NATIONAL INCOME ACCOUNTING

It refers to sum of factor income earned by all normal resident in form of rent interest profit
wages during period of accounting year.
it is also national product which is market value of final goods and services produced by normal
resident during accounting year

normal resident: it is a person( individual or institution):

A) who normally resides in the country and period of stay is more than 1 year
B) whose centre of interest lies in the country
centre of economic interest implies:
A) Resident lives or is located within the economic territory
B) resident carries out the basic economic activities of earning, spending and
accumulation of wealth from that location
Implications: production activity of the resident of an economic territory is national product.

following are not included in normal resident of the country

1) foreign visitors for vacations, medical treatment, studies, Sports
2) crew member of ship or aircraft of another country
3) border area workers: they are resident of country in which they live and they are not
resident of country in which they work
4) officials, the diploma, embassies of another country working in domestic country
5) international organisation like WHO, UNO
Employees of International Organisation Are considered as resident of countries to which they
belong and not of international area.
but if non-residents are working for more than one year then he will be treated as normal
resident of India.
Note: citizenship and resident ship at two different terms
Citizenship: it is basically a legal concept based on following
a) place of birth of the person
b) some legal provision allowing person to become a citizen that is person born outside
apply for citizenship of India
residentship: it is an economic concept based on the basic economic activities performed by a
person.

Domestic Territory or economic territory

according to UN” economic territory is the geographical territory administered by a government
within which person, goods and capital circulate freely”
based on Freedom criteria scope of economic territory includes
1) political boundary or land masses
2) territorial water of country and air space
3) ships or aircraft of country operating in different nations of world
4) officials, diplomat,, military base consultants embassies of domestic country working in
another country.

1
 NATIONAL INCOME ACCOUNTING
5) fishing vessels, oil, natural gas rigs and floating platform operated by resident of country
in international water or engage in extraction in areas in which country have exclusive
rights
Goods: meaning and types
goods are any physical objects, natural or man made which can be seen, touched and
measured and command a price in the market.
Goods which command a price in market is economic good and which do not Commando price
is non economic good.
intermediate goods and final goods
intermediate goods: they are those goods which are required for the production of for resale
during the same year like wheat purchased by restaurant
Features:
1) value of intermediate good is not added in national income
2) goods are not consumed by consumers
3) it remains within the production boundary

final goods: they are those goods which are required for personal consumption and
investment. these goods reach final users like wheat bi consumer
Features:
1) value is included in national income
2) goods are consumed by consumers
3) they remain outside the production boundary

consumption goods and capital goods

consumption goods: these are those goods which are bought by consumer as final or ultimate
go to satisfy their wants directly. these include
A) durable goods: like car, TV
B) nondurable goods and services like fruits, vegetable, teachers, Doctor
C) Semi durable goods Like crockery
D) services like bank, transport
Capital goods: these are those goods which form the capital stock of a country at the end of an
accounting year and which are used up in the production process

Factor income and transfer income

factor income: it is income received for rendering services of land,labour,capital &
entrepreneur.
1) It is bilateral income & their earned income
2) It result in production of goods & services & hence included in national income
3) It is earning concept
4) Examples rent, wages, interest, profit
Transfer income: it is income received without rendering any services & there is transfer from
one sector to another.
1) It is unilateral income & thus unearned

2
 NATIONAL INCOME ACCOUNTING
2) It does not result in production of goods & services & hence not included in national
income
3) Examples current transfer like unemployment allowance,pension. These are regular in
nature.
Capital transfer like gifts of equipment, tools. These are irregular in nature

depreciation/replacement cost/consumption of fixed capital

i t refers to loss of value of fixed capital due to:
a) Normal wear & tear
b) Accidental damage
c) Expected obsolescence which due to change in technology & change in demand of
goods & services
It is expenditure incurred by a country on replacement of worn out assets during a year & hence
when calculated for entire economy it is termed as replacement cost.

Thus depreciation provision or fund is created to keep existing stock of capital intact,
maintaining production capacity & to provide for replacement of worn out assets.

Depreciation differentiates between gross & net

NET = GROSS --- DEPRECIATION

BASIS DEPRECIATION CAPITAL LOSS

meaning It refers to fall in value of fixed assets It refers to loss in value of fixed assets
due to normal wear & tear, passage of due to natural calamities, fall in market
time, expected obsolescence. value of assets

Provision It is made for replacement as it is an No such provision is made

for loss expected loss

Production Does Not hamper the production Hampers the production process
process process

Net indirect taxes (NIT)

It is difference between taxes & subsidies
NIT = INDIRECT TAXES ---- SUBSIDIES
NIT differentiates between factor price(cost) & market price( cost)
FACTOR COST(FC) = MARKET PRICE(MP) ----- NIT
Indirect taxes are included in market price but excluded in factor price because it increases
price and it goes to government and not to the factor input whereas subsidies are excluded from
market price but included in factor price .

nominal GDP vs real GDP

NOMINAL - GDP at current prices. It is the market value of the FINAL goods and services produced within
the domestic territory of a country during an accounting year, as estimated using the CURRENT year prices

3
REAL - GDP at constant prices. It is the market value of the final goods and services produced within the
domestic territory of a country during an accounting year, as estimated using the BASE year prices.
 NATIONAL INCOME ACCOUNTING
Difference between National Income at current price and national income at base year price
NOMINAL GPD REAL GDP
basis national income at current price national income at base year price

known as nominal or monetary national real national income

income
Y = P1 X Q1 Y = Po X Q1

meaning it measures value of goods and it measures the value of final goods
services produced by normal and services produced by normal
resident at prevailing market price resident at a base year price

indicator of value changes with the change in value changes only when there is a
growth price hence not true index of growth change in the flow of goods and
services hence indicator of economic
growth

change in does not tell the change in level of it tells the change in level of
economic economic activity in terms of economic activity in terms of
activity production production

comparison it does not facilitate comparison like it felicitate

inter regional or International

Situation 1 situation 2 situation 3

when nominal GDP is when nominal GDP is equal when nominal GDP is less
greater than real GDP to real GDP than real GDP

it happens because price it happens because price it happens because price in

level in current year is more level is same in current year current year is less than price
than the price level in base and base year in base year
year

GDP deflator
it measures the average level of price of all goods and services that has increased the value of
GDP. hence it shows change in GDP due to change in price level for all goods and services
taken together
𝐺𝐷𝑃 𝑎𝑡 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑖𝑐𝑒 (𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃)
GDP deflator = 𝐺𝐷𝑃 𝑎𝑡 𝑏𝑎𝑠𝑒 𝑦𝑒𝑎𝑠 𝑝𝑟𝑖𝑐𝑒 (𝑟𝑒𝑎𝑙𝐺𝐷𝑃)
Net factor income from abroad(NFIA)
it is the difference between factor income in form of rent, interest, profit and wages earned by
normal resident from rest of the world and factor income paid to non resident in domestic
territory.
NFIA = FACTOR INCOME FROM ROW ---- FACTOR INCOME TO ROW

4
 NATIONAL INCOME ACCOUNTING
It is used to differentiate between domestic and national variable
𝑁𝑁𝑃𝐹𝐶= 𝑁𝐷𝑃𝐹𝐶 + NFIA

SITUATION EFFECTS

NFIA a is positive National income ＞domestic income

NFIA is zero National income =domestic income

NFIA is negative National income ＜domestic income

Some basic concepts

1) Gross Domestic Product at market price(𝐺𝐷𝑃
𝑀𝑃
: Gross means total, domestic
means domestic Territory or resident production units, Product means final product.
market price means that GDP is calculated at price inclusive of indirect taxes and
exclusive of subsidies. GDP at market price is a macro concept which is defined as the
market value of final goods and services produced within the domestic Territory of a
country during one year my all the production units is inclusive of net indirect taxes and
depreciation.
a) it is a flow concept that is flow of goods and services produced during the year it
does not include goods produced in the previous year
b) it is always at current price. in the situation where price of base your is taken it is
called GDP at market price at constant prices
c) it is not the value of output because it excludes value of intermediate
consumption, that is it is a sum total of value added by all the producing unit in
domestic Territory of a country
d) it excludes transfer payment, capital gains, financial transaction And income
generated through illegal means
e) it is the market value of final goods and services where market value is equal to
price X quantity of final goods and services
f) to avoid double counting it includes only final value of goods and services
g) it is confined to domestic Territory of a country and therefore excludes in NFIA
h) It is calculated by formula
𝐺𝐷𝑃𝑀𝑃= value of output in domestic territory ---- value of intermediate
consumption
Or 𝐺𝐷𝑃𝑀𝑃= Σvalue added
2) 𝐺𝑁𝑃𝑀𝑃 = 𝐺𝐷𝑃𝑀𝑃+ NFIA
3) 𝐺𝑁𝑃𝐹𝐶= It is defined as sum of gross value at factor cost by normal resident of a country
during a year and net factor income from abroad .

5
 NATIONAL INCOME ACCOUNTING
𝐺𝑁𝑃𝐹𝐶= 𝑁𝑁𝑃𝐹𝐶 + DEPRECIATION OR 𝐺𝑁𝑃𝑀𝑃 -- NIT

4) 𝑁𝑁𝑃
𝑀𝑃
= Defined as market value of output of final goods and services produced by normal
resident of an economy in its domestic territory during an accounting year exclusive of
depreciation and inclusive of an NFIA.
𝑁𝑁𝑃𝑀𝑃= 𝐺𝑁𝑃𝑀𝑃--- DEPRECIATION
OR 𝑁𝐷𝑃𝑀𝑃+ NFIA
OR 𝐺𝑁𝑃𝑀𝑃+ NFIA -- DEPRECIATION
5) 𝑁𝐷𝑃 : It is defined as market value of final goods and services produced in domestic
𝑀𝑃
Territory of a country by its normal resident and non resident or by all during an accounting year
minus depreciation .
𝑁𝐷𝑃𝑀𝑃= 𝐺𝑁𝑃𝑀𝑃-- DEPRECIATION
OR 𝑁𝑁𝑃𝑀𝑃-- NFIA
OR Σ𝑁𝑉𝐴 (VALUE ADDED OF ALL THE FIRMS)

6
 NATIONAL INCOME ACCOUNTING

Difference between net factor income from abroad and net export

basis net factor income from abroad net Exports

meaning it refers to difference between it refers to difference between export

factor income earned by our and import of goods and non factor
normal resident from rest of the services related to domestic Territory of a
world and factor income earned by country
non resident

formula Factor income earned by normal export minus import

resident minus factor income of
non-resident of domestic territory

part of national income domestic income

net compensation of employees export and import of goods

components income from property and export and import of services
entrepreneurship
net retained earning of resident
company

net National disposable income: it is income from all sources like factor income and transfer
receipts from abroad available to a country for consumption expenditure or savings during the
year.
NDI = 𝑁𝑁𝑃
𝑀𝑃
+ NET CURRENT TRANSFER FROM REST OF WORLD
OR NATIONAL CONSUMPTION EXPENDITURE ( PRIVATE FINAL CONSUMPTION
EXPENDITURE + GOVERNMENT FINAL CONSUMPTION EXPENDITURE) + NATIONAL
SAVINGS
Gross national disposable income
GNDI = NDI + DEPRECIATION

Concept of green GNP: GNP at current OR constant price is estimated with no regards to
environmental pollution, exploitation of natural resources if GNP increases along with increase
in environmental pollution the quality of life would be far less than indicated by the index of GNP
likewise if GNP increases along with the excessive exploitation of the natural resources( it
reduces availability of resources for the future generation increase) in GNP would be misleading
as it cannot be sustained in years to come accordingly it is suggested that GNP index should
account for cost in terms of environmental pollution and cost in terms of excessive exploitation

7
 NATIONAL INCOME ACCOUNTING
of the natural resources estimation of GNP that accounts for these parameter is called green
GNP.
New concepts introduced by CSO (central statistics office)
1) Net production taxes = production taxes -- production subsidies. Production taxes are
those imposed on a firm by the virtue of it producing something. It doesn't depend on
the actual volume of production. For example, registration fees, land revenue, stamp
duties etc.
2) Net product taxes: On the other hand, product taxes are paid on the actual volume of
production. It is paid per unit of product. For example, excise duty, service tax, sales
tax etc.
3) Basic price: The 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 or sale.
It excludes any transport charges invoiced separately by the producer.
4) GVA at basic price: Gross value added at basic prices is defined as output valued at
basic prices less intermediate consumption valued at purchasers’ prices. Here the GVA
is known by the price with which the output is valued. From the point of view of the
producer, purchasers’ prices for inputs and basic prices for outputs represent the prices
actually paid and received. Their use leads to a measure of gross value added that is
particularly relevant for the producer.
5) Gross value added at producers’ prices is defined as output valued at producers’ prices
less intermediate consumption valued at purchasers’ prices. In the absence of VAT, the
total value of the intermediate inputs consumed is the same whether they are valued at
producers’ or at purchasers’ prices, in which case this measure of gross value added is
the same as one that uses producers’ prices to value both inputs and outputs. It is an
economically meaningful measure that is equivalent to the traditional measure of gross
value added at market prices. However, in the presence of VAT, the producer’s price
excludes invoiced VAT, and it would be inappropriate to describe this measure as being
at “market” prices.

From these various concepts of GVA, one can arrive at an estimate of GDP in the following
manner:

1. GDP = the sum of the gross value added at producers’ prices, plus taxes on
imports, less subsidies on imports, plus non-deductible VAT.
2. GDP = the sum of the gross value added at basic prices, plus all taxes on
products, less all subsidies on products.

8
 NATIONAL INCOME ACCOUNTING
3. GDP = the sum of the gross value added at factor cost plus all taxes on products,
less all subsidies on products, plus all other taxes on production, less all other
subsidies on production.

In cases (b) and (c), the items taxes on products and subsidies on products includes taxes and
subsidies on imports as well as on outputs.

nominal GDP vs real GDP

NOMINAL - GDP at current prices. It is the market value of the FINAL goods and services produced
within the domestic territory of a country during an accounting year, as estimated using the CURRENT
year prices

REAL - GDP at constant prices. It is the market value of the final goods and services produced within the
domestic territory of a country during an accounting year, as estimated using the BASE year prices.