Lecture-32

Basic concepts in National Income

Learning objective: Basic concept of national income and methods of its
measurement
Gross National Product at Market Prices (G.N.P.):
Gross National Product at Market Prices is the total monetary value of all final goods and
services at current prices produced in an economy in a year. We include the
administrative services of the Government in G.N.P., although they do not command a
market price but are paid for by the community as a whole by means of taxes, fees, etc.
The services of charitable trusts and religious organizations are also paid by these
organizations and therefore they are also included in the G.N.P. We also provide certain
services out of love, friendship, kindness on the self-services, which are to be excluded
from G.N.P, because they may command utility but not an economic value.
1. Gross National Product=Gross National Income=Gross National Expenditure
2. GNP=GNI=GNE
3. GNE=Total personal consumption expenditure Gross Domestic private
investment expenditure + Govt. purchase of goods and services + net foreign
investment
4. GNP=Total Money value of the aggregate output of goods and services produced
by the nationals of a country during a given year
5. GNI=Wages and salaries of employees + incomes of non company business
+rental incomes of persons +corporate profits +income from net interest +indirect
taxes+ depreciation of capital goods
If the money value of the aggregate output of goods and services is measured with
respect to the prices of some particular year other than the current one, it is known as
G.N.P. at constant prices. So far as the measurement of Gross Domestic Product (GDP)
is concerned, we exclude the expenditure on net foreign investment and hence.
GDP=GNP- Net Foreign investment

Net foreign investment=Export value-import value=(X-M)

GDP=GNP- (X-M)
2. Net National Product at Market Prices (NNP):

Net National Product is the net production value of goods and services at current market
prices in a country during a year. NNP is nothing but G.N.P minus the value of capital
consumed or depreciated during a year. NNP is definitely a better concept of National
income than GNP because it makes proper allowance for the depreciations suffered 'by
machinery, buildings, equipment etc. during the course of production.
NNP=GNP- Depreciation
NDP=GDP- Depreciation
3. National Income at Factor Cost:

National income at factor cost is also known as National Income. It is the total of all
income payments received by the factors of production-land, labour capital, organization
and entrepreneur. In fact the whole of the NNP is not available for distribution. The sum of
indirect taxes goes to the Govt. Impact of indirect taxes is generally on the producers but
the incidence of these taxes is borne by the consumers. Hence indirect taxes have to be
deducted from the NNP in order to find out National Income. Today, we are living in the
era of welfare states and in such type of states, the Govt. sometimes gives subsidies on the
production of certain goods and services e.g. special concession on Khadi products for
about a month from 2nd Oct. every year to commemorate Mahatma Gandhi. The
production costs of these goods are higher but they are sold at cheaper rates on account of
Govt. subsidies. The factors producing them are paid higher rewards on account of these
subsidies. Naturally subsidies are to be added to so as to get national income at factor cost.
National Income at factor cost=NNP at Market prices- Indirect taxes + subsidies.
4. Personal Income:

In fact, whole of the national income earned by the factors of production in a particular
year is not actually received by them. Personal income is that income which is actually
received by all individuals or households in an economy during a year. Several

deductions are made out of the National. Income at factor cost e.g. joint stock companies
have to pay a sort of income tax beyond a certain limit of income which is known as
corporate tax- Naturally corporate taxes paid to the Govt. are not distributed among the
shareholders. Workers and salaried employees have to make social security contributions
out of their wages and salaries such as provident fund, Employees State Insurance
contributions for medical aid etc. Govt. under the social welfare scheme also extends
some benefits such as unemployment allowances, old age and widow pensions etc. These
benefits are given against no productive work and are known as 'transfer, payment.'
These are actually received by the individuals or households of a country and therefore
should be added to NI at factor cost so as to get Personal Income.
Personal Income= National income at factor cost-Corporate income taxes- undistributed
profits-social security contributions +transfer payments
This concept is a useful one since it tells us the potential purchasing power of an
economy and measures the welfare of the general body of the consumers.
5. Disposable Income:
The whole of the personal income is also not available for being spent on consumption. A
part of the personal income has to be paid by individuals or households as direct taxes. If
a person's annual income is beyond exemption limit of income tax, it is liable to be taxed
and the income which is left after paying the income tax may be used for consumption.
There are other types of direct personal taxes also e.g. house tax, wealth tax, gift tax etc.
DI=Personal Income-Direct personal taxes
=Disposable for consumption
=Consumption +Saving

Methods of calculating National Income

J .M.Keynes, a famous economist defined national income as follows.
"National Income is the money value of all goods and services produced in a country
during a year"

National income shows the economic position of a nation. The basic objective of an
economy is to achieve economic progress which is

achieved by coordinating natural,

human resources, capital, and technology. National income helps to assess and compare
the progress achieved by a country over a period of time. The study of national income is
important because it helps to know how far development objectives were achieved in the
process of economic development. It also helps to

know the contribution of various

sectors to national income.

Methods of calculating National Income:

National Income calculation is not an easy task. For this, we have to collect more facts
and figures. Income is generated through production process. Normally we use this
income for purchasing goods and services. When demand for commodities goes up, we
have to produce more. Thus income leads to expenditure which again leads to increased
production as shown below.

The figure above shows how production, income and expenditure are mutually related.
Economic activity is directly related to these three stages. Based on this, three methods
are used for calculating national income.
1
2
3

Production method
Income method
Expenditure method

Production Method:
This method is based on the total production of a country during a year. First of all
production units are classified into primary, secondary and tertiary sectors. Then we
identify the various units that come under these sectors. We estimate the goods and
services produced in each of these sectors. The sum total of products produced in these

three sectors is the total output of the nation. The next step is to find out the value of
these products in terms of money. The money sent by Indian citizens working abroad is
also added to this to get the gross national income.
GNI = Money value of total goods and services + Income from abroad.

Income Method:
Factors of production together produce output and income. The income received by the
factors of production during a year can be obtained by adding rent to land, wages to
labour, interest to capital and profit to organizations. This will be equal to the income of
the nation. In other words, total income is equal to the reward given to various factors of
production. By adding the money sent by the Indian citizens from abroad to the income
of the various factors of production, we get the gross national income.
GNI = Rent + Wage + Interest + Profit + Income from abroad.

This method will help us to know the contributions made by different agents like
landlords, labourers, capitalists and organizers to national income.

Expenditure Method:
National income can also be calculated by adding up the expenditure incurred for goods
and services. Government as well as private individuals spend money for consumption
and production purposes. The sum total of expenditure incurred in a country during a year
will be equal to national income.
GNI = Individual Expenditure + Government Expenditure.
This method will help us to identify the expenditure incurred by different agents. Any
one of the above methods can be used for calculating national income.
Production method = Income method = Expenditure method.
Difficulties Experienced in the Calculation of National Income:

The calculation of the national income of a country is not an easy task; rather it is
full of complexities and difficulties of which worth mentioning are as follows:
1. Meaning of nation: Economists in general agree that monetary value of the goods and
services produced within the geographical boundaries of a nation is not only the national
income but the income derived from abroad should also be included in it.
2. Which goods and services: It is very difficult to find out which goods should be
included or excluded from final calculations of national income e.g. whether goods and
services having no money value are to be included while calculating national income or
not.
3. Double counting: There is always a problem of avoiding double counting in
accounting in national income and it is practically difficult to do so.
4. Unreliable statistics: In absence of reliable and com1plete statistics, one cannot find
the correct estimate of national income.
5. Existence of barter system: In a country like India if non monetary transactions to a
considerable extent are practiced, it is very difficult to have a correct estimate of the
national income.
6. Choice of method: We cannot adopt any single method for the computation of
national income out-right. In our own country we have to adopt the mixed method for
having an estimate of national income.
7. Foreign companies: The existence of foreign companies in an economy also poses the
problem of the calculation of national income since a part of the income flows out as
dividends.
8. Instability of prices: Frequent changes in the prices in an economy also pose the
problem of having the correct estimate of national income.
Importance of the Concept of National Income:

In fact national income is considered to be a unique concept because it is symptomatic of

the trend of health and growth of the national economy. The study of national income
however, is very useful in. view of the following points:
1. Knowledge of economic conditions: We come to know about the economic
conditions of an economy with the help of national income.
2. Various sources of National Income: On the basis of the knowledge of the various
sources contributing to national income of a country, we learn about its nature and the
level of economic growth.
3. Economic Planning: Planning for growth of economy and its stability is possible only
when we know about the economic aggregates which are possible only via national
income computation.
4. Standard of Living of the people: With the help of national income data, we come to
know about the standard of living of ~ people of that country.
5. Taxable capacity: Taxable capacity of the nation can be measured if we have got an
estimate of the National Income of the country.
6. Obstacles to Economic Growth: National income figures give a profile of the
difficulties being practically faced in bringing the economy on the path leading to selfreliant economic growth.
7. Trade cycles: Cyclical business fluctuations are common in capitalistic economies
where there are changes in economic variables these cycles can be identified and checked
with the national income data.
8. Welfare: Modern economies in general are wedded to the philosophy of maximum
social welfare for this it is very essential to have an estimate of total consumption in
general and particularly of the down trodden classes. National income data serves our
purpose from this point of view also.

9. Determination of Grants-in-aid: In the system of federal government the Union or

the Central Govt. decides the amount of the grants-in-aid to various states on the basis of
their population and contribution to national income.
10. NI and International Organizations: In the international organizations like IMF,
IBRD etc. the quota of a member country is determined on the basis of its national
income.
National Income calculation in India:
The first attempt to calculate national income of India was made by Dada Bai
Naoroji in 1867-68. This was followed by several other attempts. The first scientific
attempt was made by Prof.V.K.R.V.Rao in 1931-32. But it was not a satisfactory attempt.
The first official attempt was made by Prof.P.C.Mahalanobis in 1948- 49. The final report
was submitted in 1954. Today national income is calculated and published by the Central
Statistical Organization. All the three methods are used for calculating national income in
India.
QUESTIONS
1__________ refers to the gross value of all gods and services produced in a country in
the current year including net income from abroad
a) Net national product at factor cost
b) Net national product at market cost
c) Gross national product
d) Per capita income
2 Which of the following is the best method of computing Gross National Product
a) Income Approach
b) Expenditure Approach
c) Value added Approach
d) None of the above
3 Which of the following is /are taken into consideration while computing Gross National
Product?
a) Only the value of final goods
b) Goods and services of current year production only
c) Transfer payments are not included
d) All of the above
4 Net National Product at market price is given by
a) Gross national product at factor cost _Depreciation
b) Gross national product at factor cost +Depreciation
c) Gross national product at market cost _Depreciation

d) Gross national product at market cost +Depreciation

5 Net National Product at factor cost is given by
a) Gross national product at factor cost _Depreciation
b) Gross national product at factor cost +Depreciation
c) Gross national product at market cost _Depreciation
d) Gross national product at market cost +Depreciation
6 Which of the following is not included in gross national product and net national
product at factor cost
a) Depreciation
b) Indirect taxes
c) Net income from abroad
d) Transfer payments
7 Disposable income is given by
a) Private income Direct taxes
b) Private income +Direct taxes
c) Personal income Direct taxes
d) Private income +Direct taxes
8 Per capita income is given by
a) National income/ Population of country
b) National income X Population of country
c) Gross National product/ Population of country
d) Gross national product X Population of country
9 If we deduct personal taxes from personal income, we will get
a) Disposable income
b) GNP
c) NI
d) NNP at factor cost
10 Net National product at factor cost is otherwise called as
a) Gross National Product at factor cost
b) Per capita income
c) Disposable income
d) National income
Answers
1 c)
2 c)
3d)
4 c)
5 a)
6d)
7 c)
8 a)
9 a)
10 d)