Daksh Academy Sec- 13 Dwarka

Class - XII

National Income
1. Macroeconomics – Macroeconomics is defined as that branch of economics which studies
economic issues or problems of an economy as a whole.
The study of aggregate economic activities is known as Macro economics. Ex- National Income.
J M Keynes is called as Father of Modern Macro Economics.
MICRO ECONOMICS MACRO ECONOMICS
It is that part of economic theory which It is that part of economic theory which
studies the behaviour of individual units of an
studies the behaviour of aggregates of the
economy. economy as a whole.
Its main tools are demand and supply. Its main tools are Aggregate demand and
Aggregate supply.
Its main aim is to determine price of a Its main aim is to determine income and
commodity. employment level in the economy.
It is also known as Price Theory. It is also known as income and employment
theory.
Ex.: Demand of a consumer, Supply of a firm, Ex.: AD, AS, National Income, GDP etc.
Income of a person etc.

Micro-Macro Paradox : The concepts which are logical at the micro level may not be logical at
macro level.
For example- Saving is virtue (good) at micro level as if an individual saves more, he adds to his
future prosperity and it can help in capital formation. But Saving is vice(bad) at macro level as if
all people in an economy save more(and spend less), demand for goods and services will fall.
Consequently investment, production and employment will decline.
Micro-Macro Interdependence :
Macro impacts Micro- For ex.-Increase in interest rate by RBI will leads to increase in interest
rate by commercial banks ,which will leads to decrease in investment by the individual
producers.

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Micro impacts Macro- Increase in spending at individual level will leads to rise in AD (aggregate
demand) in the economy , which leads to rise in level of output and employment in the
economy.
Significance of Macro Economics:
• It provides description of the economy
• It provides roadmap for business decisions.
• It is helpful in policy formulation.
• It is helpful in study of global issues.
• To understand structural changes and growth path of the economy.

2. Economic Agents : Economic agents refer to all the individuals or group of individuals
which take economic decisions. They can be consumers, producers and the government.
Four Sectors of an Economy – Household sector(consumers),Firm sector(producers),
Government sector, External sector( rest of the world)

[Link] between stock and flow -

Stock Flow
When we measure a variable at a particular When we measure a variable during a certain
point of time then it is known as stock period of time then it is known as flow.

It is a static concept. It Is a dynamic concept.

It has no time dimensions. It has time dimensions

Example: Stock of goods, money supply, Example: income, investment, savings,

wealth, population, bank balance etc. population growth, bank deposits, number of
birth or death.

4. Circular flow of income-

In an economy each sector depends upon the other. The system of interdependence between
the sectors of economic activity is called circular flow of income.
Phases of circular flow of income- There are 3 phases of circular flow- Production( generation)
phase, distribution (income) phase, and disposition ( expenditure) phase.
In production phase, goods and services are produced by firms by using factors of production.
It is also known as generation phase.
In distribution phase, firms make factor payment to household for providing their services. It
means households get income for providing factor services. So in this phase there is distribution
of income. In disposition phase , income is spent on purchase of final goods and services. So it
is also known as expenditure phase.
In short, production generates income, Income generates expenditure and expenditure
generates production.

Leakages and Injections-

Leakage means withdrawal of money from the circular flow. There are three components of
leakages- savings, tax and import.
Injection means introduction of income into the circular flow. There are 3 components of
injection- Investment, Government expenditure and export.
[Link] of Circular flow- (Real Flow and Money Flow)
Real Flow – It refers to flow of factor services and the flow of goods and services between
households and firms. Household sector are the owner of factors, so they provide factor services
to firms. Firm sector produces goods and services with the help of factors and provide these
goods and services to household sector. It is known as real flow because there is actual flow of
goods and services.

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Money Flow- It refers to flow of factor payments and payment for goods and services between
households and firms. Firm sector makes the payment of factor services to household sector.
And household sector makes the payment of goods and services to firm sector. It is known as
money flow because there is exchange of money between these two sectors.

Real Flow Money flow

It is the flow of goods and services between It is the flow of money between households
Households and firms. and firms.
It involves exchange of goods and services. It involves exchange of money.
It is also known as physical flow. It is also known as nominal flow.

[Link] Flow of income in two sector economy –

There are two sectors in the economy – Household sector and Firm sector. Household provide
factor services to firm and firm makes payment of these factors to household sector. Firm sector
provides goods and services to household and household sector makes payment of these goods
and services to firms. So this type of flow between household and firms is called as circular flow
of income in two sector economy. There is no government or foreign trade.
7. Final goods and Intermediate goods-
Final goods Intermediate goods
Those goods which are used for final Those goods which are used for further
consumption or for final investment. production or used for resale.
These goods have crossed the production These goods are within the production
boundary. boundary.
These goods are included in national These goods are not included in national income.
income.
Example- Milk purchased by household, Example- Milk purchased by a dairy shop,
Furniture purchased for office, Machines Stationery purchased for office use, Machine
purchased by producers. purchased by a dealer.
These goods have direct demand. These goods have derived demand as its demand
depends upon the demand for final goods.

8. Consumer goods and Producer goods-

Consumer goods are those goods which are used by consumers to satisfy their wants. These
can be classified into 4 categories-
Durable consumer goods like car, TV, washing machine, computer etc.
Semi durable consumer goods like clothes, shoes etc.
Non durable goods Like eatable items, Petrol, Ink etc.
Services like transport, education, healthcare, etc.
Producer goods are all those things which are used in production of other goods.
These goods are of 2 types-
Intermediate goods- Goods used as raw material by producers. These are also known as single
use producer goods.
Capital goods- Those final goods which help in production of other goods and service. These are
also known as durable producer goods Like machinery, furniture etc.
(Ques- Is Machine purchased always a capital good? Comment.)
Note : All capital goods are producer goods but all producer goods are not capital goods.
Similarly, all intermediate goods are producer goods, but all producer goods are not
intermediate goods.
Distinguish between consumer goods and capital goods-
Consumer Goods Capital Goods
These goods are used by consumers for final These goods are used by producers in
consumption. production process.
These goods directly satisfy human wants, so These goods indirectly satisfy human wants,
they have direct demand. so they have derived demand.
These goods may be durable or non durable. These goods are always durable.
These are meant for final consumption. These are meant for final investment.

[Link] for Self consumption and Production for exchange.

Production for Self consumption - Goods produced by the producers and kept for their own
use are called as goods for self consumption. It is also known as own account production.
Example- Wheat produced by a farmer for his own family consumption.
Production for Exchange- Goods produced for sale in the market are known as goods for
exchange. Example: Wheat produced by a farmer for sale in the market.
Note: Goods either for self consumption or for exchange, both are included in national income.
Services produced for self consumption are not included in national income. Like services of
housewife, Domestic services like cooking, housekeeping etc.

10.
Factor inputs Non factor inputs
Those inputs which do not lose their identity Those inputs which lose their identity after use
after use in production are known as factor in production are known as non factor inputs.
inputs.
These can be used for many times in These can be used only for one time in
production process. production process.
Example: Land, Labour, capital, Example: Raw material ,Fuel etc.
entrepreneur.
These are also known as primary inputs. These are also known as secondary inputs.
11.
Factor Income Transfer Income
It is received in return for rendering It is received without rendering any productive
productive services. services.
It includes rent interest, wages, and profit. It includes Old age pension, Unemployment
Allowances, Gifts, etc.
It is received by factors of production. It is received by household, firms and
government.
It is included in national income. It is not included in national income.
It is a concept of earning. It is a concept of receipt.

12. GDP (Gross Domestic Product) –

It is the market value of all final goods and services produced in the country (domestic territory)
in a year.
Real GDP and Nominal GDP-
Real GDP Nominal GDP
When we calculate GDP on the basis of When we calculate GDP on the basis of
base year’s price then it is known as current year’s price then it is known as
real GDP. nominal GDP.
It Is also known as GDP at constant It is also known as GDP at current price.
price.
It is affected only by change in output.
It is effected by both change in output
and change in price.
It can be compared with previous It cannot be compared with previous
year's GDP. year's GDP.
It is a true indicator of economic It is not a true indicator of economic
growth. growth.

Real GDP = Nominal GDP × 100

Price Index
GDP Deflator = Nominal GDP × 100
Real GDP
13. GDP and Welfare –
Q. Does GDP reflects economic welfare?
Ans. Economic welfare means better and higher level of standard of living. It is a sense of
material well being among the people. GDP is an indicator of economic growth but it is not an
adequate index of economic welfare because of following limitations—
A) Composition of GDP : If an increase in GDP is due to production of war material (defence
goods), or socially harmful goods like liquor, cigarettes etc. then this kind of increase in GDP will
not increase economic welfare.
B) Change in price: If increase in GDP is only due to increase in prices, not due to increase in
output then it will not leads to economic welfare.
C) Distribution of GDP: If the GDP of a country is rising but along with this, inequality of income
is also increasing (i.e rich become more rich and poor become more poor),then the welfare of
country will not increase. Because GDP does not take into account the distribution of income.
D) Growth rate of population: If the growth rate of population is higher than the growth rate of
GDP, then per capita income/ GDP will fall. In such case Economic welfare will be adversely
affected.
E) Non Monetary Exchange: Many activities in an economy are not measured in terms of money.
But these activities may contribute to people’s welfare like -Teacher is teaching his own son,
Charitable hospitals, domestic services by housewives etc. Hence GDP does not reflect the
welfare correctly.
F) Externalities : It refers to those activities which may give benefit or harm to the other section
of society but for which people are not paid or penalized. Production activities that result in
benefit to others are called positive externalities. And those which results in harm to others are
called negative externalities. These externalities effect the economic welfare of community but
these are not taken into an account of GDP.
For Example: If an industry is setup in a rural area, then it will provide employment to the people
and will add to GDP. But it spreads air and water pollution ,so it will reduce welfare level of the
society.

14. Public Goods V/s Private Goods :

Public goods are those goods which are provided by the government for collective use by public
and these goods are funded through taxes.( Like : Public parks, National Defence, street lights,
roads , govt. hospitals and schools etc.)
Features of public goods:
a) Non-excludability: Everyone can enjoy the benefit of public goods .It is impossible to
prevent anyone from getting its benefits, even they do not pay or contribute to its cost.
b) Non-rivalry : One person’s consumption of public goods doesn’t reduce the availability or
quality of that good for other. It means everyone can enjoy its benefit equally at same
time.
c) Free Rider problem : Since public goods are non-excludable, no individual will be willing
to pay for public goods, which leads to the problem of free rider.

Private goods are those goods which are provided by individuals or firms to others in exchange
of some monetary benefit. (Like : Food, houses, cars, movie ticket etc.)
Features of private goods:
a) Excludability : It means those who are not paying for these goods can be excluded /
stopped from using it or getting its benefits.
b) Rivalry : One person’s consumption of these goods can reduce its availability for others at
same time.

15. Concept of Domestic Territory-

Domestic territory and economic territory are the same thing. It includes the following :
a) All the political boundaries (Land area, sea area, and airspace.)
b) Ships and aircrafts operated by our residents running between two or more countries.
c) Fishing vessels and oil rigs operated by our residents running in international Water areas.
d) Embassies, military bases, Scientific Stations, immigration offices etc. of our country
located in other countries
It does not includes :
a) Embassies ,Military bases, Scientific Stations, immigration offices of other countries
located in our country.
b) Offices of international organisations like World Bank, IMF, etc. located in our country.
Important Note : All the production activities carried out inside our domestic territory are
included in our domestic income.
All the production activities carried out outside our territory are not included in a domestic
income.
 Following are part of domestic territory of Following are not part of domestic territory
India of India
Google Office in India. An Indian company located Abroad.
Branch of foreign bank in India. Branch of SBI in London.
Indian Embassy in USA. US embassy in India.
Planes operated by Air India between India Planes operated by British Airways between
and Japan. India and Britain.
Microsoft Office in India. Office of WHO in India.

16. Concept of Normal Resident of a country:

Residents and Citizens are two different terms. Generally, normal resident is a person or
institution who resides in a country for at least one year or more and whose centre of economic
interest lies in that country.(Economic interest means that residents carries out the basic
activities like earnings ,spending with in the same country) .While citizen is a person who is born
in India or Indian Law allows him to become a citizen(if born outside of India)
In this regard, following points should be kept in mind –
a) An individual or an institution both can be normal resident of a country.
b) A citizen or non citizen both can be a normal resident of a country.
c) International bodies like WHO, WTO cannot be treated as a resident of a particular
country in which these organizations operates .The employees of these organizations are
considered resident of the countries to which they belong. But if the period of stay is one
or more than one year, then they will become the normal resident of the country where
the organization is situated.
d) Border workers who live near the international borders and cross the border on regular
basis to work in other country. They are treated as normal resident of the country where
they live, not where they work.
e) Local employees working in foreign embassies located in their country are treated as
normal resident of their own country. For example, Indians working in American embassy
located in India are residents of India.
Important note : Income earned by normal residents of a country weather it is earned
inside our country or outside the country will be included in our national income.
Income earned by non residents of a country, whether it is earned within our country, is
not included in our national income.
 Following are normal residents of India. Following are not normal residents of India.
Indian tourist visiting abroad. Foreign tourists visiting India.
Indian staff of India’s Embassy in Abroad. Foreign staff of foreign embassy in India.
Indian employees working in International Foreign employees working in International
organisations in India. Organisations in India.
Foreign citizens living in India for more than Foreign workers working in India for less one
one year. year.

17. The concept of Investment.

Capital is one of the basic factor of production. Increase in the stock of capital during a year is
called as investment. Investment is also called as Capital formation.
Examples :Purchase of machinery, Change in inventory.
Fixed Investment : It implies an increase in the stock of fixed capital assets of a firm during a
year. Expenditure on purchase of capital goods like plant, machinery, building etc. is called fixed
investment. It is also known as fixed capital formation.
Inventory investment. It refers to change in stock of finished goods, semi finished goods and
raw material during an accounting year.
Inventory investment ( or Change in stock) = Closing stock- Opening stock
Gross Investment: Expenditure on purchase of fixed assets and expenditure on inventory stock
during a year is called gross investment. It also includes current replacement cost or
depreciation.
So, gross investment includes the following 3 items :
a) Expenditure on purchase of new assets.
b) Inventory investment.
c) Replacement investment ( depreciation)
Net investment = Gross investment—Depreciation

[Link] of Depreciation, Net Indirect tax and NFIA :

A) Depreciation or ( Consumption of fixed capital) or (Current replacement cost) –
Fall in the value of fixed assets due to normal wear and tear and expected obsolescence is called
as depreciation. It occurs due to following causes –
 a) Normal wear and tear (Continuous use of fixed assets in production process decrease
their value)
b) Passage of time (Value of fixed assets also decrease with the passage of time even if they
are not being used in production.)
c) Expected obsolescence (Loss of value of fixed assets due to change in technology or
change in demand)
Depreciation= Cost (value)of capital assets ÷ estimated life of capital
Use/Significance:
Gross – Depreciation = Net
Net + Depreciation = Gross

Depreciation Capital loss

It refers to fall in the value of fixed assets due It refers to loss in the value of fixed assets due
to normal wear and tear, passage of time and to unforeseen obsolescence like natural
expected obsolescence. calamities, thefts, accidents, etc.
It does not stop the production process. It stops the production process.
It is an expected loss and it is used in It is an Unexpected loss and it is not used in
measurement of national income. measurement of national income.

B) Net Indirect Tax ( NIT) : It is the difference between indirect tax and subsidies.
Indirect tax - The taxes which are levied by government on production and sale of goods are
called as indirect tax. Like : Excise duty, sales tax, custom duty, GST, etc. These tax increases the
market price of the commodity.
Subsidies : It refers to financial assistance given by the government to the producers or
households with a motive of general welfare. Subsidies helps to reduce the market price of
goods and services.
NIT = Indirect Tax – Subsidies
Use / Significance :
Factor Cost + NIT = Market Price
Market Price – NIT = Factor Cost
C) NFIA ( Net factor income from abroad) : It is the difference between factor income earned
by our residents from abroad and factor income paid to non residents providing services in our
country.
NFIA = Factor income from abroad – Factor income to abroad
Use/ Significance:
Domestic income + NFIA = National income
National income – NFIA = Domestic income.
NFIA can be positive, negative or zero. When NFIA is -ve, Domestic income will be more than
National income.
Components of NFIA :
a) Net compensation of employees -
It is the difference between compensation received by our residents from abroad and
compensation paid to non residents working in our country.
b) Net income from property and entrepreneurship :
It is the difference between the income in form of rent, interest and profit received by
our residents from abroad and similar payments made to the rest of the world.
c) Net retained earnings of resident companies :
It is the difference between retained earnings ( undistributed profits) earned by our
resident companies located in abroad and retained earnings of non resident companies
located in our country.
NFIA = a + b + c

19. Basic concepts related to National income :

• Value of total production of goods and services of a country = Gross Domestic Product
at market price (GDP mp)
GDP mp :It is the gross market value of all final goods and services produced in a domestic
territory of a country in a year.
• Domestic income of a country = Net Domestic Product at Factor Cost ( NDP fc)
NDP fc :It is the total factor income earned by the factors of production within the
domestic territory of a country in an accounting year.
• National income of a country = Net National Product at Factor Cost ( NNP fc)
 NNP fc : It is the sum total of factor income earned by the normal residents of a country
during a year( whether earned inside the territory or outside the territory)
GDP mp – Dep – NIT + NFIA = NNP fc
G D P mp

-- Dep + NFIA - NIT

N N P fc

GDP mp NNP fc
It is a domestic concept which includes the It Is in national concept, which includes the
value of goods produced within the domestic value of goods produced in the domestic
territory of a country. territory and NFIA.
It considers all the producers within the It considers only normal residents of a
domestic territory. country.
It is at market price, so it includes NIT. It is at factor cost, so it does not include NIT
It includes depreciation. It does not includes depreciation.

20. Value of Output and Value added.

Value of output: It is the total value of final goods and services produced in a country during a
year. It is always measured at market prices.
Value of output= Q × P
( Qty produced × market price)
Or
Sales + Change in stock
(Sales = Domestic sales + exports)
(Ch. In stock= closing stock -- opening stock)
Value added : Net increase in the value of a commodity through factor services is known as value
added. It measures the value which a firm has added to a commodity by its productive activities.
Value added = Value of output – Intermediate consumption
(Intermediate consumption refers to expenditure on intermediate goods/ raw materials used in
process of production)
Example: Let a baker buys intermediate goods like flour, milk, sugar etc. worth Rs. 1000 He
transforms these goods into Bread (100kg.) and sell @ 12 Rs per kg. So, value of output of baker
will be 100 × 12 = 1200.
And value added will be ₹ 200 ( 1200-1000).
The difference between value of output and intermediate consumption is Gross Value Added at
market price ( GVA mp)
( Value added is equal to income generated)
Production of goods is done with the help of factor inputs and non factor inputs. From the total
value of output ,a firm makes the payment of non factor inputs like raw material. After making
this payment, the remaining amount left is known as value added. (Value of output- IC = Value
added) . Now this value added is distributed among the factors in form of wages, rent, interest
and profit. So value added is equal to factor income or income generated.
21. Problem of Double Counting :
When the value of one commodity is taken for more than one time while calculating national
income, then it is known as problem of double counting.
This problem arises because sometime by mistake, we take the value of intermediate goods also
in national income. This is because every producer assumes his product as final.
Example: Let a farmer produces wheat (100kg),assuming that it does not use intermediate
goods, and sell it to flour mill @ 10 ₹ per kg. So, Value of output of farmer is ₹1000. Now flour
mill converts it into flour and sell it to bakery @ 12₹ p kg. So, VOO of flour mill is ₹1200. Now,
bakery converts flour into bread and sell it to consumer @₹15 p kg .So, VOO of bakery is ₹1500.
The total value of all these output is ₹3700 (1000+1200+1500) ,in which wheat has been counted
for 3 times, flour for 2 times.
There are two ways to avoid double counting: (1) By taking value of final goods only.
(2) By adopting value added method.
Value added of farmer = VOO – IC = 1000 – 0 = 1000
Value added of flour mill = 1200--1000 = 200
Value added of Bakery = 1500--1200 = 300
Total Value Added = 1000+200+300 = 1500
So, total value added is equal to value of final goods only, hence it prevents double counting.
22. Methods to measure National Income –
(A) Value Added Method :
National Income- It is the sum total of net value added by all the sectors during a financial year.
Steps-
a) To identify those sectors which are involved in the process of value added.
b) To classify these sectors into different categories-primary sector, secondary sector and
tertiary sector.
c) To estimate the net value added made by each sector.
d) To estimate domestic income by adding up net value added by all these sectors.
e) Add NFIA in domestic income to get national income.
Precautions-
a) Only the value of final goods should be included in national income, but the value of
intermediate goods should not be included.
b) Production of goods for self consumption should be taken.
c) Production of services for self consumption should not be taken (like services of
housewife, doctor treating his own family, teacher teaching his own child)
d) Change in stock should be taken
e) Own account production of fixed assets should be included.
Formula-
GVA MP = Sales + Change in stock + Production for self consumption -- Intermediate
consumption
(Sales= Domestic sales+ exports Or Sales= Qty sold × price per unit)
( Change in stock= closing stock- opening stock)
(IC = raw materials+ imports+ fuel& electricity etc.)
OR
GVA mp = Value of output ( by primary sector+ secondary sector+ tertiary sector)
NVA fc = Sales + Ch. In stock – IC – Depreciation-- NIT
National Income= NVA fc (Domestic Income) + NFIA
(B) Income Method :
National Income: It is the sum total of all factor income earned by normal residents of a
country ( within or outside the country)during a financial year.
Steps:
a) To identify those enterprises/sectors which employ factors of production.
b) To classify these factors into different categories like land, labour, capital and entrepreneur.
c) To estimate the amount of factor payment like rent, wages, interest, and profit.
d) To estimate domestic income by adding up all these factors payments.
e) Add NFIA to Domestic Income to get National Income.
Precautions:
a) Only factor income should be taken in national income, transfer income should not be taken.
b) Income from illegal activities should not be taken.
c) Income from windfall gains like lotteries, should not be taken.
d) Income from sale of shares and debentures (capital gains) should not be taken.
e) Income from sale of second hand goods should not be taken.
f) Commission received in sale- purchase of shares/ debentures or second hand goods should
be taken.
g) Imputed rent of self occupied house should be taken.
h) Corporate tax is a part of profit, so it should not be taken separately in national income. And
income tax is a part of compensation of employees. So income tax paid by employees should
not be taken separately.
Formula:
We can earn income by 3 ways-
• Income from work (Compensation of employees)
• Income from property and entrepreneur ( Operating Surplus)
• Income from self employment (Mixed income)
NDP fc = COE+ OS + MI
NNP fc = NDP fc + NFIA
 • COE : It includes all payments made by the producers to their employees for their
productive work. It is paid in the following ways –
a) In form of cash - Salary, wages, bonus ,commission ,allowances, etc.
b) In form of free goods and services like free meal, free medical facility, free uniform etc.
c) In form of employer's contribution to Social Security scheme like Insurance ,Provident
Fund etc.
*It does not includes travelling allowances to Salesman, Compensation to injured labour, and
employee's contribution to Social Security scheme.
• OS : It includes income from property and entrepreneurship.
a) Income from property : rent & royalty, interest on capital.
b) Income from entrepreneur: profit ( corporate tax+ undisturbed profit+ dividend)
# OS = Rent + Interest+ Profit

• MI :It includes the income of self employed persons like businessman, shopkeepers,
doctor, lawyer, accountants etc.

(C) Expenditure Method:

National Income: It is the sum total of all the expenditure made on final goods and services
during a financial year.
Steps :
a) To identify those sectors or units which incur final expenditure.
b) To classify the final expenditure into different categories-
• Private final consumption expenditure (PFCE)
• Government final consumption expenditure (GFCE)
• Gross domestic capital formation (GDCF)
• net exports (NX)
c) To estimate the amount of all these final expenditure.
d) To find GDP mp by adding up all these final expenditure.
e) Subtract depreciation and NIT from it and add NFIA to get national income.
Precautions:
a) Expenditure made on purchase of final goods should be taken in National Income while
expenditure made on purchase of intermediate goods should not be taken.
 b) Expenditure made on purchase of shares and debentures should not be taken.
c) Expenditure made on transfer payments should not be taken.
d) Expenditure made on purchase of second hand goods should not be taken. But if
purchased from abroad then it should be taken.
e) Expenditure on capital formation and expenditure on stock should be taken.

Formula:
GDP mp= PFCE+ GFCE+ GDCF+ NX
NNP fc = GDP mp – Dep – NIT + NFIA
(GDCF = Gross fixed capital formation+ ∆ in stock)
Components:
a) PFCE :
i) Final consumption expenditure of household sector.
ii) Final Consumption expenditure of private non profit institutes.
b) GFCE :
i) COE paid by government
ii) Raw material purchased by government.
iii) Government expenditure on social welfare.
* It doesn’t includes expenditure on transfer payments by government.
c) GFCF :
i) Gross residential construction investment
ii) Gross business fixed investment
iii) Gross public investment
d) ∆ in stock : ( It is also known as Inventory investment)
Closing stock – Opening stock
e) NX : Export – Import
23. Difficulties in calculating / estimating National Income in India
Underdeveloped countries like India face a lot of difficulties while estimating national income—
a) Selection of appropriate method.
b) Incomplete and unreliable data.
c) Transactions done through barter system.
d) Production for self consumption.
e) Problem of double counting.

[Link] GNP :
It measures national income adjusted for the depletion of natural resources and degradation
of environment. It will help to attain a sustainable use of natural resources and equality in
distribution of benefit of development.
Green GNP = GNP – Net fall in the stock of natural capital

Practice Numericals -
1. Production Method (Value Added Method)-

Example 1: Find GVA mp & NVA fc

• Sales: ₹8,000 lakh

• Change in Stock: ₹100 lakh
• Intermediate Consumption: ₹5,500 lakh
• Net Indirect Taxes: ₹70 lakh
• Depreciation: ₹20 lakh

GVA at MP = Sales + Change in Stock−Intermediate Consumption = 8,000 + 100 − 5,500=

₹2,600 lakh

NVA at FC = GVA at MP−Net Indirect Taxes−Depreciation=2,600−70−20=₹2,510 lakh

Example 2: Find GVA mp & NVA fc

• Sales: ₹5,000 lakh

• Change in Stock: ₹(-30) lakh
• Intermediate Consumption: ₹1,000 lakh
• Net Indirect Taxes: ₹60 lakh
 • Depreciation: ₹20 lakh

GVA at MP=Sales+Change in Stock−Intermediate Consumption=5,000−30−1,000=₹3,970

NVA at FC=GVA at MP−Net Indirect Taxes−Depreciation =3,970−60−20=₹3,890 lakh

2. Income Method

Example 1: Find NNP fc ( National income)

• Compensation of Employees: ₹2,000 crore

• Rent: ₹800 crore
• Interest: ₹400 crore
• Profit: ₹1,000 crore
• Net Factor Income from Abroad (NFIA): ₹(-150) crore

NDP at FC=Compensation of Employees+Rent+Interest+Profit

=2,000+800+400+1,000=₹4,200 crore

NNP at FC=NDP at FC+NFIA =4,200−150=₹4,050 crore

Example 2: Find NNP fc

• Compensation of Employees: ₹2,000 crore

• Rent and Interest: ₹800 crore
• Net Indirect Taxes: ₹120 crore
• Corporation Tax: ₹460 crore
• Consumption of Fixed Capital: ₹100 crore
• Subsidies: ₹20 crore
• Dividend: ₹940 crore
• Undistributed Profits: ₹300 crore
• Net Factor Income to Abroad: ₹150 crore
• Mixed Income: ₹200 crore

Profit=Dividend+Corporation Tax+Undistributed Profits =940+460+300=₹1,700 crore

Operating Surplus=Rent and Interest+Profit =800+1,700=₹2,500 crore

NDP at FC=Compensation of Employees+Mixed Income+Operating Surplus

=2,000+200+2,500=₹4,700 crore

NNP at FC=NDP at FC−Net Factor Income to Abroad =4,700−150=₹4,550 crore

3. Expenditure Method

Example 1: Find NNP fc

• Private Final Consumption Expenditure: ₹1,000 crore

• Government Final Consumption Expenditure: ₹500 crore
• Gross Domestic Fixed Capital Formation: ₹200 crore
• Change in Stock: ₹100 crore
• Net Exports: ₹(-50) crore
• Net Factor Income from Abroad (NFIA): ₹20 crore
• Consumption of Fixed Capital: ₹50 crore

GDP at MP=Private Final Consumption Expenditure+Government Final Consumption Exp

enditure+Gross Domestic Fixed Capital Formation+Change in Stock+Net Exports
=1,000+500+200+100−50=₹1,750 crore

NNP at FC=GDP mp-Depreciation-NIT+NFIA

=1750--50+20=₹1,720 crore

Find National Income by Income and Expenditure Method -

• Wages & Salaries = ₹90,000

• Employer’s Contribution to Social Security = ₹15,000
• Rent = ₹18,000
• Interest = ₹13,000
• Profit = ₹28,000
• Mixed Income = ₹22,000
• Net Factor Income from Abroad (NFIA) = ₹3,000

• Private Final Consumption Expenditure (C) = ₹180,000

• Government Final Consumption Expenditure (G) = ₹70,000
• Gross Domestic Capital Formation (I) = ₹90,000
• Exports (X) = ₹35,000
• Imports (M) = ₹27,000

Solution Using Income Method:

NDP at FC= COE + OS + MI = 90,000 +15,000 + 18,000 + 13,000 + 28,000 + 22,000

=186,000 crore

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