NATIONAL INCOME
This chapter is basically answering ONE
question:
“How much income does a country generate in
one year?”
But there are many ways to measure it → GDP,
GNP, NDP, NNP, Personal Income, Disposable
Income etc.
1. What is National Income?
Definition:
National Income = Total income earned by
normal residents of a country during one year
from production of goods and services.
Income can be:
Wages → Labour
Rent → Land
Interest → Capital
Profit → Entrepreneurship
Formula:
National Income = NNP at FC
(THIS IS THE MOST IMPORTANT FORMULA)
Where:
NNP = Net National Product
FC = Factor Cost
2. Basic Concepts (VERY IMPORTANT)
A. Domestic Territory
Area under economic control of government.
Includes: ✔ India
✔ Indian embassies abroad
✔ Ships and aircraft owned by Indians
Excludes: ✘ Foreign embassies in India
B. Normal Residents
People/organizations living in a country for
more than one year and having economic
interest there.
Example:
Indian working in India → Resident
Foreign company operating in India →
Resident
Tourist → Not resident
3. Stock vs Flow
Stock
Measured at a point of time.
Examples:
Wealth
Population
Money supply
Flow
Measured over a period.
Examples:
Income
Production
Expenditure
Exam favourite: National Income → FLOW
[Link] Flow of Incom
Shows movement between:
Households → Firms
Households provide:
Labour
Land
Capital
Firms provide:
Income
Simple cycle:
Households → Factors → Firms
Households ← Income ← Firms
4. GDP (Gross Domestic Product)
MOST IMPORTANT.
Definition:
Total value of final goods and services
produced within domestic territory in one year.
Formula:
GDP = Value of Output − Intermediate
Consumption
OR
GDP = C + I + G + (X − M)
Where:
C = Consumption
I = Investment
G = Government expenditure
X = Exports
M = Imports
Gross means:
Depreciation included.
Domestic means:
Produced inside India.
Product means:
Goods + Services.
5. GNP (Gross National Product)
Definition:
Total output produced by normal residents.
Formula:
GNP = GDP + NFIA
Where: NFIA = Net Factor Income from Abroad
NFIA
Formula:
Income received from abroad
− Income paid abroad
Positive → GNP > GDP
Negative → GDP > GNP
Example: Indian engineer earning abroad.
6. Net Product
Net means depreciation removed.
Depreciation:
Loss in value of machinery.
Formula:
NDP = GDP − Depreciation
NNP = GNP − Depreciation
7. Market Price (MP) and Factor Cost (FC)
THIS CONFUSES EVERYONE.
Market Price (MP)
Price consumers pay.
Includes: ✔ Taxes
Subtract: ✘ Subsidies
Formula:
MP = FC + Indirect Tax − Subsidy
Factor Cost (FC)
Amount producers actually receive.
Formula:
FC = MP − Indirect Tax + Subsidy
8. Complete Conversion Formula (SUPER
IMPORTANT)
GDPMP
↓ − Depreciation
NDPMP
↓ + NFIA
NNPMP
↓ − Indirect Tax
↓ + Subsidy
NNPFC
= NATIONAL INCOME
Shortcut:
GDPMP
− Depreciation
NFIA
− Net Indirect Tax
= National Income
(Net Indirect Tax = Indirect Tax − Subsidy)
[Link] Income (PI)
Income actually received by households.
Formula:
PI = NI − Corporate Tax − Undistributed Profit
− Social Security Contribution + Transfer
Payments
Transfer payments:
Pension
Scholarship
(No production involved)
1. Personal Disposable Income (PDI)
Income left for spending.
Formula:
PDI = PI − Personal Tax
OR
PDI = Consumption + Saving
2. Private Income
Income earned by private sector.
Formula:
Private Income = NI + Transfer Income + NFIA
− Income from government
3. Nominal GDP vs Real GDP
Nominal GDP
Current year prices.
Price effect included.
Formula: Current Quantity × Current Price
Real GDP
Base year prices.
Removes inflation.
Formula: Current Quantity × Base Year Price
4. GDP Deflator
Measures inflation.
Formula:
GDP Deflator = Nominal GDP ÷ Real GDP × 100
5. Value Added Method
VERY IMPORTANT NUMERICAL.
Value Added
= Value of Output − Intermediate Consumption
Example:
Farmer → ₹100
Miller → ₹250
Value Added: 250−100 = ₹150
National Income = Sum of value added.
6. Final Goods vs Intermediate Goods
Final Goods
Bought for final use.
Example: Bread for eating.
Intermediate Goods
Used for further production.
Example: Flour for bakery.
7. Methods of Calculating National Income
A. Product Method
Total value added.
B. Income Method
Add factor incomes:
Wages
Rent
Interest
Profit
C. Expenditure Method
Add expenditure: C + I + G + (X−M)
All should theoretically give same answer.
ONE PAGE FORMULA REVISION
National Income = NNPFC
GDP = C+I+G+(X−M)
GNP = GDP+NFIA
NDP = GDP−Depreciation
NNP = GNP−Depreciation
MP = FC+Indirect Tax−Subsidy
FC = MP−Indirect Tax+Subsidy
PDI = PI−Personal Tax
GDP Deflator = Nominal GDP/Real GDP×100
Common CBSE 3–5 markers
Difference between GDP and GNP
Explain stock and flow
Define depreciation
Explain NFIA
Explain circular flow
Difference between MP and FC
Nominal vs Real GDP
Now quick test (don’t see notes 😏):
National Income = ______
GDP measures production inside ______
Formula of GNP?
MP → FC conversion formula?
If GDP = 1000 and NFIA = −50, find GNP.
Is National Income stock or flow?
What does depreciation mean?