UNIT V

NATIONAL INCOME AND

RELATED AGGREGATES
Points to Remember
 Goods : In economics goods is defined as any physical object.
natural or man made, that could command a price in the market.
Goods are items that are tangible, such as books, pen, shoes,
car etc.
 Services : It is a part of production that is intangible. A service is
consumed at the point of production. Such as banking, insurance,
postal service etc.
 Consumption Goods : Those final goods which are used by
the consumers to satisfy human wants directly. All goods and
services purchased by consumers are consumer goods.
 Capital Goods : Those final goods which are used for investion
by the producers in production of goods and services. These
goods are of durable nature.
 Final Goods : Those goods which are purchased either for final
consumption by consumers (consumers goods) or for investment
by producers (capital goods). These are not for resale or for
further processing.
 Intermediate Goods : Those goods and services which are
purchased for as a raw material for further production or for resale
in the same year. These goods do not fulfill needs of mankind
directly. Services used by the producers are intermediate goods.
e.g. Service of Lawyers, Mechanics, Charted Accountants etc.
 Investment : Value of addition made to the physical stock of
capital during a period of time (financial year) is called investment.
It is also called capital formation.

85 Class XII - Economics

  Depreciation : means fall in value of fixed capital goods due to
normal wear and tear, expected obsolescence and efflux of time.
It is also known as consumption of fixed capital. Depreciation
can be calculated by dividing the value of fixed capital by its
expected life in years.
 Gross Investment : Total addition made to physical stock of capital
during a period of time. It includes depreciation. It is also known as
Gross Capital formation.
 Net Investment : Net addition made to the real stock of capital
during a period of time. It excludes depreciation. Net Investment
= Gross investment – Depreciation.
 Stocks : Variables whose magnitude is measured at a particular
point of time are called stock variables. e.g., Wealth, assets,
money, Inventory etc. A stock variable is nothing but an
accumulated sum of flows.
 Flow : Variables whose magnitude is measured over a period of
time are called flow variable. Eg. National income, change in
stock etc.
 Circular flow of income : It refers to continuous flow of goods
and services and money income between firms and households
in two sector economy. It is circular in nature. It has neither any
end nor any beginning point. Real flow shows the flow of produced
goods and services and factor services between firms and
households. Money flow shows the flow of consumption/
investment expenditure and factor payments between firms and
households.
 Leakage : It is the amount of money which is withdrawn from
circular flow of income. e.g. Taxes, Savings and Imports.
 Injection : It is the amount of money which is added to the circular
flow of income. e.g., Govt. Exp., Investment and Exports.
 Economic Territory : Economic (or domestic) Territory is the
geographical territory administrated by a Government within
which persons, goods and capital circulate freely.

Class XII - Economics 86

 Scope of Economic Territory :
(a) Political frontiers including territorial waters and airspace.
(b) Embassies, consulates, military bases etc. located abroad.
(c) Ships and aircraft operated by the residents between two
or more countries.
(d) Fishing vessels, oil and natural gas rigs operated by
residents in the international waters.
 Normal Resident of a Country : is a person or an institution
who normally resides in a country and whose centre of economic
interest lies in that country.
 Factor Income : Income earned by the factors of production
(Labour, Land, Capital and Enterpreneurship) for rendering factor
services in the production process. e.g., Rent, Interest, wages
and profit.
 Transfer payments : refers to income received without rendering
any productrive service in return. They are one sided payments
made without getting anything in return e.g., old age pension,
taxes, scholarships etc.
 Capital gain : An increase in the value of capital assets or
financial assets over the time that gives it a higher worth than
the purchase price. The gain is not realized until the asset is
sold.
 Compensation of employees : Payment to labour factor
(employees and workers) in cash or kind for providing factor
services during the production of goods and services. It includes
salary, wages, bonus, pension, contribution by emplyer in social
sercurity schemes etc.
 Operating Surplus : During the operation of production money
left after the payment of compensation of Employees is called
operating surplus. It is the sum of Rent, Interest and Profit.
 Subsidies : A subsidy is an amount of money given directly to
firms by the government to encourage production and
consumption. It reduce the market price.

87 Class XII - Economics

  Value of Output : Market value of all goods and services produced
by an enterprise during an accounting year. Value of Output = Sales
+ Change in Stock.
 Value added : It is the difference between value of output of a firm
and value of intermediate goods bought from the other firms during
a particular period of time. Value added=value of output-
Intermediate consumption.
 Domestic Income (NDPFC) : It is the factor income accuring to
owners of factors of production for suppling factor services with
in domestic territory during an accounting year.
NDPFC = GDPMP – Depreciation – NIT.
 Gross Domestic Product at Market Price (GDPmp): is the
market value of all the final goods and services produced by all
producing units located in the domestic territory of a Country
during an Accounting year.
 Net Domestic Product at Market Price (NDPmp) : NDPMP =
GDPMP – Depreciation (Consumption of fixed capital)

NATIONAL AGGREGATES
 Gross National Product at Market Price (GNPMP) is the market
value of all the final goods and services produced by normal
residents (in the domestic territory and abroad) of a country during
an accounting year. GDPMP + NFIA = GNPMP
 National Income (NNPFC) : It is the sum total of all factors
incomes earned by normal residents of a country in the form of
wages. Rent, Interest and profit during an accounting year in
domestic economic territory as well as abroad.
NNPFC = NDPFC + NFIFA = National Income.
Some Important Relations
 Gross = Net + Depreciation (consumption of fixed capital)
 National = Domestic + NFIFA (Net factor income from abroad)
 Market Price = Factor Cost + NIT (Net Indirect Tax)

Class XII - Economics 88

  Net Indirect Tax (NIT) = Indirect Tax – Subsidies
 Net Factor Income from Abroad (NFIFA) = It is diffrerence between
factor income received/earned by normal residents of a country
and factor income paid to nonresidents of the country.
Componetns of NFIFA

Methods of estimation of National Income

Value Added Method (Product Method) :
Gross Value Added at Market Price (GVAMP)
= Sales + change in stock – Intermediate Consumption.
= GDPMP = GVAMP of all sectors
OR
= Value of output – Intermediate consumption
NVAFC = GVAMP – Depriciation – NIT
 National Income = NNPFC = GDPMP – Depreciation + NFIFA –
NIT
Steps to be followed :
1. Write Sales value (Add sales of all sectors if given sector
wise)
2. Add : Change in stock (Closing stock – opening stock if
given separately).
3. Subtract : Intermediate consumption
Capital goods are not intermediate good.
You have reached GDPMP
National Income (NNPFC) = GDPMP – Depreciation + NFIFA
– NIT

89 Class XII - Economics

  Income Method (Factor Income distribution method):
Domestic Income (NDPFC) = Compensation of Employees +
Operating Surplus + Mixed Income
National Income (NNPFC) = NDPFC + NFIFA
Steps to be followed :
1. Write compensation of Employees (if not given add salary,
wages, bonus, contribution by employer in social security
schemes).
2. Add : Operating Surplus (If not Given add interest, Rent &
Royalty and Profit).
3. Add : Mixed Income of self employed. You have reached
NDPFC
National Income (NNPFC) = NDPFC + NFIFA
 Expenditure Method :
GDPMP = C + G + I + (X – M)
Steps to be followed :
1. Write Private Final Consumption Expenditure
2. Add : Government Final Consumption Expenditure
3. Add : Gross Domestic Capital Formation
4. Add : Net Exports (Export – Imports)
You have reached at GDPMP
National Income (NNPFC) = GDPMP – Depreciation + NFIFA
– NIT
 Problem of Double Counting : Counting the value of a
commodity more than once while estimating national income is
called double counting. It leads to overestimation of national
income. So, it is called problem of double counting.

Class XII - Economics 90

 (I)

Components of Domestic Income

1. Compensation of 2. Operating 3. Mixed Income of

Employees surplus self-Employed
person

a. Wages and b. Employers Rent & Royalty Interest Profit

salaries Contribution to
(Cash or Social security
kinds) Schemes Corporate Dividend Undistributed
Tax corporate profit

91 Class XII - Economics

  GDP and Welfare : In general Real GDP and Welfare are directly
related with each other. A higher GDP implies that more
production of goods and services. It means more availability of
goods and services. But more goods and services may not
necessarily indicate that the people were better off during the
year. In other words, a higher GDP may not necessarily mean
higher welfare of the people.
 Real GDP : When the goods and services are produced by all
producing units in the domestic territory of a country during an
accounting year and valued at base year's prices or constant
price, is called real GDP or GDP at constant prices. It changes
only by change in physical output not by change in price level. It
is called a true indicator of economic devleopment.
 Nominal GDP : When the goods and services are produced by
all producing units in the domestic territory of a country during
an accounting year and valued at current year's prices or current
prices, is called Nominal GDP or GDP at current prices. It is
influenced by change in both physical output and price level. It is
not considered a true indicator of economic development.
 Conversion of Nominal GDP into Real GDP
Nominal GDP
Real GDP = 100
Price index
Price index plays the role of deflator deflating current price
estimates into constant price estimates. In this way it may be
called GDP deflator.
 Welfare mean material well being of the people. It depends on
many economic factors like national income, consumption level
quantity of goods etc and non-economic factor like environmental
pollution, law and order etc. the welfare which depends on
economic factors is called economic welfare and the welfare
which depends on non-economic factor is called non-economic
welfare. The sum total of economic and non-economic welfare
is called social welfare. The limitations in taking GDP as welfare
measure are as follows :
1. Externalities : Externalities refer to benefits or harms of an

Class XII - Economics 92

 activity caused by a firm or an individual, for which they are not
paid or penalized. For example, environmental pollution caused
by industrial plants is a negative externality and building a flyover
is a positive externality.
2. Composition of GDP : GDP does not exhibit the structure of
the product. If the increase in GDP is mainly due to increased
production of war equipment's and ammunitions, then such an
increase cannot improve welfare in economy.
3. Distribution of GDP : When GDP is unevenly distrubuted,
increase in GDP does not increase welfare.
4. Non-monetary exchanges : Many activities in an economy are
not evaluated in monetary terms, they are not included in GDP,
due to non availability of data. However, such activities influence
the economic welfare of people of the economy.
Finally, it can be concluded that GDP may not be taken as a
satisfactory measure of economic welfare due to above
mentioned limitations, yet it does reflect some index of economic
welfare.

MULTIPLE CHOICE QUESTIONS (1 MARK)

1. National Income is the sum of factor income accuring to :
(a) Nationals (b) Economic territory
(c) Residents
(d) Both residents and non residents
2. A 'resident' of a country is one :
(a) who was born in that country
(b) who lives in that country
(c) who is the citizen of that country
(d) who lives, earn, spend and accumulates in that country.
3. When goods and services are produced in a year valued at
current years prices is called
(a) Real GDP (b) GDP at constant prices
(c) National Product (d) GDP at current prices

93 Class XII - Economics