National Income

Why is national income important?

• Measuring the level and rate of growth of national income is

important to economists when they are considering:

– Economic growth and where a country is in the business cycle

– Changes to average living standards of the population

– Looking at the distribution of national income (i.e. measuring income and

wealth inequalities)
 National Income

National income measures the total value goods and services

produced within the economy over a period of time.

Methods of calculating the national income

I. Expenditure methods
II. Value Added methods
III. Income methods
 Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the monetary value of all final goods and
services produced within the domestic territory of a country during a
specific period, usually a year.
This is calculated at market prices and is known as GDP at market prices.
Dernberg defines GDP at market price as "the market value of the output of final goods and
services produced in the domestic territory of a country during an accounting year."

Significant
Economic Growth: Indicates whether an economy is expanding or contracting.
Standard of Living: Higher GDP per capita often correlates with a better standard of
living.
Policy Implications: Guides government and business decisions, monetary and fiscal
policies.
What are the Types of GDP?

Nominal GDP – the total value of all goods and services produced at current market
prices over a time period, including the effects of inflation or deflation.

Real GDP – a more accurate measure of the sum of all goods and services produced
at constant prices. The prices used in determining the Gross Domestic Product are
based on a certain base year or the previous year, thereby making it
inflation-adjusted.

Potential GDP – ideal economic condition with 100% employment across all
sectors, steady currency, and stable product prices.
Income Method
Income method calculates national income based on the flow of factor revenues. There
are four factors associated with every production activity; these are land, labor, capital,
and entrepreneurship.
Laborers receive their wages, the land gets rent, capital accrues interest, and
entrepreneurship gets profit, each earning through the individual means.

Apart from that, self-employed individuals like doctors, CAs, advocates, etc. employ
their own capital and labor. Thus, their income is regarded as mixed income.

Therefore, in the income method, the national income is measured in terms of these
factor payments. Thus, it is also known as the ‘factor payment method.
Income
The next step is to compute the domestic income NDPFC. Domestic Income (NDPFC) is the
sum of all factor earnings.
NDPFC = Employee Compensation + Profit + Rent & Royalty + Interest + Mixed Income.
 Limitation of National Income

Income from Sale of Securities

Intermediate goods
Non-Monetary Transactions
Owner-occupied Houses
Transfer Income will not be included
 Items to be Included or Excluded in National Income with
Reasons
1. Construction of a new house.
Yes, it will be included in the national income as it is a part of capital formation and leads to production of goods and
services in the economy.
2. Winning of a lottery prize.
No, it will not be included in the national income as it does not add to the flow of goods and services in the economy.
3. Increase in the prices of stocks lying with a trader.
No, it will not be included in the national income as it does not amount to any flow of goods.
4. National debt interest.
OR
Interest on public debt.
No, it is not included in the national income as it is the interest paid on loans taken by government to meet its
consumption purposes.
 GDP Deflator
GDP deflator is an index of price changes of goods and services include in GDP. It is a price index
which is calculated by dividing the nominal GDP in a given year by the real GDP for the same year
and multiplying it by 100. Thus,

https://economictimes.indiatimes.com/news/economy/policy/nirmala-sitharaman-vs-p-chidambaram-in
-rajya-sabha-over-indias-gdp-growth/videoshow/105818879.cms
 Questions
If nominal GDP is Rs. 21,100 crore and real GDP is Rs. 20,000
crore, calculate the GDP Deflator.

Convert nominal GDP into real GDP in the following cases.

i)GDP at current year prices is Rs. 2,35,560 and price index for the current
year is Rs. 255
ii) GDP at current year prices is Rs. 4,23,670 and current year price index is
Rs. 412
 GDP & GNP

GDP GNP
▪ If an Indian company manufacture a pen ▪ If an Indian-owned software company
in India, it is counted under GDP establishes a subsidiary in the United
States and earns profits from its
▪ If a British company manufacture
operations there, the income generated
biscuits in India, it is counted under
by the U.S. subsidiary is included in
GDP
India's GNP because it is owned by
▪ If an Indian company manufacture a pen Indian residents.
in USA, it comes under the GDP of
▪ GNP focuses on the ownership of
USA, but not India.
production, regardless of location.
 Basic Concepts of National Income

Gross Domestic Product (GDP)

Net Domestic Product (NDP)
Gross National Product (GNP)
Net National Product (NNP)
Real and Nominal GDP
GDP Deflator
 Net National Product (NNP)

NNP includes the value of total output of consumption goods and

investment goods.
The word ‘net’ refers to the exclusion of that part of total output
which depreciation.

NNP = GNP - Depreciation

 Net Domestic Product (NDP)

NDP is the value of net output of the economy during the year.

NDP = GDP at Factor Cost – Depreciation.

NDPFC = GDPMP – Depreciation –Net Indirect Taxes (Indirect Taxes- Subsidies)

GDPFC = GDPMP – Indirect Taxes + Subsidies

GDPMP = C + I + G + X
GDPFC = GDPMP – Indirect Tax + Subsidies
NDPFC = GDPFC− Depreciation
NDPMP = GDPMP− Depreciation
NDPFC = NDPMP− Indirect Taxes + Subsidies
NNPFC = NDPFC + NFIA
Calculate the NDP at FC by using the income method.

S. No. Items Amount

(in crores)

(i) Compensation of employees 3,165

(ii) Income from property 2,375

(iii) Income from entrepreneurship 1,567

(iv) Mixed income of self-employed 4,363

(v) Savings of non-departmental 5,770

enterprise

(vi) Income from property and 2,530

entrepreneurship to government
administrative departments
 What is Value Added?
❑ Value-added refers to the addition in the value of a raw
material or intermediate good by an organization during
the production process. To calculate the national income
through the value-added method, the difference between
the value of output and the value of intermediate goods is
taken. The value-added method is the most commonly
used method to estimate national income as it avoids
double counting, which is a major error while calculating
national income.
Value Added = Value of Output – Intermediate
Consumption
Formula

GVA MP = Value of Output – Intermediate Consumption

Value of output = Sales + Change in stock (Closing – Opening)

Or Sales + Addition to Stock/ Increase in Stock
Or Sales – Fall in stock/Decrease in Stock
Or Sales + Inventory Investment

Value of Output = P X Q
Domestic Sales + Export
GDPFC = GDPMP − NIT
GDPMP = GVA + NIT
NIT = Indirect Taxes − Subsidies
NNPMP = GDPMP − Depreciation
NNPFC = NNPMP − NIT + NFIA
 Gross National Product (GNP)

Is the total market value of all final goods and services produced
within a given period by factors of production owned by a country’s
citizens regardless of where the output is produced.

GDP + Net factor income from Aboard.

For Example,
GDP + Indian company/Individual income from overseas – Foreign
company/Individual income from the India
Question

Gross Fixed investment 20,000

Inventory Investment 10,000
Depreciation 4,000
Indirect Taxes 2,000
Subsidies 4,000
Export 3,000
Import 5,000
Consumption Expenditure 40,000

Calculate National Income

 Nominal and Real GDP
When GDP is measured on the basis of current price, it is called GDP at current
prices or nominal GDP.
On the other hand, when GDP is calculated o the basis of fixed prices in some year,
it is called GDP at constant prices or real GDP.

Nominal GDP is the values of goods and services produced in a year and measured
in terms of rupees (Money) at current (market) price.
Calculate NVA at FC
Sales = 1000
Subsidy = 50
Depression = 50
Export = 100
Closing Stock = 20
Opening Stock = 50
Intermediate Purchase = 500
Import of raw material = 100
Economic Development & Economic Growth
 Multiplier

In simple term the multiplier is something that multiplies or increases.

Link
▪ The first concept of multiplier was given by R.F. KAHN. KAHN MULTIPLIER is
called as Employment Multiplier .

In economics particularly in macroeconomics the multiplier is the change in output that

results from one unit change in expenditure.

Investment Multiplier asserts that an increase in private consumption expenditure,

investment expenditure, or net government spending raises the total Gross Domestic
Product (GDP) by more than the amount of the increases.
Multiplier = Change in income/change in Initial Investment
According to Keynes investment multiplier tells us that if there is increment in
investment , income will increase , by how much amount it is increased will be denoted
by “k” times the increment of investment.
 Example
Multiplier (k) is the ratio of increase in national income (∆Y) due to an increase in
investment (∆I).

K= ∆Y/∆I
Suppose an additional investment (∆I) of RS 4,000 crores in an economy generates an
additional income (∆Y) of Rs 16,000 crores.

The value of multiplier (k), in this case will be:

k =16,000/4,000 = 4

It means, income increased 4 times with a single increase in investment

 Algebraic Relationship

We know at equilibrium, income (Y) is the sum total of consumption

(C) and investment (I).

Y=C+I

Similarly, any change in income (∆Y) will also be equal to (∆C + ∆I).

∆Y = ∆C + ∆I

Dividing both sides by ∆Y, we get

Types of Multiplier
Leakages in the Multiplier

Saving
Paying off debts
Holding of idle cash balances
Imports
Taxation
Increase in Prices