National Income — Clean Notes
Based on Parmar SSC Notes · Economics / Indian Economy
Circular Flow of Income
Households own factors of production and supply them to firms. Firms produce goods/
services and sell them back to households. Money flows continuously between the two
sectors.
Factor Payment
Land Rent
Labour Wages
Capital Interest
Entrepreneurs Profit
Rent, wages, interest, and profit are collectively called factor payments.
Four Key Aggregates
GDP GNP
Gross Domestic Product Gross National Product
Total value of all final goods & services Total value of all final goods & services
produced within the territory of a country in produced by the nationals of the country
a financial year (1 Apr – 31 Mar)
NDP NNP
Net Domestic Product Net National Product
= GDP − Depreciation = GNP − Depreciation · Also called
National Income (FC)
→ Horizontal: + NFIA ↓ Vertical: − Depreciation
Key Formulas
Domestic ↔ National
GNP = GDP + Net Factor Income from Abroad (NFIA)
NNP = NDP + NFIA
Gross ↔ Net
NDP = GDP − Depreciation
NNP = GNP − Depreciation
Market Price ↔ Factor Cost
FC = MP − Net Indirect Tax (Net IT = Indirect Tax − Subsidy)
GDPFC = GDPMP − Indirect Tax + Subsidy
Basic Price = FC + Net Production Tax *Net Production Tax =
Production Tax − Subsidy
NNP at Factor Cost = National Income (official definition)
GDP Deflator & Real vs Nominal GDP
GDP Deflator = (Nominal GDP ÷ Real GDP) × 100
Real GDP Nominal GDP
• Calculated at constant (base year) • Calculated at current prices
prices • Not inflation-adjusted
• Inflation-adjusted • Always ≥ Real GDP (due to
• Base year in India: 2011-12 inflation)
• Truer measure of growth • Irving Fisher: "Money Illusion"
Methods to Calculate GDP
1. Value Added / Product Method
Value Added = Output − Input (intermediate costs)
Avoids double counting. India uses GVA at basic prices (since 2015) for sector-wise
contributions.
Stage Cotton Yarn Cloth Shirt
Market Value ₹100 ₹200 ₹400 ₹800
Value Added ₹100 ₹100 ₹200 ₹400
Sum of value added = ₹800 = Final product price. No double counting.
2. Income Method
Sum of all factor payments:
• Compensation to employees (wages & salaries)
• Operating surplus (rent + interest + profit)
• Mixed income (self-employed / unorganised sector)
3. Expenditure Method
GDP = C + G + I + (X − M)
• C — Private consumption expenditure
• G — Government expenditure
• I — Investment (gross capital formation)
• X − M — Net exports (exports minus imports)
Types of Goods
Final Goods Intermediate Goods
• Used by end consumer; not • Semi-finished; used as input in
processed further production
• Consumer goods: personal • Not counted in GDP (avoids double
consumption counting)
• Capital goods: used to produce • Ex: Tea bought by a tea shop to
other goods resell
• Ex: Tea bought for personal use
Inventory Goods
Planned Unplanned
Accumulation Intentional stock increase based Unexpected stock build-up due
on anticipated demand to fall in sales
Decumulation Intentional stock reduction to Unexpected reduction due to
match demand demand surge, theft, etc.
Stock vs Flow
Stock Flow
Measured at a point in time Measured over a period of time
Ex: Wealth, loan, inventory, capital Ex: Income, expenditure, depreciation,
change in inventory
Personal & Disposable Income
Personal Income (PI) = NI + Transfer payments + Net interest paid by
Govt. − Corporate tax − Social security payments
Personal Disposable Income = PI − Tax
Transfer payments (e.g. subsidies) = income received but not earned through production
Other Key Concepts
Per Capita Income
Per Capita Income = National Income ÷ Population
Purchasing Power Parity (PPP)
Compares countries using a common basket of goods. India ranks 3rd by PPP (after
USA & China) vs 5th by nominal GDP. PPP makes India's economy appear larger
because prices are lower here.
Special GDP Variants
Green GDP = GDP − Environmental Damage
Recessionary Gap = Potential GDP − Real GDP
Important Facts
• GDP concept developed by Simon Kuznets (American economist, 1934)
• GDP calculated by National Statistical Office (NSO) under MoSPI
• Base year for India's GDP: 2011-12
• Second-hand goods are not counted in GDP
• Household income is not directly counted in GDP
• NNP at FC = National Income (official definition)
India's GDP Ranking (Nominal)
Rank Country
1 USA
2 China
3 Germany
4 Japan
5 India