NATIONAL INCOME

Title of the topic
Name of the faculty
AIMIT, St Aloysius College (Autonomous) MULTIPLE REGRESSION ANLYSIS
Dr. DHANANJAYA K
UNIT III
Production and Cost of Production
Dr. Dhananjay K
Associate Professor
Economics for Managers

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Time Series Analysis
Module V
Gross Domestic Product

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Gross Domestic Product (GDP)
• GDP- The measure of economic growth
• Economic growth- Increase in the ability of a nation to
produce goods & Services
• GDP – Market value of all final goods and services
produced within a country in a given time period

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• “GDP is the market Value….”
“You can’t add apples and oranges”
-But that is just what govt statisticians must do.
-Hence, the approach to GDP is to add up rupee value of every good
and services – the number of rupee each product sold for.
-Prices reflect the value of goods & services

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• “Of All…”
• GDP tries to be comprehensive.
• Includes all items sold in the market legally.
• Excludes goods produced & sold illegally.
• Excludes unpaid household service/labor.
• Oxfam’s Time to Care 2020 report states that women and girls in India contribute 3.26 billion hours
of unpaid care work every day, representing the equivalent of at least $271 billion in unpaid income
in India a year. This burden of unpaid work negatively impacts women’s economic gains and traps
them at the bottom of the economy.
- Paul Samuelson- If you marry your maid, GDP
decreases

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
“…Final…”
-Only value added at each stage is calculated.
-To avoid the problem of double counting.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• Compute Value Added

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
“…Goods & Services…”
• Both tangible goods & Intangible Services included.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• “Produced”
• Includes goods and services currently produced not in
the past.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• “Within a country”
• Produced within a country
• Asian Paints producing paints in China - is part of
Chinese GDP
• US MNC P &G’s products in India is part of Indian GDP

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• “…In a given period of time…”
• Measures the value of production that takes place within
a specific interval of time.
• Usually a quarter and year
• “GDP is the Market value of all final goods and
services produced within a country in a given time
period”

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• Consider a simple economy in which one good is
produced and sold.
• 1. Ramya finds a seed and plants it. Sometime later, an
orange tree appears.
• 2. Ramya pays Arun $5 in wages to pick and box the
oranges.
• 3. Next, Ramya sells the oranges to Pooja for $8.
• 4. Pooja turns the oranges into orange juice and sells the
orange juice to Carol for $10.
• Carol drinks the juice.
• Compute the value added.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• Compute GDP

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Rank Counrty GDP(Million $)
1 United States 2,14,27,700
2 China 1,43,42,903
3 Japan 50,81,770
4 Germany 38,45,630
5 India 28,75,142
6 United Kingdom 28,27,113
7 France 27,15,518
8 Italy 20,01,244
9 Brazil 18,39,758
10 Canada 17,36,426
Top 10 countries nominal GDP(2019)
Rank Counrty GDP(Million $)
1 China 2,34,60,170
2 USA 2,14,27,700
3 India 96,11,679
4 Japan 54,59,155
5 Germany 46,59,795
6 Russia 42,81,807
7 Indonesia 33,29,169
8 France 33,15,118
9 United Kingdom 32,55,484
10 Brazil 32,20,373
Top 10 countriesby PPPGDP(2019)

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Concepts of GDP
• GDP and Net Domestic Product (NDP)
• NDP = GDP-Depreciation.
Depreciation is the decrease in stock of capital that
results from wear and tear.
-Also known as capital consumption Allowance

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Net Domestic Product (GDP)
• NDP = GDP - Depreciation

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• Ms. Veena, a computer engineer by qualification, is a housewife.
She has got a job offer by an IT company. However, to join the
duty she has to appoint a maid. What will happen to GDP if she
accepts the offer?
• Over the years Indians have chosen to cook less at home and eat
more at restaurants. How has this practice affected GDP.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Nominal GDP and Real GDP
• Nominal GDP and Real GDP
-Nominal GDP is GDP at current prices.
• Nominal GDP is “the sum of all the current-year quantities
times their current-year prices.”
-Real GDP is GDP at base year’s price
• -Real GDP is “the sum of all the current-year quantities times
their base-year* prices.”
• Base-year prices eliminate the effects of inflation.
• The base year is the year with which the prices from other years are
compared.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• Compute Real GDP

Title of the topic
Name of the faculty
Dr. DHANANJAYA K

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• 𝑮𝑫𝑷 𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓 =
𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷
∗ 𝟏𝟎𝟎
• GDP Deflator measures the impact of inflation on GDP of
an economy during a specific fiscal year
• Suppose that nominal GDP in 2020 is $100000 and
Real GDP is $100000
𝟏𝟎𝟎𝟎𝟎𝟎
𝟏𝟎𝟎𝟎𝟎𝟎
∗ 𝟏𝟎𝟎 = 𝟏𝟎𝟎

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Real GDP is $80000
𝟏𝟎𝟎𝟎𝟎𝟎
𝟖𝟎𝟎𝟎𝟎
∗ 𝟏𝟎𝟎 = 𝟏𝟐𝟓
The aggregate level of prices increased by 25 percent
from the base year to the current year

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Real GDP is $150000
Real GDP is $200000

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Gross National Income (GNI)
• Gross domestic product (GDP), which takes into account all output
produced within a country's borders regardless of who owns
the means of production.
• Gross National Income (GNI) is the total value of goods and
services produced by the residents of a country, irrespective
of their geographic location.
• GNI is the total amount of money earned by a nation’s people and
businesses.
GNI= GDP- value of goods produced in India by rest of the world
+ value of goods produced by India in rest of the world.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• Suppose that the GDP of India is $100000
• The value of the goods produced by the rest of the
word in India is $10000 (Outflow of income from
India)
• The value of the goods produced by India in rest of
the word is $15000 (Inflow of income to India)
• Compute GNI
• GNI= GDP + (Net income from abroad)

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• The value of products produced by the P& G in India
is part US_____________ and part of ndia’s__________________
• The value of products produced by Asian Paints in
US is part US_____________ and part of India’s____________

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Item
Credit Debit Net
1 8 9 10
A. CURRENT ACCOUNT
I. MERCHANDISE 64,937 98,941 -34,004
II. INVISIBLES (a+b+c) 57,619 30,696 26,923
a) Services 37,885 19,802 18,083
b) Transfers 15,936 687 15,250
c) Income 3,798 10,207 -6,409
Total Current Account (I+II) 122,556 129,637 -7,081
B. CAPITAL ACCOUNT
1. Foreign Investment (a+b) 62,919 52,343 10,576
a) Foreign Direct Investment (i+ii) 17,050 6,265 10,785
b) Portfolio Investment 45,869 46,078 -209
2.Loans (a+b+c) 28,999 31,356 -2,358
a) External Assistance 1,513 1,175 338
b) Commercial Borrowings(MT&LT) 6,756 7,666 -910
c) Short Term To India 20,729 22,515 -1,786
3. Banking Capital (a+b) 17,348 16,033 1,315
a) Commercial Banks 17,347 16,033 1,314
b) Others 2 0 2
4. Rupee Debt Service 0 0 0
5. Other Capital 5,696 4,694 1,002
Total Capital Account (1 to 5) 114,962 104,426 10,536
C. Errors & Omissions 601 601
D. Overall Balance (A+B+C) 238,119 234,062 4,056
E. Monetary Movements (i+ii) 0 4,056 -4,056
i) I.M.F. 0 0 0
ii) Foreign Exchange Reserves 0 4,056 -4,056
( Increase - / Decrease +)
Oct-Dec 2015 P

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
National Income
If GDP is 75, calculate GNI

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
National Income
• Calculate National Income

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
National Income
• GNI and National Income
• National income is the sum of all incomes earned by
residents as a result of the economic activity.
• Total income earned by Indian citizens & business, no
matter where they reside or locate.
• National income is that income which accrues to the
economic agents of the country.
• National income is the sum of the payments to
resources (land, labor, capital, and entrepreneurship).

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
National Income
• National income = Compensation of employees +
Proprietors’ income + Corporate profits + Rental income
+ Net interest.
National Income = GNI- (depreciation + indirect
business taxes).

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
National Income
• Compensation of Employees Compensation of employees
consists of wages and salaries paid to employees plus
employers’ contributions to Social Security and employee
benefit plans plus the monetary value of fringe benefits, and
paid vacations etc.
• Proprietors’ Income
Proprietors’ income includes all forms of income earned by
self-employed individuals and the owners of unincorporated
businesses, including unincorporated farmers.
• Corporate Profits
Corporate profits include all the income earned by the
stockholders of corporations.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
National Income
• Rental Income
Rental income is the income received by individuals for the use of
their nonmonetary assets (land, houses, offices). It also includes
returns to individuals who hold copyrights and patents.
• Net Interest
Net interest is the interest income received by Indian households
and government minus the interest they paid out.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
National Income to GDP

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
National Income
Calculate National Income
Calculate GDP
Calculate GNI

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Personal Income
• Personal Income (PI)
-Personal income is the income received by the factors of
production.
- Not all income earned is received, and not all income
received is earned
• An example of “income earned but not received” is
undistributed profits.
• An example of “income received but not earned” is
Social Security benefits.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Personal Income
PI = National Income
-Undistributed corporate profits (Retained Profit)
-Corporate Profit Taxes
-Payment to social security contributions
+Transfer payments*(social security benefits
received from the Govt)
• *A transfer payment is a payment of money for which there are no goods or
services exchanged. (Ex. Old age pension)

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Personal Income
Suppose that the transfer payment is $10, retained
profit is $2, corporate profit tax is $1 and contribution
to social security is $5.
Calculate Personal Income

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Disposable Income
• Disposable Income (DI)
-Actual income available for spending by an individual
after paying the direct taxes.
-Amount of nominal income available for consumption
(and Saving)
-DI = PI – Direct tax

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Measure Definition/Calculation
GVA
= Total Output - Cost of intermediate goods &
services
GDP = GVA - Subsidies
GNI = GDP + (Net income from abroad)
National Income = GNI - (Depreciation+ Indirect Business Taxes)
Personal Income
= National Income (NI) - (Retained profit +
Corporate profit tax+ Contribution to social
security benefits) + Transfer Payments
Disposable Income = Personal Income - Direct Tax (Income tax)

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
Approaches to GDP Measurement
GDP can be calculated using 3 methods
-Product Method (Value added approach)
-Income method
-Expenditure Method and

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
GDP Measurement –Value Added Approach
produced and sold.
oranges.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
GDP Measurement –Value Added Approach
• Value Added Approach in India…
• GDP data is compiled by Central Statistical
Organisation under the Ministry of Statistics and
Programme Implementation.
• For the purpose of GDP, the economy is classified into 15
broad sectors like Agriculture, manufacturing, mining,
Forestry, Fishing, Electricity, Gas and Water Supply,
construction, Trade, Hotels, Restaurants, Railways,
Transport, Communication, Banking, Insurance, Public
Admin. & defense, Real Estate and other services..

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
GDP Measurement- Value Added Approach
• The contribution of various sectors to the gross
domestic product (GDP) is estimated in terms of gross
value added (GVA).
• Gross Product - Valuation of products and by-
products at market prices.
• Gross Value added = Gross product - value of inputs
of raw materials and services consumed in the process
of production
Hence, GDP = GVA - Subsidies

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
GDP Measurement – Income Approach
produced and sold.
oranges.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
National Income
Calculate National Income

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
GDP Measurement – Income Approach

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
National Income
Calculate GDP

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
GDP Measurement –Expenditure Approach
produced and sold.
oranges.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• Compute GDP
Final Consumption Expendiure by
Households
$100000
Govt. Consumption Expenditure $5000
Public Capital Formation by Govts $10000
Expenditure on building and
equipment and software by firms
$50000
Expenditure on new residence by
households
$1000
Opening Inventory $500
Clsoing Inventory $750
Export $15000
Import $12000

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
GDP Measurement –Expenditure Approach
• Expenditure Method
-Total expenditure of money used to buy goods &
services is another way of measuring production.
• Components of GDP in Expenditure Method
• GDP = C + I + G+ (X-M)
C –Final Consumption Expenditure
I –Investment Expenditure
G - Govt Expenditure
X-M - Net exports

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• Consumption Expenditure(C)
-Expenditure on final goods & services by households
• Investment Expenditure (I)
- Expenditure on building and equipment and software by
firms and new residence by households and changes
in inventory.

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• Government Expenditure (G)
-Consumption expenditure
-Public capital formation.
• Net Exports (X-M)
-Value of exports minus value of imports (X-M)
So, GDP= C+I+G+ (X-M)

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• Concepts of GDP- GDP, NDP, Nominal and Real GDP,
GNI, NI, PI & DI
• Concepts of National Income- GDP, GNI, NI, PI and DI
• Components of National Income
• Approaches to GDP measurement

Title of the topic
Name of the faculty
Dr. DHANANJAYA K
• 𝑪𝑷𝑰 =
𝑷𝒓𝒊𝒄𝒆 𝒊𝒏 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒚𝒆𝒂𝒓
𝑷𝒓𝒊𝒄𝒆 𝒊𝒏 𝒃𝒂𝒔𝒆 𝒚𝒆𝒂𝒓
∗ 𝟏𝟎𝟎
2011-12
(Base Year
2019 2020
20 25 30
Price of Rice (in Rs.)

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