Concepts & methods of national income

National Income in India,
Concept and Measurement

Meaning of National Income
• National income is the money
value of all the final goods and
services produced by a country
during a period of one year.
National income consists of a
collection of different types of
goods and services of different
types.

Meaning of National Income
•Since these goods are measured in
different physical units it is not
possible to add them together. Thus
we cannot state national income is so
many millions of meters of cloth.
Therefore, there is no way except to
reduce them to a common measure.
This common measure is money.

Example
•If the value of a meter of cloth is Rs.
20 and the total cloth produced is
100 meters, then the money value of
cloth is Rs. 2000. In this way we can
find out the value of other goods
and services and the total value of
all the goods and services produced
during one year.

Basic Concepts in National income
• Gross domestic product
• Gross domestic product at constant
price and at current price
• Gross domestic product at factor
cost and Gross domestic product at
market price

Basic Concepts in National income
•Net domestic product
•Gross national product
•Net national Product
•Net national product at factor
cost or national income

Gross Domestic Product
• Gross domestic product is
the money value of all final
goods and services
produced in the domestic
territory of a country during
an accounting year.

•Domestic territory Means
a. Territory lying within the political
frontiers, including territorial waters of
the country.
b. Ships and aircrafts operated by the
residents of the country between two or
more countries.

c. Fishing vessels, oil and natural gas rigs,
and floating platform operated by the
residents of the country in the international
waters or engaged in extraction in areas in
which the country has exclusive rights of
exploitation.
d. Embassies, consulates and military
establishment of the country located
abroad.

Gross Domestic Product at Constant
price and Current price
• GDP can be estimated at current
prices and at constant prices. If
the domestic product is
estimated on the basis of the
prevailing prices it is called
gross domestic product at
current prices.

Gross Domestic Product at Constant
price and Current price
• If GDP is measured on the basis of
some fixed price, that is price
prevailing at a point of time or in
some base year it is known as GDP
at constant price or real gross
domestic product.

GDP at Factor cost and GDP at Market
price
• The contribution of each producing
unit to the current flow of goods
and services is known as the net
value added. GDP at factor cost is
estimated as the sum of net value
added by the different producing
units and the consumption of fixed
capital.

GDP at Factor cost and GDP at Market
price
• Conceptually, the value of GDP
whether estimated at market price or
factor cost must be identical. This is
because the final value of goods and
services must be equal to the cost
involved in their production.
• GDP F.C = GDP M.P – IT + S.

Net Domestic Product
• While calculating GDP no provision
is made for depreciation allowance
(also called capital consumption
allowance). In such a situation gross
domestic product will not reveal
complete flow of goods and services
through various sectors.

Net Domestic Product
• A part of is therefore, set aside in
the form of depreciation allowance.
When depreciation allowance is
subtracted from gross domestic
product we get net domestic
product.
• NDP = GDP – Depreciation.

Gross National Product
• Gross national product is defined as the
sum of the gross domestic product and
net factor incomes from abroad. Thus in
order to estimate the gross national
product of India we have to add net factor
income from abroad - income earned by
non-resident in India to form the gross
domestic product of India.
• In brief GNP = GDP + NFIA.

Net National Product
• It can be derived by subtracting
depreciation allowance from GNP. It
can also be found out by adding the
net factor income from abroad to
the net domestic product.
• NNP = GNP - Depreciation

Net National Product
• If the net factor income from abroad
is positive then NNP will be more
than NDP, If the net factor income
from abroad is negative then NNP
will be less than NDP and it would be
equal when net factor income from
abroad is zero.
• NNP = NDP + NFIA

NNP at factor cost or National
Income
• NNP at factor cost is the
volume of commodities and
services turned out during an
accounting year, counted
without duplication. It can also
be defined as the net value
added at factor cost in an
economy during an accounting
year.

NNP at factor cost or National Income
• NNP at factor cost or national income
is defined as the sum of domestic
factor incomes and net factor income
form abroad. If NNP figure is available
at market price we will subtract
indirect taxes and add subsidies to
the figure to get NNP at factor cost or
national income of the economy.

NNP at factor cost or National Income
• NNP at FC = National Income = FID +
NFIA
• FID factor income earned in the
domestic territory of a country.
• Net Factor Income from Abroad.

Personal Income and Disposable income
• Personal income and disposable
income are two concepts of national
income very commonly used in
advanced countries. Personal
income may be defined as the
current income of persons or
households from all services.
Personal income is not a measure of
production.

Disposable Income
• All personal income is not at the
disposal to be spent on consumption.
Individuals have to pay personal direct
taxes to the government. They are free
to spend only after the payment of
taxes.
• DPI = Personal income – Personal
Direct taxes.

Disposable Personal Outlay
• The disposable personal income may
be spent fully or individuals may
save. What remains after saving is
called the personal outlay. Disposable
income is equal to consumption and
savings.
• Disposable outlay = Disposable
income – Savings.

Real Income
• Since national income does not reveal
the real state of the economy, the
concepts of real income has been used.
To find out the real income of the
economy, a base year is selected and
the price level of that year is assumed
to be 100.
• Real income= Money Income × 100
Price Index

Methods of Measuring national income
• The national income of a country can
be measured in three alternative
ways
• Census of production method
• As a flow of income, and
• As a flow of expenditure
• Added to this, there is yet another
method of estimating national
income i.e., Value added method.

Product Method
• This method is popular in U.S.A. and is
called as Total Product method or
Goods Flow Method. In India, It is
known as inventory or Product method.
In this method, the economy is
classified in to three transaction sector
like industrial, services and foreign
transaction sector where international
payments are considered.

Product Method
•We calculate the money value of
all final goods and services
produced in an economy during
a year. The money value of these
goods and services is calculated
at market price. The sum-total is
called the GDP at market price

Income Method
• We estimate the income earned
by various factor services
engaged in the process of
production. The sum of these
incomes provides us the
measure of gross national
income at factor cost.

Income Method
• GNP = wages and salaries + rent
+interest + Dividends +
undistributed corporate profits +
mixed incomes + direct taxes +
indirect taxes + depreciation +
net income from abroad.

Expenditure method
•Prof. Samuelson calls this as “
Flow of Product Approach”. In
India, it is known as Outlay method.
GNP is the sum of expenditure
incurred on goods and services
during one year in a country.
•GNP = C + I + G + (x – M)

Expenditure method
• We sum up the flow of
expenditure in an economy to
arrive at national income
estimates, If we add the value
of expenditure on all these
items we get the value of gross
national expenditure at market
prices.

Value Added Method
• In order to avoid double counting
value added at each stage of
production should be calculated to
arrive at GNP. The difference between
the value of output and input at each
stage of production is called the value
added. By summing such value added
for all industries in the economy, GNP
can be found out.

Circular flow of national income
• Lipsey defined the circular flow of
income as “ the flow of payments
from domestic households to
domestic firms and back again”.
National income and expenditure
flow in a circular manner. In any
economy, both commodities and
factors of production are constantly
being exchanged for money.

•Simple Economy
•Two sector model = Y = C + I
•Three Sector Model = Y = C + I + G
•Four sector model = Y = C + I + G +(x – m)

•The concept of circular flow shows
clearly whether the economy is
working efficiently or whether there
is any disequilibrium in its working. It
also helps in restoring equilibrium.

Problems in estimating national income
• Simon Kuznets national income is not
limited to the territorial boundaries of a
country. We must include income of all the
residents of a country even if they are
abroad.
• Another difficulty in estimating the national
income in UDC is the prevalence of non-
monetized sector.

Problems in estimating national Income
• Income earned through illegal
activities is not included in national
income.
• Services rendered free of charge are
not included in GNP. By leaving out
these service, national income will
work out to be less

Problems in estimating national
income
•Transfer payments are not included in
national income as they do not contribute to
national product.
•Capital gains and losses are not included in
GNP as they are not the result of current
economic activities.

Problems in estimating national income
• In the calculation of national income leisure
foregone in the process of production is not
included.
• In UDC due to illiteracy, most producer do
no keep regular accounts.
• Another difficulty in the measurement of
national income in underdeveloped
countries is lack of adequate statistical data.

Trends in India’s national income growth and
structure
• Trend in NNP: The real national
income of India has increased at an
annual average rate of 4.4% during the
55 years of economic planning. If we
consider the last 14 years we find that
the rate of increase in the national
income has been around 6% per
annum. Although this is an
encouraging sign.

Trends in India’s national income
growth and structure
•During the tenth five year plan they
set up the target of 8% growth rate
but achieved at 7.6%, this
encouraged the eleventh planners
to set a target of 8.5% per annum
growth rate.

Trends in Per capita income
• India’s per capital net national product i.e.,
during the last 55 years of planning has
increased at a rate of 2.3% per annum. It is
to be noted that during the last 14 years the
rate of increase in per capita national
income is significant. It was around 4.5 %
per annum in this period as against 1.25%
per annum during the first 30 years of
economic planning.

Importance of National Income Analysis
• They provide as an index of economic
activity and an instrument of economic
planning.
• National income accounting indicates the
growth of the economy in terms of income
and output.
• National income statistics help the policy
makers to frame policies to achieve full
employment and rapid economic growth.

Importance of National Income Analysis
• A complete knowledge about the trends in
national income is essential in economic
planning.
• Research scholar also make use of national
income data pertaining to input, output,
saving, consumption, investment and
employment.
• National income statistics it helps in solving
the remove inequalities in income
distribution.

Multiple Choice Questions
Question 1
• “National income” is the money value
of
– final goods
– services
– final goods and services produced
annually in the economy
– intermediary goods

Answer: Question 1
• “National income” is the money value
of
– final goods
– services
– final goods and services produced
annually in the economy
– intermediary goods

Question 2
• Measurement of national income
in India was done by using
– income methods
– output methods
– expenditure methods
– both income and output
methods

Answer: Question 2
• Measurement of national income
in India was done by using
– income methods
– output methods
– expenditure methods
– both income and output
methods

Question 3
• The income method of measuring
national income can be applied in the
case of
– agriculture
– fishing
– animal husbandry
– trade and transport

Answer: Question 3
• The income method of measuring
case of
– agriculture
– fishing
– animal husbandry

Question 4
• The product method of measuring
case of
– agriculture and allied sectors
– organized banking
– small enterprises

Answer: Question 4
• The product method of measuring
case of
– agriculture and allied sectors
– organized banking
– small enterprises

Question 5
• The domestic product is estimated on
the basis of the prevailing prices it is
called
– GDP at current price
– GDP at constant price
– GDP at market price
– None of the above

Answer: Question 5
• The domestic product is estimated on
the basis of the prevailing prices it is
called
– GDP at current price
– GDP at constant price
– GDP at market price

Question 6
• If the GDP is measured at the price
prevailing point of time then it is called
– current price
– market price
– constant price
– none of the above

Answer: Question 6
•If the GDP is measured at the price
prevailing point of time then it is called
– current price
– market price
– constant price

Question 7
• GDP at factor cost can be measure as
– GDP at market price – Income tax +
Subsidies
– GDP at constant price – Income tax +
Subsidies
– GDP at current price - Income tax +
Subsidies

Answer: Question 7
• GDP at factor cost can be measure as
– GDP at market price – Income tax +
Subsidies
– GDP at constant price – Income tax +
Subsidies
– GDP at current price - Income tax +
Subsidies

Question 8
• GNP can be defined as
– GDP – Depreciation
– GDP + NFIA
– GDP – Subsidies
– NNP + NFIA

Answer: Question 8
• GNP can be defined as
– GDP – Depreciation
– GDP + NFIA
– GDP – Subsidies
– NNP + NFIA

Question 9
• Estimate of national income in
India are usually prepared by
– reserve bank of India
– planning commission
– central statistical organization
– national income committee

Answer: Question 9
• Estimate of national income in
India are usually prepared by
– reserve bank of India
– planning commission
– central statistical organization
– national income committee

Question 10
• One of the problems in estimating
the national income in India is
– low rate of savings
– widespread unemployment
– rapidly rising prices
– large non-monetized
transactions

Answer: Question 10
• One of the problems in estimating
the national income in India is
– low rate of savings
– widespread unemployment
– rapidly rising prices
– large non-monetized
transactions

Question 11
• Expenditure method is also called
as
– outlay method
– income method
– value added method

Answer: Question 11
• Expenditure method is also called
as
– outlay method
– income method
– value added method

Question 12
• Expenditure on final goods and
services is broadly classified in to
– consumption expenditure
– investment expenditure
– consumption and investment
expenditure

Answer: Question 12
• Expenditure on final goods and
services is broadly classified in to
– consumption expenditure
– investment expenditure
– consumption and investment
expenditure

Question 13
• The real national income of India
has increased at an annual
average rate of
1. 5.6%
2. 4.4.%
3. 7.8%
4. 8.9%

Answer: Question 13
• The real national income of India
has increased at an annual
average rate of
1. 5.6%
2. 4.4.%
3. 7.8%
4. 8.9%

Question 14
• For the past 14 years the net
national income has been around
1. 8%
2. 7%
3. 6%
4. 10%

Answer: Question 14
• For the past 14 years the net
national income has been around
1. 8%
2. 7%
3. 6%
4. 10%

Question 15
• India’s economic growth rate in
the tenth plan period was (2002-
07)
1. 6.5%
2. 8.0%
3. 8.5%
4. 7.6%

Answer: Question 15
• India’s economic growth rate in
the tenth plan period was (2002-
07)
1. 6.5%
2. 8.0%
3. 8.5%
4. 7.6%

Question 16
• Per capita income can be
calculate by
– national income / population
– national income – population
– national income * population
– national income + population

Answer: Question 16
• Per capita income can be
calculate by
– national income / population
– national income – population
– national income * population
– national income + population

Question 17
• NDP can be calculated as
1. GNP – Depreciation
2. GDP – Subsidies
3. GDP – Depreciation
4. GNP – Subsidies

Answer: Question 17
• NDP can be calculated as
1. GNP – Depreciation
2. GDP – Subsidies
3. GDP – Depreciation
4. GNP – Subsidies

Question 18
• If the GDP is measured at the
price prevailing point of time then
it is called
– current price
– market price
– constant price

Answer: Question 18
• If the GDP is measured at the
price prevailing point of time then
it is called
– current price
– market price
– constant price

Question 19
• NNP at factor cost is
– NNP at constant price – net direct
taxes
– NNP at market price – net indirect
taxes
– GNP at market price – net direct
taxes
– GNP at constant price – net indirect
taxes

Answer: Question 19
•NNP at factor cost is
– NNP at constant price – net direct
taxes
– NNP at market price – net indirect
taxes
– GNP at market price – net direct taxes
– GNP at constant price – net indirect
taxes

Question 20
• GNP at factor cost is
– GNP at market price – depreciation
– GNP at market price – net indirect
taxes
– GNP at market price – net income
form abroad
– GDP at market price – net indirect
taxes

Answer: Question 20
•GNP at factor cost is
– GNP at market price – depreciation
– GNP at market price – net indirect
taxes
– GNP at market price – net income form
abroad
– GDP at market price – net indirect
taxes

Mathematical summaries of various
concept
• GNP at market price – depreciation =
NNP at market price
• GNP at market price – net income from
abroad = GDP at market price
• GNP at market price – net indirect taxes
= GNP at factor cost.
• NNP at market price – net income from
abroad = NDP at market price
• NNP at market price – net indirect taxes
= NNP at factor cost

Mathematical summaries of various
concept
• GDP at market price – net indirect
taxes = GDP at factor cost
• GNP at factor cost – depreciation =
NNP at factor cost
• NDP at market price – net indirect
taxes = NDP at factor cost
• GDP at factor cost – depreciation =
NDP at factor cost.

Concepts & methods of national income

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