CHAPTER 2: NATIONAL INCOME

WHAT IS NATIONAL INCOME?

The total factor income received in the form of rent, wages, interest, and pro t by
normal residents of a country in one nancial year is called national income.
Factor income is any income received by a factor of production i.g. land labour, capital,
and enterprise. Non-factor income is any income without work (economic activity
received as a gift, charity, pension, or remittance).
Normal resident is a person or other entity like a company with economic interest in
the country.
Citizenship is a political right which is related to birthplace or other factors. The
Japanese residents who are working on the bullet train should be called normal
residents of India for the years they are working in India. On the contrary, when Indian
workers abroad are called NRIs (non-resident Indians), although they are Indian
citizens.
National income is a ow concept; hence, it is calculated for a period of time, like a
nancial year. Stock concept is measurable at any point in time.

METHODS OF COMPUTATION OF NATIONAL INCOME

a. Production method
b. Income method
c. Expenditure method

PRODUCTION METHOD
Under this method, the value of GDP (gross domestic product) is estimated or
calculated as the total market value of nal goods and services, including taxes
produced within the domestic territory of the country in a nancial year. The adjusted
value of GDP is called national income.
Step 1: GDP = Q x MP [MP ≡ Market price]
Step 2: adjustment ±
Step 3: NI (NNP)⤆BP [BP ≡ Basic price]
Intermediate goods are those which are sold by a producer to another producer for
further processing, and hence they are not included in GDP because GDP is estimated
at the nal stage when goods reach the consumer, since this method has the problem
of double counting, which is the counting of the same product in multiple stages.
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To solve double counting, the 'value added method' is adopted, which estimates gross
value and basic price as the di erence between the value of output and the value of
input for all the producers in the chain.
GVABP = value of output - value of input

People Input Output Value added

A 0 100 100 - 0 = 100
B 100 300 300 - 100 = 200
C 300 1000 1000-300 = 700
D (consumer) 1000 0 1000

GDP GVA
MD BD
Final goods and services all goods and services
Risks of double counting no such risk

GVA method is better and that is why India has started using it from 2015.

Q. Discuss the GDP computing methodology in India before and after 2015.

TYPE OF TAXES
Taxes can be broadly classi ed into direct and indirect type

Direct Taxes
direct taxes are payable by the taxpayer to the government, i.g. income tax.

Indirect Taxes
indirect taxes are payable through some intermediary, i.g., consumers pay GST to
farmers to pay it to the government.
Indirect taxes are further classi ed into:
Product taxes
Product taxes are those which are imposed on a per-unit basis, i.g. GST.
Production taxes
Production taxes are imposed on a periodic basis, like per annum, irrespective of the
volume of production.
In India, production taxes have a negligible share in the indirect taxes.
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 MARKET PRICE AND BASIC PRICE
Market price includes all the taxes which are a part of the market value or selling price
of goods and services. However, a basic price is the price that goes to the sailor after
subtracting the net product taxes charged by the government. Net product tax is the
di erence between product taxes and product subsidies. Income industries like KHADI
government help the producer by giving nancial incentives called product subsidies.
Such subsidies are paid out of the total product access received on the other goods
and services
BP = MP - NPT; NPT ≡ Net Product Taxes = ∑ Product Taxes - ∑ Product Subsidies
GDPMP - NPT = GVABP

CONCEPT OF FACTOR COST

Before 2015 national income of India has estimated at factor cost which is the
di erence between market price and net indirect taxes (all)
FC = MP - ∑ Indirect tax
NIFC = MP - ∑ Indirect tax
GDPFC = GDPMP - ∑ Product Tax - ∑ Production Tax

Cultural industry, Spiritual tourism

NOMINAL GDP VERSUS REAL GDP

When GDP is valued at current market price of goods and services then it is called
nominal GDP however if quantity produced in current year multiplied with price of any
past year which is considered as base year for comparison of any changes in the
quantity produce of a period of time then it is called real GDP
Base here can be a year in the past, which is normal and assumed for the purpose of
comparison or year by year change in real terms

Nominal Price in
Financial Current Real GDP
Quantity (Q) GDP Base Year
year (FY) Price (PC) (RGDP)
(NGDP) 11-12 (PB)
22-23 10 10 10x10 = 100 5 10x5 = 50
23-24 8 15 8x15 = 120 5 8x5 = 40
Changes: -20% Real +20% -20% Real
Unreal
RGDP that's why shows growth of the country growth means quantity going up
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 The concept of real GDP is useful for comparison of performance year two year which
generally called economic growth rate. Because change in nominal GDP is based on
the change in price and quantity both but growth is con ned to only the quantity.. in
other situations generally nominal GDP is useful
GDP De ector = [NGDP/RGDP]x100%;
Base Year (BY): recent past, normal stable, no disaster (economic or natural).
The ratio between nominal and real GDP in any year is known as GDP de ector it
measures the total change in prices of good services from Bascha to current year i.g.
GDP de ector = (QxPC/QxPB)x100% = (120/40)x100% = 300%
means total in ation from base year to current year is 200%.

CONSUMPTION OF FIXED CAPITAL (ASSETS) OR

DEPRECIATION
Factor Payment/ Cost/ Income = Rent + Wages + Interest + Pro t
Total Cost = Factory Cost + Depreciation
It refers to the reduction or less in value in asset like building machinery land etc used
in the production goods and services in any nancial year
Since depreciation is a cost of producing goods and services it must be subtracted
while nding the net pro t or net income at aggregate level. It is subtracted from GDP
to nd NDP( net domestic product)
NDP = GDP - Depreciation; Net = Gross - Depreciation
Some economist consider the depreciation to environment on annual basis for nding
GDP. This concept is getting popularity because of growing concern about
environment protection because the rich countries have polluted environment
signi cantly during industrialisation.
Green GDP= NGDP - Loss To Environment Environments (Annual)

GEP, EnviStats, Green National Accounting (GNA)

POTENTIAL GDP
The level of GDP which an economic and produce with optimal utilisation of its
resources like labour and capital under stable conditions is called potential GDP
The determinants of potential GDP indicates
a. Rate of capital formation
b. State of technology
c. Demography
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d. Infrastructure
e. Sociopolitical environment
As economic conditions are not always stable and favourable and even other factors
and economy may fail to achieve the level of potential GDP. The di erence between
potential and actual GDP is called GDP gap. In Indian economy following factors are
inhibiting India from realising it's true potential is:
‣ Poor Infrastructure
‣ Poor Human Resource Development
‣ Backward Technology
‣ Lack Of Entrepreneurship
‣ Socio Political Issues etc.

Q. Define potential GDP and explain its determinant what are the factors
that are inhabiting India from reaching its potential GDP?

PURCHASING POWER PRIORITY (PPP)

From comparison of GDP of di erent countries, a common currency and price is
required because each country has di erent currency and price level
PPP is a concept which convert GDP of every country in terms of USD using American
prices for similar goods and services
Convergence of GDP given in local currency into EST by using Forex rate(i.g. Rs.84
equal to 1USD) is insu cient because prices in America is almost 4 times prices in
India for many good sen services therefore GDP(PPP) is estimated by multiplied with
the quantity produce with its American price in USD [GDP(PPP)= QxPUSA($)]
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 This concept is similar to concept of real GDP
IMF provides PPP ranking for the members countries using Forex rate as well as PPP
rate according to the last estimate India's NGDP using forex rate is $4.1 trillion while
the PPP rate shows GDP(PPP) is $14 trillion.

GNP VS. GDP

Gross national product is the sum of GDP and net factor from abroad(NFIFA) which is
the di erence between factor income from abroad(FIFA) and factor income to
abroad(FITA) in Indian case multinational earn more from India than the Indian company
or normal residence earn from abroad that's why the NFIFA is a negative gure and
India's in GNP is less than GDP
GNP = GDP - NFIFA;
NFIFA = FIFA - FITA; In case of India FIFA < FITA

GDP VS. NI
National income is the adjusted value of GDP which required the following changes or
adjustment:
• GDPMP - Depreciation = NDPMP
• NDPMP + NIFA = NNPMP
• NNPMP - Net Product Taxes (Product Taxes - Subsidy) = NNPBD ≡ NI

INCOME METHOD
Under income methods national income is estimated as the total of factor income
receive in the form of friend wages, interest and pro t by the normal residence of the
country during one nancial year or period

Non-factor incomes i.g. remittance, donation, charity, gifts are excluded from national
income although they are included in other concept such as private income and
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 personal income private income is the total of factor and non-factor income of the non-
government sector including farms, partnership companies, individual etc.
Personal income is the total factor plus no factor income of individual excluding the
government and private institution. If personal taxes like income tax are subtracted
then it is called dispersiable personal income.
Total income divided by total population of a country gives per capital income which
means average income per person.

EXPENDITURE METHOD
Income is estimated as the total of expenditure and saving; hence, GDP includes the
following:
a. Private Final Consumption Expenditure (PFCE), which is the total amount spent
by the private sector on consumption of nal goods and services.
b. Government Final Consumption Expenditure (GFCE) is the amount spent by the
government on consumption of nal goods and services.
c. Gross Fixed Capital Formation (GFCF) is the amount invested in capital assets or
valuable for long-term use, such as infrastructure, machinery, buildings, produced
within the year but not fully consumed.
d. Change in stock in consumable and valuable goods, which means closing stocks
at the end of the nancial year minus opening stock at the beginning. These are
the consumer goods within a year but not consumed and hence they are treated
like savings for short terms.
e. Net exposed, which is the di erence between the export (x) and import (m) during
the nancial year (FY).
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ESTIMATION OF NATIONAL INCOME IN INDIA
As India has a large informal sector, it is not possible to compute national income from
one single method, and therefore it is estimated by MOSPI using a combination of all
three methods.
During 2015, the method of estimation was revised on the basis of the requirement of
the system on national accounts (SNA 2008) suggested by the UN (United Nations).
MOSPI provides advance estimates, provisional estimates, provisional estimates, and
revised estimates on a periodic basis before the end of the nancial year. The estimate
was released on 31 May 2024, estimating India's GDP at around Rs. 296 trillion and
GVA at Rs. 260 trillion. The rate of capital formation was 31%, and India is among the
countries that have the highest saving or capital formation percentage-wise. Presently,
the real GDP is growing about 7% when all the large countries are facing a global
slowdown and low growth situation.

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