DETERMINATION OF

NATIONAL INCOME
NATIONAL INCOME ACCOUNTING
 Determination of
National Income

National Income
Accounting

Limitations and
Different concepts of Measurement of
Challenges of National
National Income National Income in
Income Computation
India

1.1 INTRODUCTION
When we undertake the study of national economies, we are interested in
macroeconomic aggregates such as, aggregate income, output, employment,
prices, consumption, savings, investment etc. Just as there are accounting
conventions which measure the performance of business, there are conventions for
measuring and analyzing the economic performance of a nation. National Income
Accounting, pioneered by the Nobel prize-winning economists Simon Kuznets and
Richard Stone, is one such measure.
National Income is defined as the net value of all economic goods and services
produced within the domestic territory of a country in an accounting year plus the
net factor income from abroad. According to the Central Statistical Organisation
(CSO) ‘National income is the sum total of factor incomes generated by the normal
residents of a country in the form of wages, rent , interest and profit in an
accounting year’.

1.2 USEFULNESS AND SIGNIFICANCE OF

NATIONAL INCOME ESTIMATES
National income accounts are fundamental aggregate statistics in macroeconomic
analysis and are extremely useful, especially for the emerging and transition
economies.
1. National income accounts provide a comprehensive, conceptual and
accounting framework for analyzing and evaluating the short-run performance
of an economy. The level of national income indicates the level of economic
activity and economic development as well as aggregate demand for goods
and services of a country.
2. The distribution pattern of national income determines the pattern of demand
for goods and services and enables businesses to forecast the future demand
for their products.
3. Economic welfare depends to a considerable degree on the magnitude and
distribution of national income, size of per capita income and the growth of
these over time.
4. The estimates of national income show the composition and structure of
national income in terms of different sectors of the economy, the periodical
variations in them and the broad sectoral shifts in an economy over time. It is
also possible to make temporal and spatial comparisons of the trend and speed
of economic progress and development. Using these information, the
governments can fix various sector-specific development targets for different
sectors of the economy and formulate suitable development plans and policies
to increase growth rates.
5. National income statistics also provide a quantitative basis for macroeconomic
modeling and analysis, for assessing and choosing economic policies and for
objective statement as well as evaluation of governments’ economic policies.
These figures often influence popular and political judgments about the
relative success of economic programmes.
6. National income estimates throw light on income distribution and the possible
inequality in the distribution among different categories of income earners. It
is also possible make comparisons of structural statistics, such as ratios of
investment, taxes, or government expenditures to GDP.
7. International comparisons in respect of incomes and living standards assist in
determining eligibility for loans, and or other funds or conditions on which
such loans, and/ or funds are made available. The national income data are
also useful to determine the share of nation’s contributions to various
international bodies.
8. Combined with financial and monetary data, national income data provide a
guide to make policies for growth and inflation.
9. National income or a relevant component of it is an indispensable variable
considered in economic forecasting and to make projections about the future
development trends of the economy.

1.3 DIFFERENT CONCEPTS OF NATIONAL

INCOME
The basic concepts and definitions of the terms used in national accounts largely
follow those given in the UN System of National Accounts (SNA) developed by
United Nations to provide a comprehensive conceptual and accounting framework
for compiling and reporting macroeconomic statistics for analysing and evaluating
the performance of an economy. Each of these concepts has a specific meaning,
use and method of measurement.
National income accounts have three sides: a product side, an expenditure side
and an income side. The product side measures production based on concept of
value added. The expenditure side looks at the final sales of goods and services.
Whereas the income side measures the distribution of the proceeds from sales to
different factors of production. Accordingly, national income is a measure of the
total flow of ‘earnings of the factor-owners’ which they receive through the
production of goods and services. Thus, national income is the sum total of all the
incomes accruing over a specified period to the residents of a country and consists
of wages, salaries, profits, rent and interest.
On the product side there are two widely reported measures of overall production
namely, Gross Domestic Product (GDP) and Gross National Product (GNP).
1.3.1
Gross Domestic Product (GDP MP)
Gross domestic product (GDP) is a measure of the market value of all final economic
goods and services, gross of depreciation, produced within the domestic territory
of a country during a given time period. It is the sum total of ‘value added’ by all
producing units in the domestic territory and includes value added by current
production by foreign residents or foreign-owned firms. The term ‘gross’ implies
that GDP is measured ‘gross’ of depreciation. ‘Domestic’ means domestic territory
or resident production units. However, GDP excludes transfer payments, financial
transactions and non- reported output generated through illegal transactions such
as narcotics and gambling (these are also known as ‘bads’ as opposed to goods
which GDP accounts for).
Gross Domestic Product (GDP) is in fact Gross Domestic Product at market prices
(GDP MP) because the value of goods and services is determined by the common
measuring unit of money or it is evaluated at market prices. Money enables us to
measure and find the aggregate of different types of products expressed in
different units of measurement by converting them in terms of Rupees, say tonnes
of wheat may, thus, be added with millions of apples and with value of services
such as airplane journeys.

GDPMP = Value of Output in the Domestic Territory – Value of

Intermediate Consumption
GDP MP = ∑ Value Added

While learning about national income, there are a few important points which one
needs to bear in mind:
(i) The value of only final goods and services or only the value added by the
production process would be included in GDP. By ‘value added’ we mean the
difference between value of output and purchase of intermediate goods. Value
added represents the contribution of labour and capital to the production
process.
(ii) Intermediate consumption consists of the value of the goods and services
consumed as inputs by a process of production, excluding fixed assets whose
consumption is recorded as consumption of fixed capital. Intermediate goods
used to produce other goods rather than being sold to final purchasers are not
counted as it would involve double counting. The intermediate goods or
services may be either transformed or used up by the production process. For
example, the value of flour used in making bread would not be counted as it
will be included while bread is counted. This is because flour is an intermediate
good in bread making process. Similarly, if we include the value of an
automobile in GDP, we should not be including the value of the tyres
separately.
(iii) Gross Domestic Product (GDP) is a measure of production activity. GDP covers
all production activities recognized by SNA called the ‘production boundary’.
The production boundary covers production of almost all goods and services
classified in the National Industrial Classification (NIC). Production of
agriculture, forestry and fishing which are used for own consumption of
producers is also included in the production boundary. Thus, Gross Domestic
Product (GDP) of any nation represents the sum total of gross value added
 (GVA) (i.e, without discounting for capital consumption or depreciation) in all
the sectors of that economy during the said year.
(iv) Economic activities, as distinguished from non-economic activities, include all
human activities which create goods and services that are exchanged in a
market and valued at market price. Non-economic activities are those which
produce goods and services, but since these are not exchanged in a market
transaction they do not command any market value; for e.g. hobbies,
housekeeping and child rearing services of home makers and services of family
members that are done out of love and affection.
(v) National income is a ‘flow’ measure of output per time period—for example,
per year—and includes only those goods and services produced in the current
period i.e. produced during the time interval under consideration. The value
of market transactions such as exchange of goods which already exist or are
previously produced, do not enter into the calculation of national income.
Therefore, the value of assets such as stocks and bonds which are exchanged
during the pertinent period are not included in national income as these do
not directly involve current production of goods and services. However, the
value of services that accompany the sale and purchase (e.g. fees paid to real
estate agents and lawyers) represent current production and, therefore, is
included in national income.
(vi) An important point to remember is that two types of goods used in the
production process are counted in GDP namely, capital goods (business plant
and equipment purchases) and inventory investment—the net change in
inventories of final goods awaiting sale or of materials used in the production
which may be positive or negative. Additions to inventory stocks of final goods
and materials belong to GDP because they are currently produced output.
The national income in real terms when available by industry of origin, give a
measure of the structural changes in the pattern of production in the country which
is vital for economic analysis.
1.3.2
Nominal GDP vs Real GDP: GDP at Current and Constant prices
Since we measure the value of output in terms of market prices, GDP, which is
essentially a quantity measure, is sensitive to changes in the average price level.
The same physical output will correspond to a different GDP level if the average
level of market prices changes. That is, if prices rise, GDP measured at market prices
will also rise without any real increase in physical output. This is misleading because
it does not reflect the changes in the actual volume of output. To correct this i.e. to
eliminate the effect of prices, in addition to computing GDP in terms of current
market prices, termed ‘nominal GDP’ or ‘GDP at current prices’, the national income
accountants also calculate ‘real GDP ’or ‘GDP at constant prices’ which is the value
of domestic product in terms of constant prices of a chosen base year. Real GDP
changes only when production changes. As a rule, when prices are changing
drastically, nominal GDP and real GDP diverge substantially. The converse is true
when prices are more or less constant. For example, the GDP of 2015-16 may be
expressed either at prices of that year or at prices that prevailed in 2011-12. In the
former case, GDP will be affected by price changes, but in the latter case GDP will
change only when there has been a change in physical output.
1.3.3
Gross National Product (GNP)
Gross National Product (GNP) is a measure of the market value of all final economic
goods and services, gross of depreciation, produced within the domestic territory
of a country by normal residents during an accounting year including net factor
incomes from abroad. Gross National Product (GNP) is evaluated at market prices
and therefore it is in fact Gross National Product at market prices (GNP MP).

GNP MP = GDP MP + Net Factor Income from Abroad

GDP MP = GNP MP – Net Factor Income from Abroad

NFIA is the difference between the aggregate amount that a country's citizens and
companies earn abroad, and the aggregate amount that foreign citizens and
overseas companies earn in that country.
If Net Factor Income from Abroad is positive, then GNP MP would be greater than
GDP MP.

You might have noticed that the distinction between ‘national’ and ‘domestic’ is
net factor income from abroad.

National = Domestic + Net Factor Income from Abroad

The two concepts GDP and GNP differ in their treatment of international
transactions. The term ‘national’ refers to normal residents of a country who may
be within or outside the domestic territory of a country and is a broader concept
compared to the term ‘domestic’. For example, GNP includes earnings of Indian
corporations overseas and Indian residents working overseas; but GDP does not
include these. In other words, GDP excludes net factor income from abroad.
Conversely, GDP includes earnings from current production in India that accrue to
foreign residents or foreign-owned firms; GNP excludes those items. For instance,
profits earned in India by X Company, a foreign-owned firm, would be included in
GDP but not in GNP. Similarly, profits earned by Company Y, an Indian company in
UK would be excluded from GDP, but included in GNP.
1.3.4
Net Domestic Product at market prices (NDP MP)

Net domestic product at market prices (NDP MP) is a measure of the market value
of all final economic goods and services, produced within the domestic territory of
a country by its normal residents and non residents during an accounting year less
depreciation. The portion of the capital stock used up in the process of production
or depreciation must be subtracted from final sales because depreciation
represents capital consumption and therefore a cost of production.

NDP MP = GDP MP – Depreciation

NDP MP = NNP MP – Net Factor Income from Abroad
As you are aware, the basis of distinction between ‘gross’ and ‘net’ is depreciation
or consumption of fixed capital.

Gross = Net + Depreciation or Net = Gross – Depreciation

1.3.5
Net National Product at Market Prices (NNP MP)

Net National Product at Market Prices (NNP MP) is a measure of the market value of
all final economic goods and services, produced by normal residents within the
domestic territory of a country including Net Factor Income from Abroad during an
accounting year excluding depreciation.

NNP MP = GNP MP – Depreciation

NNP MP = NDP MP + Net Factor Income from Abroad

NNP MP = GDP MP + Net Factor Income from Abroad – Depreciation

1.3.6
Gross Domestic Product at Factor Cost (GDPFC)
The production and income approach (which we will discuss later in this unit)
measure the domestic product as the cost paid to the factors of production.
Therefore, it is known as ‘domestic product at factor cost’. GDP at factor cost is
called so because it represents the total cost of factors viz. labor, capital and
entrepreneurship.
At this stage, we need to clearly understand the difference between the concepts:
‘market price’ and ‘factor cost.’ In addition to factor cost, the market value of the
goods and services will include indirect taxes which are:
 product taxes like excise duties, customs, sales tax, service tax etc., levied by
the government on goods and services, and
 taxes on production, such as, factory license fee, taxes to be paid to the local
authorities, pollution tax etc. which are unrelated to the quantum of
production.
You might have noticed that the government gives subsidy to many goods and
services. The market price will be lower by the amount of subsidies on products
and production which the government pays to the producer. Hence, the market
value of final expenditure would exceed the total obtained at factor cost by the
amount of product and production taxes reduced by the value of similar kinds of
subsidies. Direct taxes do not have the same effect since they do not impinge
directly on transactions but are levied directly on the incomes. For example if the
factor cost of a unit of good X is ` 50/, indirect taxes amount to ` 15/per unit and
the government gives a subsidy of ` 10/per unit, then market price will be ` 55/-
Thus, we find that the basis of distinction between market price and factor cost is
net indirect taxes (i.e., Indirect taxes - Subsidies).

Market Price = Factor Cost + Net Indirect Taxes

= Factor Cost + Indirect Taxes – Subsidies

Factor Cost = Market Price - Net Indirect Taxes

= Market Price - Indirect Taxes + Subsidies

Gross Domestic Product at Factor Cost (GDPFC)

= GDP MP – Indirect Taxes + Subsidies

= Compensation of employees
+ Operating Surplus (rent + interest+ profit)
 + Mixed Income of Self- employed
+ Depreciation

1.3.7
Net Domestic Product at Factor Cost (NDPFC)
Net Domestic Product at Factor Cost (NDP FC) is defined as the total factor incomes
earned by the factors of production. In other words, it is sum of domestic factor
incomes or domestic income net of depreciation.
As mentioned above, market price includes indirect taxes imposed by
government. We have to deduct indirect taxes and add the subsidies in order to
calculate that part of domestic product which actually accrues to the factors of
production. The measure that we obtain so is called Net Domestic Product at factor
cost.

NDPFC = NDP MP – Net Indirect Taxes

= Compensation of employees
+ Operating Surplus (rent + interest+ profit)
+ Mixed Income of Self- employed
1.3.8
Net National Product at Factor Cost (NNPFC) or National Income
National Income is defined as the factor income accruing to the normal residents
of the country during a year. It is the sum of domestic factor income and net factor
income from abroad. In other words, national income is the value of factor income
generated within the country plus factor income from abroad in an accounting year.
NNPFC = National Income = FID (factor income earned in domestic territory) + NFIA.

If NFIA is positive, then national income will be greater than domestic factor
incomes.
1.3.9
Per Capita Income
The GDP per capita is a measure of a country's economic output per person. It is
obtained by dividing the country’s gross domestic product, adjusted by inflation,
by the total population. It serves as an indicator of the standard of living of a
country.
1.3.10
Personal Income
While national income is income earned by factors of production, Personal Income
is the income received by the household sector including Non-Profit Institutions
Serving Households. Thus, national income is a measure of income earned and
personal income is a measure of actual current income receipts of persons from all
sources which may or may not be earned from productive activities during a given
period of time. In other words, it is the income ‘actually paid out’ to the household
sector, but not necessarily earned. Examples of this include transfer payments such
as social security benefits, unemployment compensation, welfare payments etc.
Individuals also contribute income which they do not actually receive; for example,
undistributed corporate profits and the contribution of employers to social security.
Personal income forms the basis for consumption expenditures and is derived from
national income as follows:

PI = NI + income received but not earned – income earned but not

received.
An important point to remember is that national income is not the sum of personal
incomes because personal income includes transfer payments ( eg. pension) which
are excluded from national income. Also, not all national income accrues to
individuals as their personal income.
1.3.11
Disposable Personal Income (DI)
Disposable personal income is a measure of amount of the money in the hands of
the individuals that is available for their consumption or savings. Disposable
personal income is derived from personal income by subtracting the direct taxes
paid by individuals and other compulsory payments made to the government.

DI = PI - Personal Income Taxes

1.4 MEASUREMENT OF NATIONAL INCOME IN INDIA

National Accounts Statistics (NAS) in India are compiled by National Accounts
Division in the Central Statistics Office, Ministry of Statistics and Programme
Implementation. Annual as well as quarterly estimates are published. This
publication is the key source-material for all macroeconomic data of the country.
As per the mandate of the Fiscal Responsibility and Budget Management Act 2003,
the Ministry of Finance uses the GDP numbers (at current prices) to determine the
fiscal targets.
The Ministry of Statistics and Programme Implementation has released the new
series of national accounts, revising the base year from 2004-05 to 2011-12. In the
revision of National Accounts statistics done by Central Statistical Organization
(CSO) in January 2015, it was decided that sector-wise estimates of Gross Value
Added (GVA) will now be given at basic prices instead of at factor cost. In simple terms,
for any commodity the ‘basic price’ is the amount receivable by the producer from
the purchaser for a unit of a product minus any tax on the product plus any subsidy on
the product.
1.4.1 The Circular Flow of Income
Circular flow of income refers to the continuous circulation of production, income
generation and expenditure involving different sectors of the economy. There are
three different interlinked phases in a circular flow of income, namely: production,
distribution and disposition as can be seen from the following figure.
Figure 1.1.1
Circular Flow of Income

Production of goods and services

Distribution as factor incomes (Rent , Wages, Interest ,Profit

Disposition Consumption
/Investment

(i) In the production phase, firms produce goods and services with the help of
factor services.
(ii) In the income or distribution phase, the flow of factor incomes in the form of
rent, wages, interest and profits from firms to the households occurs
(iii) In the expenditure or disposition phase, the income received by different
factors of production is spent on consumption goods and services and
investment goods. This expenditure leads to further production of goods and
services and sustains the circular flow.
These processes of production, distribution and disposition keep going on
simultaneously and enable us to look at national income from three different angles
namely: as a flow of production or value added, as a flow of income and as a flow
of expenditure. Each of these different ways of looking at national income suggests
a different method of calculation and requires a different set of data. The details in
respect of what is measured and what data are required for all three methods
mentioned above are given in the following table.
Table 1.1.1
Data requirements and Outcomes of Different Methods of National Income
Calculation

Method Data required What is measured

Phase of Output: Value The sum of net values Contribution of
added method (Product added by all the producing production units
Method) enterprises of the country
Phase of income : Total factor incomes Relative contribution of
Income Method generated in the factor owners
production of goods and
services
Phase of disposition: Sum of expenditures of the Flow of consumption
Expenditure method three spending units in the and investment
economy, namely, expenditures
government, consumer
households, and producing
enterprises
Corresponding to the three phases, there are three methods of measuring national
income. They are: Value Added Method (alternatively known as Product Method);
Income Method; and Expenditure Method.
1.4.2 Value Added Method or Product Method
Product Method or Value Added Method is also called Industrial Origin Method or
Net Output Method. National income by value added method is the sum total of
net value added at factor cost across all producing units of the economy. The value
added method measures the contribution of each producing enterprise in the
domestic territory of the country in an accounting year and entails consolidation of
production of each industry less intermediate purchases from all other industries.
This method of measurement shows the unduplicated contribution by each
industry to the total output. This method involves the following steps:
Step 1. Identifying the producing enterprises and classifying them into different
sectors according to the nature of their activities
All the producing enterprises are broadly classified into three main sectors namely:
(i) Primary sector,
(ii) Secondary sector, and
(iii) Tertiary sector or service sector
These sectors are further divided into sub-sectors and each sub-sector is further
divided into commodity group or service-group.
Step 2. Estimating the gross value added (GVA MP) by each producing enterprise

Gross value added (GVA MP) = Value of output – Intermediate consumption

= (Sales + change in stock) –

Intermediate consumption
Step 3. Estimation of National income
For each individual unit, Net value added is found out.

∑ (GVA MP) – Depreciation = Net value added (NVA MP)

Adding the net value-added by all the units in one sub-sector, we get the net value-
added by the sub-sector. By adding net value-added or net products of all the sub-
sectors of a sector, we get the value-added or net product of that sector. For the
economy as a whole, we add the net products contributed by each sector to get
Net Domestic Product. We subtract net indirect taxes and add net factor income
from abroad to get national income.

Net value added (NVA MP) – Net Indirect taxes = Net Domestic
Product
(NVA FC)
 Net Domestic Product (NVA FC) + (NFIA) = National Income (NNP FC)

The values of the following items are also included:

(i) Own account production of fixed assets by government, enterprises and
households.
(ii) Production for self- consumption, and
(iii) Imputed rent of owner occupied houses.
1.4.3 Income Method
Production is carried out by the combined effort of all factors of production. The
factors are paid factor incomes for the services rendered. In other words, whatever
is produced by a producing unit is distributed among the factors of production for
their services.
Under Factor Income Method, also called Factor Payment Method or Distributed
Share Method, national income is calculated by summation of factor incomes paid
out by all production units within the domestic territory of a country as wages and
salaries, rent, interest, and profit. By definition, it includes factor payments to both
residents and non- residents.
Thus,
NDP FC = Sum of factor incomes paid out by all production units within the
domestic territory of a country

NNP FC or National Income = Compensation of employees

+ Operating Surplus (rent + interest+

profit)
+ Mixed Income of Self- employed
+ Net Factor Income from Abroad
Only incomes earned by owners of primary factors of production are included in
national income. Transfer incomes are excluded from national income. Thus, while
wages of labourers will be included, pensions of retired workers will be excluded
from national income. Labour income includes, apart from wages and salaries,
bonus, commission, employers’ contribution to provident fund and compensations
in kind. Non-labour income includes dividends, undistributed profits of
corporations before taxes, interest, rent, royalties and profits of unincorporated
enterprises and of government enterprises.
However, normally, it is difficult to separate labour income from capital income
because in many instances people provide both labour and capital services. Such is
the case with self-employed people like lawyers, engineers, traders, proprietors etc.
In economies where subsistence production and small commodity production is
dominant, most of the incomes of people would be of mixed type. In sectors such
as agriculture, trade, transport etc. in underdeveloped countries (including India),
it is difficult to differentiate between the labour element and the capital element of
incomes of the people. In order to overcome this difficulty a new category of
incomes, called ‘mixed income’ is introduced which includes all those incomes
which are difficult to separate.
1.4.4 Expenditure Method
In the expenditure approach, also called Income Disposal Approach, national
income is the aggregate final expenditure in an economy during an accounting
year. In the expenditure approach to measuring GDP, we add up the value of the
goods and services purchased by each type of final user mentioned below.
1. Final Consumption Expenditure
(a) Private Final Consumption Expenditure (PFCE)
To measure this, the volume of final sales of goods and services to consumer
households and nonprofit institutions serving households acquired for
consumption (not for use in production) are multiplied by market prices and
then summation is done. It also includes the value of primary products which
are produced for own consumption by the households, payments for
domestic services which one household renders to another, the net
expenditure on foreign financial assets or net foreign investment. Land and
residential buildings purchased or constructed by households are not part of
PFCE. They are included in gross capital formation. Thus, only expenditure
on final goods and services produced in the period for which national income
is to be measured and net foreign investment are included in the expenditure
method of calculating national income.
(b) Government Final Consumption Expenditure
Since the collective services provided by the governments such as defence,
education, healthcare etc are not sold in the market, the only way they can be
valued in money terms is by adding up the money spent by the government in the
production of these services. This total expenditure is treated as consumption
expenditure of the government. Government expenditure on pensions,
scholarships, unemployment allowance etc. should be excluded because these are
transfer payments.
2. Gross Domestic Capital formation
Gross domestic fixed capital formation includes final expenditure on machinery and
equipment and own account production of machinery and equipments,
expenditure on construction, expenditure on changes in inventories, and
expenditure on the acquisition of valuables such as, jewelry and works of art.
3. Net Exports
Net exports are the difference between exports and imports of a country during
the accounting year. It can be positive or negative.
How do we arrive at national income or NNP FC using expenditure method ? We
first find the sum of final consumption expenditure, gross domestic capital
formation and net exports. The resulting figure is gross domestic product at market
price ( GDP MP ). To this, we add the net factor income from abroad and obtain
Gross National Product at market price (GNP MP). Subtracting indirect taxes from
GNP MP, we get Gross National Product at factor cost (GNP FC). National income or
NNP FC is obtained by subtracting depreciation from Gross national product at
factor cost (GNP FC).
Ideally, all the three methods of national income computation should arrive at the
same figure. When national income of a country is measured separately using these
methods, we get a three dimensional view of the economy. Each method of
measuring GDP is subject to measurement errors and each method provides a
check on the accuracy of the other methods. By calculating total output in several
different ways and then trying to resolve the differences, we will be able to arrive
at a more accurate measure than would be possible with one method alone.
Moreover, different ways of measuring total output give us different insights into
the structure of our economy.
Income method may be most suitable for developed economies where people
properly file their income tax returns. With the growing facility in the use of the
commodity flow method of estimating expenditures, an increasing proportion of
the national income is being estimated by expenditure method. As a matter of fact,
countries like India are unable to estimate their national income wholly by one
method. Thus, in agricultural sector, net value added is estimated by the production
method, in small scale sector net value added is estimated by the income method
and in the construction sector net value added is estimated by the expenditure
method.

1.5 THE SYSTEM OF REGIONAL ACCOUNTS IN

INDIA
Regional accounts provide an integrated database on the innumerable transactions
taking place in the regional economy and help decision making at the regional
level. At present, practically all the states and union territories of India compute
state income estimates and district level estimates. State Income or Net State
Domestic Product (NSDP) is a measure in monetary terms of the volume of all
goods and services produced in the state within a given period of time (generally
a year) accounted without duplication. Per Capita State Income is obtained by
dividing the NSDP (State Income) by the midyear projected population of the state.
The state level estimates are prepared by the State Income Units of the respective
State Directorates of Economics and Statistics (DESs). The Central Statistical
Organisation assists the States in the preparation of these estimates by rendering
advice on conceptual and methodological problems. In the preparation of state
income estimates, certain activities such as are railways, communications, banking
and insurance and central government administration, that cut across state
boundaries, and thus their economic contribution cannot be assigned to any one
state directly are known as the ‘Supra-regional sectors’ of the economy. The
estimates for these supra regional activities are compiled for the economy as a
whole and allocated to the states on the basis of relevant indicators.

1.6 LIMITATIONS AND CHALLENGES OF

NATIONAL INCOME COMPUTATION
There are innumerable limitations and challenges in the computation of national
income. The task is more complex in underdeveloped and developing countries.
Following are the general dilemmas in measurement of national income. GDP
measures ignore the following:
(a) Income distributions and, therefore, GDP per capita is a completely
inadequate measure of welfare. Countries may have significantly different
income distributions and, consequently, different levels of overall well-being
for the same level of per capita income.
(b) Quality improvements in systems and processes due to technological as well
as managerial innovations which reflect true growth in output from year to
year.
(c) Productions hidden from government authorities, either because those
engaged in it are evading taxes or because it is illegal (drugs, gambling etc).
(d) Nonmarket production (with a few exceptions) and Non-economic
contributors to well-being for example: health of a country’s citizens,
education levels, political participation, or other social and political factors
that may significantly affect well-being levels.
(e) The disutility of loss of leisure time. We know that, other things remaining the
same, a country’s GDP rises if the total hours of work increase.
(f) Economic ’bads’ for example: crime, pollution, traffic congestion etc which
make us worse off.
(g) The volunteer work and services rendered without remuneration undertaken
in the economy, even though such work can contribute to social well-being
as much as paid work.
(h) Many things that contribute to our economic welfare such as, leisure time,
fairness, gender equality, security of community feeling etc.,
(i) The distinction between production that makes us better off and production
that only prevents us from becoming worse off, for e.g. defence expenditures
such as on police protection. Increased expenditure on police due to increase
in crimes may increase GDP but these expenses only prevent us from
becoming worse off. However, no reflection is made in national income of
the negative impacts of higher crime rates. As another example, automobile
accidents result in production of repairs, output of medical services,
insurance, and legal services all of which are production included in GDP just
as any other production.
There are many conceptual difficulties related to measurement which are difficult
to resolve, such as:
(a) lack of an agreed definition of national income,
(b) accurate distinction between final goods and intermediate goods,
(c) issue of transfer payments,
(d) services of durable goods,

(e) difficulty of incorporating distribution of income

(f) valuation of a new good at constant prices, and
(g) valuation of government services
Other challenges relates to:
(a) Inadequacy of data and lack of reliability of available data,
(b) presence of non-monetized sector,
(c) production for self-consumption,
(d) absence of recording of incomes due to illiteracy and ignorance,
(e) lack of proper occupational classification, and
(f) accurate estimation of consumption of fixed capital

SUMMARY
 National income accounts are extremely useful for analyzing and evaluating
the performance of an economy, knowing the composition and structure of the
national income, income distribution, economic forecasting and for choosing
economic policies and evaluating them..
 Gross domestic product (GDP MP) is a measure of the market value of all final
economic goods and services, gross of depreciation, produced within the
domestic territory of a country during a given time period gross of
depreciation.
 Capital goods (business plant and equipment purchases) and inventory
investment—the net change in inventories of final goods awaiting sale or of
materials used in the production are counted in GDP
 To eliminate the effect of prices, in addition computing GDP in terms of current
market prices, termed ‘nominal GDP’ or GDP at current prices, the national
income accountants also calculate ‘real GDP ’or GDP at constant prices which
is the value of domestic product in terms of constant prices of a chosen base
year.
 GNP MP = GDP MP + Net Factor Income from Abroad

 NDP MP = GDP MP - Depreciation

 NDP MP = NNP MP - Net Factor Income from Abroad

 NNP MP = GNP MP - Depreciation

 Market Price = Factor Cost + Net Indirect Taxes= Factor Cost + Indirect Taxes
– Subsidies
 Gross Domestic Product at Factor Cost (GDPFC) = GDP MP – Indirect Taxes +
Subsidies

 Net Domestic Product at Factor Cost (NDPFC) is defined as the total factor
 incomes earned by the factors of production.
 Net National Product at Factor Cost (NNPFC) or National Income

 NNPFC = National Income = FID (factor income earned in domestic territory) +

NFIA.
 Personal income is a measure of the actual current income receipt of persons
 from all sources. Disposable Personal Income (DI) that is available for their
consumption or savings DI = PI - Personal Income Taxes
 Circular flow of income refers to the continuous interlinked phases in
circulation of production, income generation and expenditure involving
different sectors of the economy.
 Product Method or Value-Added Method is also called Industrial Origin
Method or Net Output Method and entails the consolidation of the production
of each industry less intermediate purchases from all other industries.
 Under income method, national income is calculated by summation of factor
incomes paid out by all production units within the domestic territory of a
country as wages and salaries, rent, interest, and profit. Transfer incomes are
excluded.
 Under the expenditure approach, also called Income Disposal Approach,
national income is the aggregate final expenditure in an economy during an
accounting year composed of final consumption expenditure, gross domestic
capital formation and net exports.