2 only Human capital formation refers to the process of acquiring and increasing the number of persons who have the skills, education, experience and access to health care needed to be productive. It is better explained as increasing the knowledge, skill levels and capacities of people as given in statement 2.

1. NATIONAL INCOME CONCEPTS

2.  National Income is the total money value of
all final goods and services produced by the
country in certain year.
 the total amount of income accruing to a
country from economic activities in a year’s
time

3. NATIONAL INCOME ACCOUNTING (NIA)
Mainly done for
• Policy Formulation
• Effective Decision Making
• International Economic Comparison

4. Measures Of National Income.
 GDP (Gross Domestic Product)
 NDP (Net Domestic Product)
 GNI (Gross National Income )
 NNI (Net National Income)

5. GDP (GROSS DOMESTIC PRODUCT)
- The total value of all final goods and services
produced by the resident units of the country
during a given period of time (generally one
year) is called GDP.
-‘Resident Units’-Not based on nationality or
legal criteria but on the concept of ‘Economic
Territory’.
-RU is an Institutional unit having
predominant Economic interest in the
economic territory of a country.

6. Economic Territory Includes:
-Area under the effective control of a single
govt. either by virtue of physical location or
Legal Jurisdiction.
 Islands
 Airspace
 Territorial waters
 Territorial Enclaves in ROW

7. GDP Formula
 GDP=GVA at basic prices+(Product Taxes
including import duties-Product Subsidies)
Product Taxes including import duties-Product
Subsidies =Net Indirect Taxes
So GDP=GVA at basic prices + Net Indirect
Taxes
(Simply one can say that GDP=P*Q)

8. NDP (Net Domestic Product)
NDP = GDP – Consumption of Fixed Capital
( NDP=GDP-Depreciation)
Consumption of Fixed Capital
Decline in the current value of the stock of
fixed assets owned and used by producer as
result of physical deterioation,normal
obsolescence or normal accidental damage.
CFC=Initial Value of Asset-Current Value of
asset.

9. CFC is a part of production expenditure but
not the income of anybody who is involved in
the production process.
Then why GDP,not NDP?
 Difficulty in measuring and obtaining CFC
data
 Differences in methodology of estimating
CFC in different countries
 GDP enables better comparison.

10. GNI (Gross National Income)
GNI (Gross National Income) is based on a
similar principle to GNP.
“GNI is the sum of value added by all resident
producers plus any product taxes (minus
subsidies) not included in the valuation of
output plus net receipts of primary income
(compensation of employees and property
income) from abroad.”(WB definition)

11. GNI =GDP + Net Primary income from Rest of the
World(ROW)
Primary incomes are incomes that accrue to
institutional units as a consequence of their
involvement in process of production or ownership
of assets that may be needed for purpose of
production.
Primary incomes generated in the production
activity of resident producer units are distributed
mostly to other resident institutional units; however,
part of them may go to non-resident units.
Symmetrically, some primary incomes generated in
the rest of the world may go to resident units. This
leads to the definition and measurement of gross
national income (GNI).

12. Primary Income (Factor Income)
 It has two components
 Income from Work (Compensation of employees)
 Income from property and entrepreneurship (Rent, interest,
profit)
Net Primary income from Rest of the World(ROW)
=Net Compensation of Employees + Net
property and Entrepreneurial income
In contrast to GDP, GNI is not a concept of value
added, but a concept of income (primary
income).

13. If Net Primary Income from ROW is
positive,
GNI>GDP
If Net Primary Income from ROW is
negative,
GNI<GDP

14. NNI (Net National Income)
NNI=GNI-Consumption of Fixed Capital
It is known as NATIONAL INCOME

15. Understanding the New GDP Measurement In India
The Central Statistical Office(CSO) of India has
upgraded the National Income Accounting
standards by introducing some notable
changes in 2015.
 to make India’s national income accounting
standards in conformity with global standards.
 Globally, most accepted and followed national
income accounting format is the System of
National Accounting (SNA), prepared by the
UN and ratified by the IMF, World Bank, OECD
and EC.

16. OTHER CHANGES BY CSO
 Methodological changes
 GDP of the country is to be estimated in terms
of Market Price(SNA 2008 standards)
 Gross Value Added (GVA) from different sectors
will be calculated at basic prices.
 Change in the base year
CSO adopted a new base year of 2011-12,
instead of the previous one – 2004-05
 Giving comprehensive coverage to all sectors.

17. GVA (GROSS VALUE ADDED)
 GVA provides the rupee value of the amount of
goods and services that have been produced, less
the cost of all inputs and raw materials while
producing these goods and services.
 First we should calculate the GVA of each sector.
 To estimate the GVA for the entire economy, we
have to cumulate the GVA of all sectors.
 SNA and the new methodology adopted in India
calculate sectoral GVA at basic prices.

18. Gross Value Added At Basic Prices
In India GVA at Basic Prices of 11 sectors is calculated.
 Agriculture, Forestry and Fishing
 Mining and quarry
 Manufacturing
 Electricity,gas,water supply and other utility services
 Construction
 Trade,repair,hotels and restaurants
 Transport,storage,communication and service related to
broadcasting
 Real estate, ownership of dwelling and professional services
 Public administration and defence
 Financial Services
 Other Services

19.  Basic price is the amount receivable by the
producer from the purchaser for a unit of a
good or service produced as output minus any
tax payable, and plus any subsidy receivable,
by the producer as a consequence of its
production.

20. 0utput= Input materials and Services +
Value added
GVA at basic prices=Output -
Intermediate Consumption.

21.  The following identity reveals us what all
expenditure items are considered when we
calculate Gross Value Added in a particular sector
at basic prices.
Gross vale added at basic prices = CE +
OS/MI + CFC + production taxes less
production subsidies.
 CE – Compensation of Employees
 OS – Operating Surpluses
 MI – Mixed Income
 CFC – Consumption of fixed capital

22. Production Tax
 These taxes are paid by the producer independent of
the quantity of production. Meaning is that the
production tax is not per unit tax imposed on a
commodity. Rather it is a general tax. Examples are
land revenue and stamp duty.
Production Subsidies
 It is not the subsidy availed in terms of per unit of
production. Subsidies to Railways, input subsidies to
farmers, subsidies to village and small industries,
Administrative subsidies to corporations or
cooperatives etc.

23. Estimation of GVA at basic prices is a step to
measure the GDP at market prices.
We have to cumulate these sectoral GVAs to
get the GDP ,ie, ∑ of GVAs of all the sectors

24. GDPmp Formula
 GDPmp=GVA at basic prices+(Product Taxes
including import duties-Product Subsidies)
Product Taxes including import duties-
Product Subsidies =Net Indirect Taxes
So GDPmp=GVA at basic prices + Net
Indirect Taxes

25. Product taxes
Product taxes are paid on per unit of the
product. Examples for product tax are excise
duties, sales tax etc.
Product subsidies
Product subsidies are received on per unit of
the product. Food, fertilizer and fuel
subsidies which are provided per unit are
product subsidies.

26. Market Price Vs Factor Cost
Market Price
It refers to the actual transacted price which
includes indirect taxes such as custom duty, excise
duty, sales tax, service tax etc. (impending Goods
and Services Tax). These taxes tend to raise the
prices of the goods in an economy.
Factor cost
It is a measure of national income or output based
on the cost of factors of production, instead of
market prices. This allows the effect of any subsidy
or indirect tax to be removed from the final
measure.

27. Factor Cost = Market Price – Indirect Taxes +
Subsidies
(Indirect Taxes – Subsidies = Net Indirect
Taxes )
Factor Cost= Market Price – Net Indirect
Taxes
GDP fc =GDP mp – Indirect Taxes +
Subsidies GNI fc = GNI mp- Indirect Taxes +
Subsidies

28. Real GDP and Nominal GDP
Nominal GDP
Refers to current year production of final goods
and services valued at current year prices.(Total
Quantity * Price during that particular year)
Real GDP:
Refers to the current year production of goods and
services valued at base year prices. Such base
year prices are Constant Prices (Total Quantity *
Price during base year)

29. GDP Deflator
 It is also called Implicit Price Deflator.
 It is a measure of general price inflation.
= Nominal GDP/ Real GDP * 100
 MOSPI publishes the GDP Deflator
 Base Year: 2011-12

30.  Which one is a better measure?
• Real GDP is a better measure to calculate
the GDP because in a particular year GDP
may be inflated because of high rate of
inflation in the economy.
• Real GDP therefore allows us to determine
if production increased or decreased,
regardless of changes in the inflation and
purchasing power of the currency.

31. Purchasing Power Parity
 PPP is defined as the number of units of a
country’s currency required to buy the same
amount of goods and services in the domestic
market as one dollar would buy in the US.
 India third largest economy on the basis of PPP.

33. Q:Economic growth in country X will necessarily
have to occur if (2013)
a) there is technical progress in the world economy.
b) there is population growth in X
c) there is capital formation in X
d) the volume of trade grows in the world economy

34. The national income of a country is equal to the
(2013)
a) total value of goods and services produced by the
nationals.
b) sum of total consumption and investment
expenditure
c) sum of personal income of all individuals
d) money value of final goods and services
produced

35. with reference to Indian economy. Consider the
following statements : (2015)
1) The rate of growth of real GDP has steadily
increased in the last decade.
2) the GDP at market prices has steadily increased
in the last decade

36. National Income is : (1997)
a) Net national product at market price
b) NNP at factor cost
c) NDP at MP
d) NDP at FC

37. The most appropriate measure of economic growth
is : ( 2001)
a) GDP
b) NDP
c) Per capita real income
d) None of the above

38. FROM 2018
Which one of the following statements
correctly describes the meaning of legal
tender money ?
 The money which is tendered in courts of law to
defray the fee of legal cases
 The money which a creditor is under
compulsion to accept in settlement of his claims
 The bank money in the form of cheques, drafts,
bills of exchange, etc.
 The metallic money in circulation in a country

39. Which one of the following links all the
ATMs in India ?
 Indian banks’ Association
 National Securities Depository Limited
 National Payments Corporation of India
 Reserve Bank of India

40. If a commodity is provided free to the
public by the Government, then
 the opportunity cost is zero.
 the opportunity cost is ignored.
 the opportunity cost is transferred from the
consumers of the product to the tax-paying
public.
 the opportunity cost is transferred from the
consumers of the product to the
Government.

41.  Despite being a high saving economy,
capital formation may not result in
significant increase in output due to
 weak administrative machinery
 illiteracy
 high population density
 high capital-output ratio

42.  Increase in absolute and per capita real
GNP do not connote a higher level of
economic development, if (Pre18 Set-D)
 industrial output fails to keep pace with
agricultural output.
 agricultural output fails to keep pace with
industrial output.
 poverty and unemployment increase.
 imports grow faster than exports.

43. Consider the following statements: Human capital
formation as a concept is better explained in terms
of a process, which enables
1 individuals of a country to accumulate more capital.
2 increasing the knowledge, skill levels and capacities of
the people of the country.
3 accumulation of tangible wealth.
4 accumulation of intangible wealth.
 Which of the statements given above is/are correct?
 1 and 2
 2 only
 2 and 4
 1, 3 and 4