods and services produced

in a country during a particular year It is the money value of all economic activities of a nation in a given

year Products and services can be counted only once to measure the N.I. To avoid any double calculation only market value of final goods &

services are calculated (Defined in terms of Product Flow) Definition: “total market value of all final goods & services produced

in the economy during a given year”

National Income (N.I.) It can be viewed in various angles National Income = National Product = National

Expenditure National Income - all the incomes, in cash and kind

accruing to Factors of Production for generating the national product. It is National Income = National Product

National Product - Consists of all the goods and services produced and exchanged for money during a year. Does not include goods and services which are not paid for, such as hobbies, housewives’ services, charitable work, etc

National Income (N.I.)

National Expenditure – sum of consumers expenditure, net investment expenditure & govt’s expenditure towards final goods & services

One man’s income is another man’s expenditure

National Income = National Product = National Expenditure

National Income Concepts Per Capita Income Real Income Gross National Product

(GNP) Net National Product

(NNP) Gross Domestic

Product (GDP)

Personal Income Disposable Income Net Domestic Prod

(NDP) N.I. @ Mkt Price &

Factor Cost N.I. @ Current Price &

Constant Price

Personal Income (P.I.) Total of all income received by an indi. from all his sources

in a given year P.I. = N.I. – (Social Security contributions + corporate Taxes

+ Undistributed Profits) + Transfer Payments Social Security contributions, corporate tax & undistributed

profit is not actually received by individuals hence deducted from N.I.

Transfer Payment like pension, unemployment compensation etc. is not earned by individuals but received by indi. hence added to N.I.

Disposable Income (D.I)

D.I. is the income available with a person to spend on consumption & savings

After accounting for direct personal tax like income tax, wealth tax etc, the remainder of personal income is known as Disposable income

DI = Personal Income – Personal Taxes DI = Consumption (C) + Savings (S)

Per Capita Income (PCI)

It refers to the average income per head in the country

PCI = NI / P (Population) This concept is useful to know the average

std of living of people in a country

Real Income Real income is income of individuals after adjusting

for inflation The income of an individual or group after taking into

consideration the effects of inflation on purchasing power. For example, if you received a 2% salary rise over the

previous year and inflation for the year was 1%, then your real income only rose 1%. Conversely, if you received a 2% raise in salary and inflation stood at 3%, then your real income would have shrunk 1%

Gross National Product (GNP) GNP is the aggregate market value of all final goods &

services produced in a country during a year GNP in Open Economy = C + I + G + (X-M) + (R-P) GNP in Closed Economy = C + I + G C = Consumer Goods & Services I = Gross Investment including depreciation G = Govt Expenditure on Goods & Services X-M = Export – Import R-P = Net Foreign Income (Receipt – Payments)

Gross National Product (GNP)

Net National Product (NNP)

NNP is GNP less Depreciation i.e. NNP = GNP – Depreciation (D) Depreciation is the wear & tear of capital

assets that takes place during production process

Gross Domestic Product (GDP)

GDP refers to the money value of good & services produced within the geographical boundaries of a country.

Income from abroad is NOT included GDP = GNP – Net Income from Abroad GDP = C + I + G + (X-M)

Net Domestic Product (NDP)

NDP is obtained when depreciation cost is deducted from GDP

NDP = GDP – Depreciation (D)

N.I. @ Mkt Price & Factor Cost N.I. @ Market Price (MP) Refers to money value of all goods & services produced

in an economy in a year at current mp. MP includes indirect taxes

N.I. @ Factor Cost (FC) Refers to aggregate of factor cost (rent, wages, interest

& profit) for producing goods & services. It can be calculated by deducting indirect taxes or adding subsidies to market prices

N.I. @ Mkt Price & Factor Cost Scenario 1 MP of 1 Kg sugar is Rs.25 which includes Indirect tax

of Rs. 5 and cost of Production is Rs. 20 i.e. NI mp = Rs. 25 and NI fc = Rs. 20 Scenario 2 MP of 1 Kg sugar is Rs.25, cost of production is Rs.28

and subsidy given by govt is Rs. 3 i.e. NI mp = Rs. 25 and NI fc = Rs. 28

NI @ Current Price & Constant Price

N.I. @ Current Refers to sum of net money value of all goods & services produced in

a country during a year. It is obtained by multiplying physical output of goods with current prices in that year

N.I. @ Constant Price It is the money value of final goods and services produced in a

country in a year, measured at base year price. Base Year is a normal year which is free from price fluctuations.

Presently 2004-2005 is taken as the base year in India. If we measure India’s National Income of 2013-2014 at the prices of 2004-2005, then it is termed as ‘National Income at constant price’

Measurement of National Income

There are 3 methods of measuring N.I. Product/Value Added Method Census of Income Method Expenditure Method

Product/Value Added Method Here, N.I. is measured as a flow of goods and services Money value of all final goods and services produced in an

economy during a year are calculated Final goods refer to those goods which are directly

consumed and not used in further production process. Goods which are further used in production process are called intermediate goods

In the value of final goods, value of intermediate goods is already included therefore value of intermediate goods is not included in national income otherwise there will be double counting

Product/Value Added Method To avoid the problem of double counting we can use the value-

addition method in which not the whole value of a commodity but value-addition at each stage of production is calculated and these are summed up to arrive at GDP

Sectors which produce goods & services are broadly divided into 3 sectors – primary, secondary & tertiary

Each sector is further sub divided e.g. Primary sector – Agriculture, Fishing, mining etc. Secondary – Mftg – large & small scale etc. Tertiary – Transport, Communication, Trade etc.

Product/Value Added Method Value of Gross Output produced by each

producing unit in a sub sector is obtained From Gross Value, value of Raw Materials,

Intermediate products and depreciation is deducted to get net value of output produced

By adding the net value of all producing units in all sectors we derive net value of the economy viz. Net Domestic Product (NDP)

Product/Value Added Method

If NDP is at the market price then NDP at factor cost can be obtained by reducing indirect taxes and adding subsidies

By adding Net income from abroad (R-P) to NDP we derive Net National Product at factor cost which is National Income

Product/Value Added Method N.I. with product/value added method can be

depicted as Y = (P-D) + (S-T) + (R-P) Y = National Income P = Domestic Output of all goods and services D = Depreciation S = Subsidies T = Indirect Taxes R – P = Receipts – Payments from Abroad

Income Method Here N.I. Is obtained by adding all the factor income Factor Income includes rent, wages, interest and

profit Transfer Income is not included in National Income In case of self employed people, income may come

from various sources, hence concept of mixed income is used

N.I. = Rent + Wages + Interest + Profits

Expenditure Method Income earned by factors of production is either spent or saved Expenditure is of 2 types – Consumption Goods or Capital Goods Expenditure done on final goods & services is only calculated to avoid

double counting Total Expenditure consists of consumption + capital investment

expenditure Both expenditure are incurred by private sector and government Private Consumption = Household expenses on consumption goods Govt Consumption = expenditure on education, health services etc.

Expenditure Method Capital Investment is also incurred by private & govt Investment is of 3 types

Inventory Investment Net Fixed Investment Replacement Investment

Increase in stock of capital goods in economy is e.g. of inventory and net fixed investment

Wear & Tear of capital goods is represented by replacement investment

Expenditure Method

All 3 investments together represent Gross Domestic Investment (GDI)

When we deduct replacement investment we derive Net Domestic Investment (NDI)

When Net Foreign Investment is added to GDI we get Gross National Investment

Measurement of National Income

The 3 methods of calculating N.I. give us dimensions of economy

Product Method – Sectoral distribution of N.I. Income Method – Distribution of N.I. Among

various factors can be analyzed Expenditure Method – Level of Consumption &

investment Expenditure Output (Product) = Income = Expenditure

Difficulties in Measuring N.I. Double Counting Service Included – what service to include & which to exclude Calculating Depreciation Illegal Activity Improvement in quality not considered New companies enter into the market Goods kept for self consumption No proper records as people are illiterate Various Economic Activities – Seasonal nature etc. No proper data is available

Real GNP v/s Nominal GNP

Measures the changes in the output of the economy according to the prices of base year i.e. GNP at constant prices

Central Statistical Organization (CSO) calculates the GNP at constant & current prices

Actual growth of Nat.Inc due to increase in output is indicated by real GNP

CSO considers year 2011-2012 as the base year for calculating real GNP

Measures GNP at current market price

Does NOT indicate real growth of N.I.

Changes in Nominal Income may be for 2 reasons

i) increase in Output Ii) increase in price

Real GNP Nominal GNP

Real GNP v/s Nominal GNP

Year

GNP @ Current Prices

(Nominal Income – Rs.

In Crores)

Difference Between Nominal Income

GNP @ Constant Prices (Real

Income – Rs. In

Crores – 2011-2012)

Difference Between

Real Income

2011-2012 86,59,215 - 86,59,215 -

2012-2013 98,34,581 11,75,366 91,18,709 4,59,494

2013-2014 1,11,32,877 12,98,296

(1,22,930) 97,17,062 5,98,353(1,38,859)

National Income Deflator GDP Deflator is a measure of overall change in the prices

of the economy Deflator is useful to measure the changes in the overall

level of prices in goods & services that make up GDP GDP inflator is a price index that measures average level

of prices for specified set of goods & services in relation to the prices in a specified year

GDP Inflator = N.I. @ Nominal Price (Current Price) X 100 N.I. @ Constant Price(Real Income)

National Income Deflator

GDP Deflator in 2012 (Base Year) = 60,000 / 60,000 * 100 = 100%

GDP Deflator in 2015 (Current Year) = 66,000 / 62,000 * 100 = 106.5 %

i.e. Overall price is 6.5% higher in current year than base year

Year Nominal GDP Real GDP2012 60,000 60,0002015 66,000 62,000

Questions 1. Explain National Income and various methods to measure it (any

combination of methods can be asked in exam) 2. Throw light on National Income and its concepts (any

combination of concepts can be asked or distinguish between concept can be asked in exam)

3. Discuss the problems faced in measuring National Income 4. Distinguish between Nominal Income & Real Income 5. Give your opinion as to why National Income should be

calculated on constant price 6. Short Note on National Income Deflator