National income

ASSIGNMENT OF MACRO ECONOMICS

ON

1.) NATIONAL INCOME

BY

MANISHA VAGHELA

vaghela_manisha13@yahoo.com
1

TABLE OF CONTENTS

PARTS SR.NO CONTENTS PAGE
NO.
A.) 1. Meaning and Concepts of National 1
Income(NI)
2. Circular Flow of Income 2
3. Some concepts of National Income 4
4. Difficulties in Estimating National 7
Income
B.) 5. National Income of India 10
1.)Measurement of national income
in India
2.)National income Of India 2010- 12
2011
3.)Annual Estimates Of
Expenditures On GDP, 2010-11
17

6. Conclusion 19

7. Bibliography 20

2

Parts A.)
1. Meaning and Concepts of National Income(NI)

Consumption is the final aim of the all economic activity .But it must be
preceded by production distribution and exchange .National income is the final
outcome of all economic activities of a nation. The national income may be
considered of a closed economy-an economy ,which has no transactions with the
rest of the world or an open economy. In an open economy , national income also
includes the net results of its transactions with the rest of the world. I.e. exports less
imports. National income is the flow of goods and services , which becomes
available to a nation during a year. National income is the aggregate money value of
all goods and services produced in a country during one year. Year is financial year.

According to Marshall,” the labour and capital of a country, acting upon its natural
resources, produced annually a certain net aggregate of commodities , material and
immaterial, including services of all kinds .”

According to Pigou,” National income is that part of objective income of the
community, including of course income from derived from abroad, which can be
measured in money.”

Thus Marshall and Pigou approach national income from the point of production. But
fischer approaches from the point of consumption.

According to Fischer,” The national dividend or income consists solery of services as
received by ultimate consumers, whether from their material human environments.”

3

This income is produced by factors of production and hence distributed between
them. These are land, labour , capital and entrepreneur. Higher level of national
income implies higher shares of these factors . Higher level of national income helps
in removing poverty . Level of satisfaction of consumers’ wants depends upon
national income . we cannot measure level of satisfaction. But we can measure it
indirectly by measuring the flow of goods and services produced in the country
during a year . however it should be noted that what is produced is more important.
Thus war goods or luxury goods are produced to a greater extent the welfare of the
common man will not increase.

2. Circular Flow of Income

Circular flow of income explains the flow of national income between factors of
production and firms. There are 2 flows. On is that of goods and services and the
other is that of money .one can include government sector and foreign trade
sectore in the analysis also. It will also make it easy to grasp the alternative
interpretations of national income.

In every economy , there are households on the one hand and productive
enterprises ar firms on the other . market brings them together . The objective of
households is to consume goods and services for the satisfaction of their wants;
and The function of firms gets together resources or factors of production for
producing respective goods or services. This can be represented as circular flow.

Households give their resources and services to the firms. Firms pay for these
services . Firms produce goods and services and the households with the help of
income that they have received from the firms , purchase services and goods.
Firms in turn receive payments made by the households. Thus there are two
flows and at every stage market plays the role of bringing together the
households and firms . There are three markets.

4

1.) Labour market :
In the labour market the firms demand the labour and households supply
labour. According to classical theory ,equality of supplies of labour and demand
for labour determines the price of labour i.e. wages.

2.) Capital market :

In the capital market there are again two sides. On the supply side there are
those who save and offer their savings .On the demand side there are firms
etc .who want these savings for investment purposes. The return on capital is
the part of the income of those who save. households mostly supply savings
,but even firms also supply savings.

3.)Goods market:

In the goods market sellers sell the goods and services and the buyers
purchase them. Interaction between them determines prices. One can expand
this analysis by including government and rest of the word sectors.

CIRCULAR FLOW OF INCOME

HO
HOUSEHOLD FIRMS:
S:FACTOR FACTOR
OWNERS USERS AND
AND
PRODUCERS
CONSUMERS

5

1=Factor Incomes =Wages+Intrest+rent+profits
2=FOP=Labour , Capital , Land , organization
3=Goods and services
4=payments for goods and services =value of output
The above diagram shows circular flow of income with two sectors.Inner flows
are real flows. In the above diagram upper half is factor market and lower half is
product or commodity market.

3. Some concepts of national income

Generally the following concepts are used in the discussion of national income:
(1)Gross Domestic Product: (GDP)
Money value of final goods and services produced within the geographical
boundaries of a country during a year, irrespective of whether they are produced
by the nationals or foregners.

(2) Net Domestic Product : (NDP)
in the production of goods and services certain capital is used. The value of
depreciation should be deducted to arrive at net figure. Ndp =gdp – capital
depreciation.

(3)Gross National Product:
When we adjust foreign trade sector in the gdp,we get gdp-gross national
product. we add the value of exports and deduct value of imports to get GDP to
get Gnp. Thus GNP =GDP +(X-M) , where X is exports and m is imports.

(4) Net National product:- (NNP)
NNP is obtained by deducting depreciation from GNP.NNP =GNP-depreciation.

6

(5) National Income at Factor Cost :
Total annual output of final goods and services valued at their cost of production
where profits are included in costs.

(6)Per Capita Income :
The term per capita national income refers to the income per head of
production.it is the average income of the individuals of country in a particular
year. Per capita income is , therefore , obtained by dividing national income by
total production of same year.

National income in 2001

Per capita income in 2001 = ------------------------------------------
Population in 2001

(7) Personal Income (P.I.)

Personal income is that which is actually received by the individuals or
households in a country during the year. It should be remembered that the whole
of the national income earned by the factors of production in one year is not
available to them.several deductions are made out of it, in order to derive
personal income (P.I.) from national income (N.I.) ,we have to deduct from
national income those amounts, which are not available for distribution among
the factors of production. At the same time , we have to add to national income ,
the transfer payments made by the government to certain categories of people.

Personal income= National income –corporate income taxes – undistributed
corporate profits – social security contributions +transfer payments.

(8) Disposable income or disposable personal income (DPI)
The whole of the personal income (P.I.) accounting to individuals or households
is not available for being spent on consumption. The reason is that a part of the

7

P.I has to be paid by individuals or households to the government by way of
personal direct taxes. That part of personal direct taxes, is called disposable
personal income. In fact , it is the disposable income. In fact, it is the disposable
income, which is spent by the individuals or the households on consumption
.therefore,
Disposable personal income =personal income – personal direct taxes . But it is
not essential that the whole of the DPI is spent on consumption alone .
Generally , individuals spend a major portion of DPI on consumption , reserving
the remainder for saving . thus,

Disposable personal income + consumption + saving.

By comparing disposable income with personal income we can find out the
money-burden of personal direct taxation . DPI is, therefore , a useful concept.

(9) Nominal and real income : national income may be expressed in nominal
terms or in real terms . in nominal terms it is called national income at market
prices or national income at current prices. Each year’s national income is
measured at the current prices of that year. However ,the concept on real income
also quite useful as it explains the real growth of the economy. Real income is
also called national income at constant prices .it is obtained by deflating national
income at market prices by inflation :

Real national income= Nominal income * price index in base year
------------------------------------------------------
Price index in current year

Each of the above concepts of national income is also expressed at market
prices ar at constant prices.

8

4. Difficulties in estimating national income

There are some difficulties in estimating national income .some of them are as
follows:

(1) Problem of double counting :
To estimate national income all goods and services produced in a year must
be accounted only once .if a commodity is counted twice it is called double
counting. If a commodity is counted more than twice it is called multiple
counting .the problem arises in all cases where goods are used for further
production .for example , when wheat is used for making flour and bread the
values of wheat will be counted more than once if we take values of wheat ,
flour and bread and add them . national income will appear more than it is.
Hence double counting must be avoided . there are two methods to solve this
problem.

(A)Value of final product method
(B) Value added method.

According to final product method we add final products only and exclude the
value of those ,which are intermediates in the process of production. Under
value added method ,we ascertain the value added to inputs at each stage of
production and then we aggregate the same .the value added by a business
firm can be defined as the difference between the value of the inputs .the
value added method must give the same result as the final product method.

9

(2) Non-monetised sector:

Another difficulty arises because of the prevalence of non- monetised
transactions in under-developed countries like india ,so that a considerable

Part of output does not come into the market at all. the farmers themselves
consume a large part of agriculture output – food grains-.the national income
statistician ,therefore, has to face the problem of finding a suitable measure
for this part of output.

(3) level of literacy:-

Because of illiteracy, most producers have no idea of the quantity and value
of their output .they do not follow the practice of keeping regular accounts.this
makes the task getting reliable information from a large number of petty
producers all the more difficult.

(4) lack of specialization:

Because of underdevelopment occupational specialization is still incomplete so
That there is a lack of differentiation in economic functioning. An individual may
Receive income partly from farm ownership , partly from manual work in
Industry in the slack season, etc.

(5) Data :

There is a general lack of adequate statistical data and this makes the task of
estimation all the more difficult.

10

(6) Inventories:
It is not easy to calculate the value of inventories , i.e., raw materials , semi –
finished and finished goods in the custody of the producers. Obviously , any
miscalculation on this score will vitiate the estimates of the output of
productive enterprises.

(7) Depreciation :
The calculation of depreciation on capital consumption presents another
formidable difficulty. there are no accepted standard rates of depreciation
applicable to the various categories of machines. Unless from the gross
national income correct deductions are made for depreciation , the estimate
of net national income is bound to go wrong.

(8) Estimates of expenditure :
The application of the expenditure method too is full of difficulties . it is difficult
to estimate all personal as well as investment expenditure .it is difficult to
estimate all personal as well as investment expenditure.

11

Parts
B.)

5. National income of India

1.) Measurement of national income in India

In india , a systematic measurement of national income was first attempted in
1949.earlier , many attempts were made by some individuals and institutions.
The earliest estimate of India’s national income was made by dadabhai narojoji
in 1876 for the year 1867-68.since then many attempts were made , mostly by
the economists and the government authorities , to estimate india’s national
income . these estimates differe in coverage , concepts and methodology and
they are not comparable. Besides , earlier estimates were made mostly for one
year , only some estimates covered a period of 3-4 years . it was therefore not
possible to construct a consistent series of national income and assess the
performance of the economy over a period of time .

It was only in 1949 that national income committee (NIC) was appointed with
P.C. Mahalanobis as chairman , and D.R.Gadgil and V.K.R.V. Rao as
members . the NIC not only highlighted the limitations of the statistical system
that existed at that time but also suggested ways and means to improve data
collection system. On the recommendation of the committee , the directorate of
national sample survey was set up to collect additional data required for
estimating national income.besides , the NIC estimated country’s national
income for the period from 1948-49 to 1950-52. In its estimates , NIC also
provided the methodology for estimating national income , which was followed
till 1967.

12

After the NIC , the task of estimating national income was taken over by the
central statistical organization (CSO). Till 1967, the CSO followed the
methodology laid down by the NIC. Thereafter , the CSO adopted a relatively
improved methodology and procedure ,which had become possible due to
increased availability of data . the improvements pertain mainly to the industrial
classification of the activities .the CSO publishes its estimates in its publication
Estimates of national income.

Methodology

Currently , output and income methods are used by the CSO to estimate the
national income of the country .the output method is used for agriculture and
manufacturing sectors , i.e, the commodity producing sectors .for these sectors,
the value added method is adopted . income method is used for the service
sectors including trade , commerce , transport and government services .in its
conventional series of national income statistics from 1950-51 to 1966-67 , the
CSO had categorized the income in 13 sectors . but , in the revised series ,it had
adopted the following 15 break- ups of the national economy for estimating the
national income.
(1.)agriculture (2) forestry and logging (3) fishing (4)mining and quarrying
(5)large-scale manufacturing (6)small scale manufacturing (7)construction
(8)electricity ,gas and water supply(9)transport and communication (10) real
Estate and dwellings(11)public administration and Defence(12) other services
And(13)external transactions.

The national income is estimated at both constant and current prices.

13

5.) National income of india 2010-2011

The Central Statistics Office (CSO), Ministry of Statistics and Programme
Implementation, has released the revised estimates of national income for the financial
year 2010-11 and the quarterly estimates of Gross Domestic Product (GDP) for the
fourth quarter (January-March) of 2010-11, both at constant (2004-05) and current
prices.

2. The CSO has also released the corresponding annual and quarterly estimates of
Expenditure components of the GDP in current and constant (2004-05) prices, namely
the private final consumption expenditure, government final consumption expenditure,
gross fixed capital formation, change in stocks, valuables, and net exports.

I REVISED ANNUAL ESTIMATES OF NATIONAL INCOME, 2010-11

3. The advance estimates of national income for the year 2010-11 were released
on 7th February, 2011. These estimates have now been revised incorporating latest
estimates of agricultural production, index of industrial production and performance of
key sectors like, railways, transport other than railways, communication, banking and
insurance and government expenditure.

4. The salient features of these estimates are detailed below:

(a) Estimates at constant (2004-05) prices

Gross Domestic Product

5. GDP at factor cost at constant (2004-05) prices in the year 2010-11 is now
estimated at Rs. 48,77,842 crore (as against Rs. 48,79,232crore estimated earlier on
7th February, 2011), showing a growth rate of 8.5 per cent (as against 8.6 per cent in
the Advance Estimates) over the Quick Estimates of GDP for the year 2009-10 of Rs.
44, 93,743 crore, released on 31th January 2011. The downward revision in the GDP

14

growth rate is mainly on account of lower performance in ‘mining and quarrying’,
‘manufacturing’ and ‘trade, hotels, transport, and communication’ and ‘financing,
insurance, real estate & business services’ than anticipated.

6. In the agriculture sector, the third advance estimates of crop production released
by the Ministry of Agriculture showed an upward revision as compared to their second
advance estimates in the production of wheat (84.27 million Tonnes from 81.47 million
Tonnes), pulses (17.29 million Tonnes from 16.51 million Tonnes), oilseeds (302.51
lakh Tonnes from 278.48 lakh Tonnes) and sugarcane (340.54 million Tonnes from
336.70 million Tonnes) during 2010-11. Due to this upward revision in the production,
‘agriculture, forestry and fishing’ sector in 2010-11 has shown a growth rate of 6.6 per
cent, as against the growth rate of 5.4 per cent in the Advance estimates.

7. In the case of ‘mining and quarrying’, the Index of Industrial Production of Mining
(IIP-Mining) registered a growth rate of 5.9 per cent during 2010-11, as against the
growth rate of 8.0 per cent during April-November, 2010, which was used in the
Advance Estimates. Due to this decrease in the IIP-Mining, the growth rate in GDP is
now estimated at 5.8 per cent, as against the advance estimate growth rate of 6.2 per
cent.

8. Similarly, the IIP of manufacturing registered a growth rate of 8.1 per cent during
2010-11, as against the growth rate of 10 per cent during April-November, 2010. Due to
this decrease in the IIP, the growth rate in GDP of ‘manufacturing’ sector is now
estimated at 8.3 per cent, as against the Advance estimate growth rate of 8.8 per cent.

9. The sector 'community, social and personal services' has shown a rise in growth
rate to 7.0 per cent in the revised estimates, as against the growth rate of 5.7 per cent in
the advance estimates, mainly due to rise in total expenditure of Central Government
than anticipated (during April-December, 2010, the total expenditure of Central
Government showed an increase of 11.2 per cent over the corresponding period of
previous year which was extrapolated in the advance estimates, whereas the RE, 2010-
11 showed a rise of 19.4 per cent during 2010-11).

15

10. Growth rates in various sectors are as follows: ‘agriculture, forestry and fishing’
(6.6 per cent),‘mining and quarrying’ (5.8 per cent), ‘manufacturing’ (8.3 per cent),
‘electricity, gas and water supply’ (5.7 per cent) ‘construction’ (8.1 per cent), 'trade,
hotels, transport and communication' (10.3 per cent), 'financing, insurance, real estate
and business services' (9.9 per cent), and 'community, social and personal services'
(7.0 per cent).

Gross National Income

11. The Gross National Income (GNI) at factor cost at 2004-05 prices is now
estimated at Rs. 48,34,759 crore (as compared to Rs. 48,44,971 crore estimated on 7th
February 2011), during 2010-11, as against the previous year’s Quick Estimate of Rs.
44,64,854 crore. In terms of growth rates, the gross national income is estimated to
have risen by 8.3 per cent during 2010-11, in comparison to the growth rate of 7.9 per
cent in 2009-10.

Per Capita Net National Income

12. The per capita net national income in real terms (at 2004-05 prices) during 2010-11
is estimated to have attained a level of Rs. 35,917 (as against Rs. 36,003 estimated on
7th February, 2011), as compared to the Quick Estimates for the year 2009-10 of Rs.
33,731. The growth rate in per capita income is estimated at 6.5 per cent during 2010-
11 as against 6.1 per cent during 2009-10.

(b) Estimates at current prices

Gross Domestic Product

13. GDP at factor cost at current prices in the year 2010-11 is estimated at Rs.
73,06,990 crore, showing a growth rate of 19.1 per cent over the Quick Estimates of
GDP for the year 2009-10 of Rs. 61,33,230 crore, released on 31th January 2011.

16

Gross National Income

14. The GNI at factor cost at current prices is now estimated at Rs. 72,41,026 crore
during 2010-11, as compared to Rs. 60,95,230 crore during 2009-10, showing a rise of
18.8 per cent.

Per Capita Net National Income

15. The per capita income at current prices during 2010-11 is estimated to have
attained a level of Rs. 54,835 as compared to the Quick Estimates for the year 2009-10
of Rs. 46,492, showing a rise of 17.9 per cent.

II ANNUAL ESTIMATES OF EXPENDITURES ON GDP, 2010-11

16. Alongwith the Revised Estimates of GDP by economic activity, the CSO is also
releasing the estimates of expenditures of the GDP at current and constant (2004-05)
prices. These estimates have been compiled using the data on indicators available
from the same sources as those used for compiling GDP estimates by economic
activity, detailed data available on merchandise trade in respect of imports and exports,
balance of payments, and monthly accounts of central government. As various
components of expenditure on gross domestic product, namely, consumption
expenditure and capital formation, are normally measured at market prices, the
discussion in the following paragraphs is in terms of market prices only.

Private Final Consumption Expenditure

17. Private Final Consumption Expenditure (PFCE) at current prices is estimated at
Rs. 45,02,974 crore in 2010-11 as against Rs. 37,82,013 crore in 2009-10. At constant
(2004-05) prices, the PFCE is estimated at Rs. 30,91,328 crore in 2010-11 as against
Rs. 28,46,410 crore in 2009-10. In terms of GDP at market prices, the rates of PFCE at
current and constant (2004-05) prices during 2010-11 are estimated at 57.2 per cent
and 58.3 per cent, respectively, as against the corresponding rates of 57.7 per cent and
58.5 per cent, respectively in 2009-10.

17

Government Final Consumption Expenditure

18. Government Final Consumption Expenditure (GFCE) at current prices is
estimated at Rs. 9,06,665 crore in 2010-11 as against Rs. 7,85,443 crore in 2009-10. At
constant (2004-05) prices, the GFCE is estimated at Rs. 5,91,761 crore in 2010-11 as
against Rs. 5,64,835 crore in 2009-10. In terms of GDP at market prices, the rates of
GFCE at current and constant (2004-05) prices during 2010-11 are estimated at 11.5
per cent and 11.2 per cent, respectively, as against the corresponding rates of 12.0 per
cent and 11.6 per cent, respectively in 2009-10.

Gross Fixed Capital Formation

19. Gross Fixed Capital Formation (GFCF) at current prices is estimated at Rs.
23,22,097 crore in 2010-11 as against Rs. 20,16,186 crore in 2009-10. At constant
(2004-05) prices, the GFCF is estimated at Rs. 16,93,284 crore in 2010-11 as against
Rs. 15,59,126 crore in 2009-10. In terms of GDP at market prices, the rates of GFCF at
current and constant (2004-05) prices during 2010-11 are estimated at 29.5 per cent
and 32.0 per cent, respectively, as against the corresponding rates of 30.8 per cent and
32.0 per cent, respectively in 2009-10. The rates of Change in Stocks and Valuables at
current prices during 2010-11 are estimated at 3.3 per cent and 2.0 per cent,
respectively.

20. The discrepancies at current and constant (2004-05) prices during 2010-11 are
estimated at (-) 0.2 per cent and (-) 1.5 per cent, respectively of the GDP at market
prices, as against the corresponding rate of (-) 0.3 per cent each in 2009-10.

21. Estimates of gross/net national income and per capita income, along with GDP
at factor cost by kind of economic activity and the Expenditures on GDP for the years
2008-09, 2009-10 and 2010-11 at constant (2004-05) and current prices are given in
Statements 1 t

18

II QUARTERLY ESTIMATES OF GDP FOR Q4 (JANUARY-
MARCH), 2010-11

(a) Estimates at constant (2004-05) prices

22. The four quarters of a financial year are denoted by Q1, Q2, Q3 and Q4. GDP
at factor cost at constant (2004-05) prices in Q4 of 2010-11 is estimated at Rs.
13,17,554 crore, as against Rs. 12,22,573 crore in Q4 of 2009-10, showing a growth
rate of 7.8 per cent. The sectors which registered significant growth rates in Q4 of 2010-
11 over Q4 of 2009-10 are ‘agriculture, forestry and fishing’ at 7.5 per cent ‘electricity,
gas and water supply’ at 7.8 per cent, ‘construction’ at 8.2 per cent, 'trade, hotels,
transport and communication' at 9.3 per cent, and 'financing, insurance, real estate and
business services' at 9.0 per cent.

23. The PFCE and GFCF at constant (2004-05) market prices in Q4 of 2010-11 are
estimated at Rs. 7,72,416 crore and Rs. 4,72,304 crore, respectively. The rates of
PFCE and GFCF as percentage of GDP at market prices in Q4 of 2010-11 were 52.6
per cent and 32.1 per cent, respectively, as against the corresponding rates of 52.4 per
cent and 34.5 per cent, respectively in Q4 of 2009-10.

19

(b) Estimates at current prices

24. GDP at factor cost at current prices in Q4 of 2010-11 is estimated at Rs.
20,12,528 crore, as against Rs. 17,16,675 crore in Q4 of 2009-10, showing a rise of
17.2 per cent.

25. The PFCE and GFCF at current market prices in Q4 of 2010-11 are estimated at
Rs. 11,70,430 crore and Rs. 6,58,212 crore, respectively. The rates of PFCE and
GFCF at current prices as percentage of GDP at market prices in Q4 of 2010-11 are
estimated at 52.6 per cent and 29.6 per cent, respectively, as against the corresponding
rates of 53.2 per cent and 32.7 per cent, respectively in Q4 of 2009-10.

26. Estimates of GDP at factor cost by kind of economic activity and the
Expenditures on GDP for the four quarters of 2008-09, 2009-10 and 2010-11 at
constant (2004-05) and current prices, are given in Statements 7 to 10.

27. The next release of quarterly GDP estimate for the quarter April-June, 2011 (Q1
of 2011-12) will be on 30.08.2011.

20

6.) Conclusions

National Income does not include data from the following activities

1. Income from illegal activities like smuggling, gambling etc.
2. Income from work done without remuneration like domestic work by housewives.
3. Black Money

Latest Figures

As per the data released by the Central Statistical Organisation on 31 May 201the
following are the estimates of National Income, GDP and Per Capita Income

GDP at factor cost at constant (2004-05) prices in the year 2010-11 - Rs.
48,77,842 crore
GDP at factor cost at current prices in the year 2010-11 - Rs. 73,06,990 crore
The gross national income (GNI) at factor cost at 2004-05 prices - Rs. 48,34,759
crore
The GNI at factor cost at current prices - Rs. 72,41,026 crore
The per capita net national income in real terms (at 2004-05 prices) during 2009-
10 - Rs. 35,917
The per capita income at current prices during 2009-10 - Rs. 54,835

21

7. Bibliography

1.)Managerial economics
By D.N.DWIVEDI,
Vikas publishing house pvt ltd

2.) Managerial economics – Materials

3.) www.google.com

22

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