MODULE -4NATIONAL INCOME

AGGREGATES&MEASUREMENT OF NATIONAL
INCOME

National income is the

sum value of all final
goods and services
produced in a country
over a period of one year.
 Factor Income & Transfer
Income
Factor Income is the income
received for supplying a factor
service. It can be in the form of
interest ,rent, wages or profit. When
a factor income is made a either a
product or service is produced. For
estimating national income factor
income alone are taken in to
account.
On the other hand Transfer
payments are unilateral or one
sided payments. They do not
create any production of goods or
services. Donations to charity,
unemployment allowance, old age
pension, gifts etc are examples of
transfer payment. Tax is a
compulsory transfer payment.
Transfer payments are excluded from
national income accounting.
Intermediate goods and Final
Goods which aregoods
used in the production of
other goods and services are called
intermediate goods. Raw materials, fuel,
electricity etc are intermediate goods.
Intermediate goods are not taken into
account while calculating national income
estimation.
Goods which are ready for consumption or
investment are called Final goods.
Consumer goods like dress, vehicles and
electronic items, machinery etc are
examples of final goods. They don’t need
further processing. They are finished
products. The values of final goods are
added in the calculation of national income
 Consumer goods & Capital
goods
Goods which are used for consumption
purpose are called consumer goods.
Food items, clothing, household electronics
and electrical items etc are examples of
consumer goods. Consumer goods can be
durable like TV, fridge etc., semi durable
like shoes dress etc or none durable like
food items.
Goods which are used to produce
other goods and services are called
capital goods. They are used for
investment purpose. Machinery, equipment,
building etc are examples of capital goods.
The economic growth of a country depends
on the stock of capital goods.
Factor Cost &Market Price
Factor cost is a measure of national income
or output based on the cost
of production. It is the incomes
received by the owners of the
production (the households) for
rendering their factor services to
the producers.
Factor cost=Market price –Indirect
taxes
Market price is the economic price
for which a good or service is offered in
the market place.
 NATIONAL INCOME
[Link] AGGREGATES
[Link]
[Link]
[Link]
5. Gross Domestic Product at Market Prices
6. Gross National Product at Market Prices
7. Net Domestic Product at Market Prices
8. Net National Product at Market Prices
9. Gross Domestic Product at Factor cost
10. Gross National Product at Factor Cost
11. Net Domestic Product at Factor Cost
12. Net National Product at Factor Cost
 Gross Domestic Product
Gross National Product

[Link] is the sum value of all final goods and

services produced in a country over period of one
year.

2. GNP=GNP=GDP+ Net factor income earned

from abroad.

We may receive income from abroad. Indians who are

working in other countries send their income to home
country. This income has to be included in national
income calculation. At the same time foreigners who
are working in India send their income to their home
countries. This income has to be excluded from the
calculation of national income.

The difference between the two is Net Factor

Income from abroad.
 Net Domestic ProductNet
National Product
[Link]=GDP-Depreciation

[Link]=GNP-Depreciation
Depreciation is the reduction in the value of
an asset due to its continuous use. This
depreciation value has to be deducted in
order to get the exact national income value.
5. Gross Domestic Product at
Market Price; GDPMP
It is the sum value of final goods and services
at prices prevailing in the market produced in
the domestic territory of a country during a
given year.
[Link] National Product at
Market Prices; GNPMP
It is defined as the aggregate market
value of all final goods and services
produced by normal residents of a
country. To get GNPMP from GDPMP we
have to add to GDPMP the net factor
income earned from abroad.
GNPMP= GDPMP+Net factor
income earned from
abroad
7. Net Domestic Product at
Market Prices; NDPMP:
It is the market value of all final goods and
services at prices prevailing in the market
produced in the domestic territory of a
country during a given year after making
allowance for depreciation.
NDPMP = GDPMP-Depreciation
 8. Net National Product at
Market Prices; NNPMP:
It shows the market value of goods and
services produced by normal residents of
country during a year after making allowance
for depreciation.
NNPMP = GNPMP-
Depreciation
NNPMP is considered to be a more accurate
measure of the true output of the economy
than GNPMP.
9. Gross Domestic Product at
Factor Cost; GDP FC
It is the sum total earnings received by
various factors of production in terms of
wages interest, rent, profits etc. within the
domestic territory of a country in a year.

GDPFC = GDPMP-Net
Indirect Taxes
10. Gross National Product at
Factor Cost; GNPFC
Itis the sum total of earnings received by
various factors of production in terms of
wages, rent, interest,etc. by normal residents
of a country .It differs from GNPMP to the
extent of net indirect taxes.

GNPFC =GNPMP-Net Indirect

Taxes
11. Net Domestic Product at
Factor Cost;NDPFC
Net Domestic Product at factor cost is the
estimate of the domestic product in terms of
earnings of factors of production within the
domestic territory of a country net of
depreciation during a year.

NDPFC =GDPFC-
Depreciation
 12. Net National Product at
Factor Cost; NNPFC
When we calculate the value of all final goods and
services produced by normal residents of a country,
whether operating within the domestic territory of a
country or outside it, at their factor cost, it is called
Net National Product at Factor Cost or
National Income. National income can be
defined as the factor income accruing to the normal
residents of a country during a year.
NNPFC or National Income=Domestic
Factor Income + Net Factor Income
earned from abroad.
NNPFC or National Income =GNPFC-
Depreciation
Technically national income is taken in the sense of Net
National Product at Factor Cost (NNPFC).
[Link] Income: It refers to the income of non-
governmental entities from all sources over a period of
one accounting year. It represents the income of firms
and households from all possible sources.
Private Income= NNPFC –domestic product accruing
to the government sector+ transfer payments+
Interest on public debt.
[Link] Income: It is the income of the household
sector from all sources during a financial year.
Personal Income=Private Income-(Corporation
tax+ Undistributed profit)
[Link] Disposable Income: It is defined as the
part of personal income left for consumption and saving
after payment of taxes. It is the take home income.
Personal Disposable Income=Personal Income-
Direct Taxes
[Link] income
It is the total national income of a country divided by the
population

Percapita Income=
National Income at Current Prices and
National Income at Constant Prices
In an economy without any increase in real output
national income estimate may show an increase in
national income. This is because of the increase in
price of goods and services. Hence in every country
national income is estimated at current prices and
constant prices.
National income estimated according to the prices of
goods and services prevailed in the current year (the
year to which national income is estimated) is known
as National income at Current prices or
Nominal National Income.
National income estimated according to the prices of
goods and services prevailed in base year is known
as National Income at Constant prices or Real
income. When there is an increase in national
income at constant prices it shows that economic
growth in that country has increased. In India
national income is estimated on the basis of prices of
goods and services prevailed in the year 2011-2012.
 GNP DEFLATOR
This is an adjustment factor used to convert
nominal GNP into real GNP .It is the ratio of
price index number (PIN) of a chosen year to
the price index number of the base [Link]
of the base year is [Link] chosen year is
the year whose real GNP is to be estimated.
PIN is a percentage number that shows the
average change in the price of a basket of
goods over a period of time as compared
with prices in the base year. Base year is
standard year taken for comparison and its
PIN is taken as [Link] PIN for a year is 125 it
means that 25%increase in the price of goods
and services when compared to base year.
GNP Deflator=

Real GNP=
MEASUREMENT OF NATIONAL
Measurement of INCOME
national income is an extremely
gigantic and complicated task. However, economists
have devised various ways of estimating national
income.
In India the task of estimating national income is
entrusted with the C S O (Central Statistical
Organization), a department of ministry of Planning
and Programme Implementation.
For the purpose of national income calculation we
have divided the economy into three sectors.
i)Primary sector: –Agriculture
ii) Secondary sector-Industry
iii) Tertiary Sector-Services. It includes health,
insurance, banking , Transport & Communication
etc.
In developed countries the tertiary sector contributes
the largest share towards national income. Even
though India is a developing country the largest
share of its national income is contributed by the
tertiary sector.
THREE WAYS TO MEASURE
NATIONAL INCOME
There are 3 different ways or
methods of measuring national
income.
1) Net Product Method or Value
Added Method
2) Income method
3) Expenditure Method
 NET PRODUCT METHOD
The net product or value added
method measures national income as
the sum total of net final output
produced or net value added by all
the producing units in an economy
during a year.
National Income= Net Value
added at factor cost of: (Primary
sector, Secondary sector, Tertiary
sector) +Net factor income from
abroad.
 INCOME METHOD
The income method measures
national income at the distribution
side at the phase of factor payments
made to primary factors for the use of
their factor services .
Under this method national income is
calculated by adding up all the
incomes generated in the course of
producing the national product.
National Income=Compensation
of Employees+ Operating Surplus
+Mixed Income+ Net factor
income earned from abroad
 EXPENDITURE METHOD
It measures the national income at the disposition stage
that is disposition of final products. In other words it
measures national income by estimating expenditure on
final products.

Y=C+In+G+(X-M)-NIT+NYA
Where
Y-national income,
C-consumption Expenditure,
In-Net investment
G-Government expenditure,
(X-M)- Net exports,
NIT-Net indirect tax
NYA- Net income from abroad
To sum up each method provides a different
view of the economy. Depending upon which phase of the
national income we should analyze which method to use
for estimating national income.
DIFFICULTIES IN MEASURING
NATIONAL INCOME
Inclusion of services: There is the basic problem
of what items should be included in national income
.The problem is associated with the inclusion of
services in national income.
Identifying Intermediate goods: National
income comprises only final goods and services,
while intermediate goods are excluded from the
calculation of national income. But in actual
practice it is difficult to draw a clear-cut distinction
between intermediate goods and final goods.
Intermediate goods are those goods which are used
for further production of final goods.
Services of the Housewives and other similar
services: There are many payments for which no
money payment is made. One of these services is
services of housewife in their own home such as
cooking, taking care of the children etc. No
payment is made for these services and therefore
they are not included in national income.
PRACTICAL DIFFICULTIES WITH
REFERENCE TO INDIA
Lack of occupational specialization: For national income
calculation it is necessary that producers be classified into
various specific occupations. But in developing countries like
India occupational classification of producers into distinct
groups is almost impossible, particularly in the agriculture
sector.
Non-Monetized sector: Non-monetized sector refers to that
part of the economy where goods and services are exchanged
through barter without the use of money .In India agriculture is
carried on a subsistence basis. A very large production does
not come to the market for sale .It is partly kept back by
producers for their personal consumption and is partly
exchanged for other goods.
Unreported Illegal Income: Sometimes people distort facts
and provide false information about their income to evade
income-tax and wealth tax. This leads to generation of black
money [Link] income which is evaded from income tax.
Therefore the income such generated goes as unreported
income.
Non availability of statistical data: The most important
difficulty in the estimation of national income in a developing
country like India is the non-availability of reliable data.
 IMPORTANCE OF NATIONAL
INCOME ACCOUNTING
It provides information regarding income yielding
sectors of a country.
It reveals the overall production performance of
an economy.
It helps in comparing the economic performance
with previous year.
It is used to estimate the degree of inflation or
deflation in the economy.
It helps the government to find out the taxable
capacity of the people in the country.
It helps in analyzing the contribution made by
different sectors such as agriculture,
manufacturing, industry trade etc.
 FEATURES OF NATIONAL
INCOME IN INDIA
It is dependent on agriculture
Poor growth rate of per capita
income.
There is unequal growth of different
sectors of the economy.
Income level in urban areas is more
than rural areas.
ITEMS THAT ARE EXCLUDED FROM
NATIONAL INCOME CALCULATION

Winning of a lottery prize.

Profit earned by foreign banks in India.
Sale of used goods.
Transfer payments such as old age
pension, widow pension will not be
included in national income
calculation.
Value of intermediate products is not
considered. Only the final value of
goods will be taken for national
income calculation.
1.
QUESTIONS
What is national income?
2. What do you mean by Gross domestic product?

3. Mention the various aggregates of national

income.
[Link] the methods of measuring national
income
5. What is the implication of the following statement?
[Link] is Rs 58, 33,558 crore and NNP is Rs55,
01,067 crore. (KTU S 4 Regular May 2017)
7 . What are the difficulties in measuring national
income?
8. What are transfer earnings?
9. Define Percapita income.
10. What is real income and nominal income?
11. What is primary sector, secondary sector and
tertiary sector?
12. 14. Differentiate GDP and GNP.( (KTU S 3
Regular, December 2017)
 Estimate NDPmp and national
income from the data given below
GDPmp=850 , Depreciation=50,
Net factor income from
abroad=210, Indirect Tax=50
Subsidy=40
(KTU S3 Regular, January 2017).
From the data given below estimate GNPMP,
GNPFC, NNPMP and National Income.
GDPMP=5000,NFIA=-50,Indirect
Tax=70,Subsidy=20,Depreciation=30