eco chpter 2

1. NATIONAL INCOME

2. 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”

3. 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

4. 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

5. 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

6. 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.

7. 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)

8. 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

9. 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%

10. 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)

11. Gross National Product (GNP)

12. 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

13. 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)

14. Net Domestic Product (NDP)
 NDP is obtained when depreciation cost is deducted
from GDP
 NDP = GDP – Depreciation (D)

15. 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

16. 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

17. 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’

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

19. 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

20. 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.

21. 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)

22. 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

23. 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

24. 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

25. 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.

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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)

32. 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)

33. 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 GDP
2012 60,000 60,000
2015 66,000 62,000

34. 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