Chouti sir’s Indian Economy 2 in 1

2
Chapter
National Income
 Economy = Study of production and productivity of goods and services
 Economic system = Production and productivity of goods and services in a geographical area
 For example Indian economic system means the goods and services produced in entire geographical
area of india
 National income nothing but estimation of goods and services produced in a country in monetary
value
Concept of National Income
 An individual or all members of a family Income earned is called personal income, it can be said as
family income.
 Also, a system Also earns income is called national income.
 National income means the value of goods and services produced by a country during a financial
year. Thus, it is the net result of all economic activities of any country during a period of one year
and is valued in terms of money.
 Income accrues when worked. Goods and services are produced when work is done. At one time
in the country, National income is the total value of all goods and services produced.
 The flow of values of goods and services produced over a period of one year can be considered as
income.
 Incomes that flow as a flow are production to some, income to others and still the same flow to
others transformed into costs. So, these three are always identical.
National income = national production = national expenditure

National Income by national income committee 1951

 National income means the value of goods and services produced by a country during a financial
year. Thus, it is the net result of all economic activities of any country during a period of one year
and is valued in terms of money.
Main features :
a) Net value of all goods and services
b) Statistics for a year
c) Depreciation, values after allowing for depreciation
d) Goods and services in public and private sectors
e) Value of consumption and capital goods
f) Net value of international transactions,
g) Statistics in which no item is counted twice.

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Definitions of Various Economists

 Marshall: ”The labor and capital of a country acting on its natural resources produce annually a
certain net aggregate of commodities, material and immaterial including services of all kinds.
 This is the true net annual income or revenue of the country or national dividend.”
 Simon Kuznets defines national income as “the net output of commodities and services flowing
during the year from the country’s productive system in the hands of the ultimate consumers.”
 A, C. Pigou defined national income as “That part of objective income of the community, including
of course income derived from abroad which can be measured in money”.
 Irving Fisher: According to Irving Fisher, the term “National dividend or income consists solely
of services as received by ultimate consumers whether from their material or from their human
environments.
 Samuelson says, “It is the loose name we give for the money measure of the overall annual flow
of goods and services in an economy.
 UNO: National income is the total value of the primary income’s receivable within an economy
less the total of the primary incomes payable by resident units.
Briefly National Income means :
 “Production within a specified period of time (usually one year) without duplication The total net
monetary value of final goods and services rendered can be called national income. National
income a concept of flow rather than stock”

Importance of National Income

National income is of great importance for the economy of a country. Nowadays the national
income is regarded as accounts of the economy, which are known as social accounts. It enables us
1. To know the relative importance of the various sectors of the economy and their contribution
towards national income; from the calculation of national income, we could find how income is
produced, how it is distributed, how much is spent, saved or taxed.
2. To formulate the national policies such as monetary policy, fiscal policy and other policies; the
proper measures can be adopted to bring the economy to the right path with the help of collecting
national income data.
3. To formulate planning and evaluate plan progress; it is essential that the data pertaining to a
country’s gross income, output, saving and consumption from different sources should be available
for economic planning.
4. To build economic models both in short - run and long - run.
5. To make international comparison, inter - regional comparison and inter - temporal comparison of
growth of the economy during different periods.
6. To know a country’s per capita income which reflects the economic welfare of the country (Provided
income is equally distributed)
7. To know the distribution of income for various factors of production in the country.

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Chouti sir’s Indian Economy 2 in 1
8. To arrive at many macro economic variables namely, Tax – GDP ratio, Current Account Deficit -
GDP ratio, Fiscal Deficit - GDP ratio, Debt - GDP ratio etc.

Various Concepts of National Income

National income is an uncertain term and is often used interchangeably with the national
dividend, national output, and national expenditure. We can
understand this concept by understanding the national income
definition.
1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Net National Product (NNP) NI
4. Net Domestic Product (NDP)
1. Gross Domestic Product (GDP)
 Nation means within the geographical area of a country
 GDP is the total monetary value of final goods and services produced in a given geographical
area in a given period of time.
 GDP takes into account where goods and services are produced but it does not consider by whom
they are produced.
 The calculation of GDP specifies both quantitative and qualitative facets and also internal and
external strengths of the economy.
 That is, how world economies depend on it and to what extent it depends on them.
 Net Domestic Product (NDP) is the result of deducting the depreciation charges from GDP. In
other words it is net form of the GDP. On the other, by adding income from abroad to the GDP we
will arrive at Gross National Product (GNP).
There are 4 main elements in the definition of GDP:
1. Geographical area (within a country)
2. Monetary Value (Rupees or Dollars)
3. Final goods and services (without duplication)
4. Specific time (In a financial year)
1. DOMESTIC TERRITORY
 You must be familiar with the term geographical territory that is defined strictly on the basis of
political boundaries of a country. Economic territory is derived from physical territory but on
economic basis.
 A nation is a system of sovereign power over a defined territory due to political conditions.
 Only the goods and services produced by a geographical area is taken into consideration to calculate
GDP of a country.
 According to the SNA, the economic territory of a country consists of geographical territory
administrated by a government within which persons, goods and capital circulate freely.

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It includes:
(a) The airspace, territorial waters, and continental shelf lying
in the international waters over which the country enjoys
exclusive rights;
(b) Territorial enclaves in the rest of the world such as
embassies, consultants, military basis, etc. and
(c) Any free zones, or bonded warehouses or factories
operated by offshore enterprises under customs control.
It does not include
(a) Territorial enclaves used by foreign governments such as foreign embassies, foreign consultants,
etc.
(b) International organizations.
Monetary Value
 Goods and services produced in the country are of
various sizes and measured in terms of various units,
for example milk in liters, eggs in dozens, rice Measured
in kg.
 But the common measure of every unit is monetary
value
 Hence every good and service produced by an economy is converted into monetary value
 India’s national income is expressed in both rupees and dollars.
 For example, in 2022, the USA GDP was $25.3 trillion, China $19.9 trillion, and Japan $4.9 trillion.
dollars, Germany 4.3 trillion dollars, India 3.3 trillion dollars.
 Note: India’s target is to produce 5 trillian dollors worth of goods and services by 2024-25
Final goods
 Only Final Goods are included in the National Income
Intermediate goods are not included in the national income
of an economy as they are already included in the final
good.
 If the value of intermediate goods is also added to determine the national income, then it will lead
to double counting. In the example of production boundary, out of wheat, flour, and bread, only the
value of bread is included in the national income of an economy as it already includes the value of
intermediate goods (wheat and flour)
The final Goods has 2 main aspects
1. It should be in the market (Should not go any transformation)
2. Ultimately consumed by consumer
Consumption Goods: Goods like food and clothing, and services like recreation that are consumed when
purchased by their ultimate consumers Are called consumer goods.

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Chouti sir’s Indian Economy 2 in 1
Consumption goods are further sub-divided into following categories:
 Durable goods: Durable goods are items that can be used repeatedly over an extended period of
time. For example, televisions, refrigerators, and so on.
 Semi-durable goods: Semi-durable goods are those that can only be used for a limited time.
These items have a one-year shelf life. For example, clothing, crockery, shoes, and so on.
 Non-durable goods: Non-durable goods are goods that
are consumed in a single act of consumption. These
items can only be used once. For example, milk, bread,
cereal grains, paper, and so on.
 Services: Services are non-material goods that directly
satisfy human desires.
 They are intangible activities, which cannot be seen or
touched. For example, the service of teachers, doctors,
and banks.
Capital Goods:
 Goods that are of durable character which are used in the production process.E.g. Heavy Machinary.
 They make production of other commodities feasible
 Don’t get transformed in the production process.
Consumer durables:
 Some commodities like television sets, automobiles or home computers,
 They are for ultimate consumption, have one characteristic in common with capital goods – also
durable. Are not extinguished by immediate or even short period consumption;
 have a relatively long life as compared to articles such as food or even clothing.
 also undergo wear and tear with gradual use and often need repairs and replacements of parts,
i.e., like machines they also need to be preserved, maintained and renewed.
Intermediate goods:
 Of the total production taking place in the economy a large number of products don"t end up in
final consumption and are not capital goods either. Such goods may be used by other producers as
material inputs. Examples are steel sheets used for making automobiles and copper used for
making utensils. Intermediate Goods are not Final Goods
Specific time:
 Since national income is a flow concept, it should consider only the production over a specific
period of time. So, GDP is calculated for every 3 months, every 6 months and every year.
 Usually held over a period of one year Only final goods and services are taken into considered.
 In India the financial year is considered from 1st April to 31st March.
Stock flow
 Stock means Point of Time. Eg: money, wealth, assets, water in a reservoir etc.
 Flow means Period of time. Eg: water in river, daily consumption, income, inflation etc. National
income is a flow concept as it flows from one sector to another.

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Roughly
1. It calculates the production of goods and services only on the basis of geographical
location.
2. Considers domestic and foreign factors of production in a geographical area.
That means its consider income of foreigners in India but not the product made
by Indians in other countries.
Net Domestic Product – NDP
 NDP is obtained by subtracting depreciation or consumption from GDP.
 Note that this is not currently being taken into consideration.
 NDP is the value of net output of the economy during the year. Some of the country’s capital
equipment wears out or becomes outdated each year during the production process.

Basis Final Goods Intermediate Goods

Meaning Final goods are those goods that do Intermediate goods are goods used to produce a
not require further processing and final good or finished good for the purpose of
are ready to use for consumption selling it to the consumers.
or investment.
Nature Final goods are included in domestic Intermediate goods are neither included in domestic
income as well as the national income income nor national income of an economy
of an economy
Production The final goods are the goods that Intermediate goods are the goods that are present
Boundary have crossed the production within the production boundary.
boundary
Value Addition No value has to be added to the Some value has to be added to the intermediate goods
final goods because they are ready because they are not ready to use.
to be used and invested by their
final users.
Example Butter purchased by a consumer for Butter used by a baker for further production,
consumption, equipment purchased equipment purchased by a trader for resale, etc
by an organization as an investment.
Product Final Goods Intermediate Goods
Consumption Capital Goods
Goods
Vehicle If it is purchased If it is purchased by If it is purchased by a dealer for resale.
by households a firm for business
purpose
Flour If it is used by If it is lying unsold with If it is used by a baker for further use, or by a
households the trader/shopkeeper trader for resale.
at the end of the year.
Services If it is used If it is used by a school/college/firm
of doctor by households
Wool If it is purchased If it is lying unsold with If it is purchased by a cloth manufacturing firm for
by households the trader at the end making woolen clothes or by a shopkeeper for
of the year. resale

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Chouti sir’s Indian Economy 2 in 1

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23

Lakh crores (TRE) (SRE) (FRE) (PE) (PAE/FAE)
Real 5.06 5.78 6.58 7.50 8.57 9.50 9.62 11.48 13.27
GSDP (TS)
Nominal 124.68 137.72 153.92 170.90 189.90 200.75 198.01 236.65 273.08
GDP (India)

Gross National Product (GNP)

 GNP refers to the total money value of Real GDP & GDP Growth rate
all the goods and services produced by
the residents and businesses of a
country, irrespective of the location of
production.
 It considers by whome the goods and
services are produced but not where
the goods and services are
produced.
 GNP does not take into
consideration the incomes
earned by the foreign nationals
in the country.
 For calculating GNP, only the
final goods and services are
considered.
 Intermediate goods are
avoided as it leads to double counting.
To calculate the GNP for a nation, the following factors are
considered:
1. Consumption expenditure
2. Investment
3. Government expenditure
4. Net exports (Total exports minus total imports)
5. Net income (Income earned by residents in foreign countries minus
income earned by foreigners in the country)
 Products made in our country by other countries Considered as an import.
 GNP is obtained by adding exports to GDP and subtracting imports from GDP.
 GNP = GDP + (X-M)
(X = Exports, M = Imports)
Case-1: Exports i.e., income for production made by domestic factors of production

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 It is called Receipts - R. as it is income to the country.
 Imports are payments for production made by foreign
factors of production should be taken as payments. denoted
with - P.
 So, GNP = GDP + (R-P)
Case-2: Incomes in return of factors of production is called
factor income.
 To calculate product earnings from abroad
 The net factor income from abroad is calculated as Net Factor Income from Abroad (NFIA).
 GNP = GDP + NFIA
Case-1: Imports are more than exports in India so generally GDP > GNP
Case-2: GNP > GDP when exports > imports.
Case-3: GNP = GDP when exports = imports.
Case-4: GNP = GDP when following a closed economy.

GDP +  X-M 
GNP  GDP ± NFIA Production cost GDP at Factor cost
GDP +  R-P 
Net National Product – NNP
 National income is a flow concept so final capital goods are consumed and depreciated.
So national income should be calculated only after deducting this depreciation.
 Deducting depreciation or consumption expenditure on fixed capital from GNP gives NNP.
NNP = GNP – Consumption Expenditure (Depreciation) of Fixed Capital
 Simply the monetary value of final goods and services produced by domestic factors of production
at a given period of time calculated after subtracting depreciation is called NNP.
 Net National Product (NNP) is the outcome of deducting the depreciation of nation's capital
stock from GNP.
 Depreciation is also termed as capital consumption allowance (CCA).
 The depreciation charges involved in the entire economy are to be deducted from GNP to get
NNP and it is wider concept than the GDP
 Note: GDP, GNP, NNP are used with slight variations to reflect national income as needed.
 National income (GDP, GNP, NNP) can be calculated at both factor cost & market price.
Factor cost (FC)
 There are a number of inputs that are included into a production process when producing goods
and services. These inputs are commonly known as factors of production and include things
such as land, labour, capital and entrepreneurship.
 Producers of goods and services incur a cost for using these factors of production. These costs
are ultimately added onto the price of the product.

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Chouti sir’s Indian Economy 2 in 1
 The factor cost refer to the cost of production that is incurred by a GDP factor cost
firm when producing goods and services. GNP
 Examples of such production costs include the cost of renting machines, NNP market price
purchasing machinery and land, paying salaries and wages, cost of
obtaining capital, and the profit margins that are added by the entrepreneur.
 The factor cost does not include the taxes that are paid to the government since taxes are not
directly involved in the production process and, therefore, are not part of the direct production
cost.
 However, subsidies received are included in the factor cost as subsidies are direct inputs into the
production
Market price (MP)
 Once goods and services are produced they are sold in a
market place at a set market price.
 The market price is the price that consumers will pay for
the product when they purchase it from the sellers.

 Taxes charged by the government will be added onto the factor price while subsides provided will
be reduced from the factor price to arrive at the market price.
 Taxes are added on because taxes are costs that increase the price, and subsidies are reduced
because subsidies are already included in the factor cost, and cannot be double counted when
market price is calculated.
Thus, MP = FC + Indirect Taxes - Subsidies
Or, FC = MP - Indirect Taxes + Subsidies
GDP at Factor Cost
 There are four factors of production & each factor will be paid in money in the following way
Land : Rent
Labour : Wage
Capital : Interest
Entrepreneurship : Profit
 GDP at factor cost is money incurred on factors of production.

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GDP at Market Price
 But GDP at factor cost will attract some tax & subsidies, which need to be added and subtracted
respectively to get GDP at market price.
 GDP at market prices = GDP at factors of production + indirect taxes - subsidies
 GDP at Market Price = GDP at factor cost + Product taxes + Production tax – Product subsidies
– Production subsidies.
 for eg. Factor cost Rs. 100, assuming indirect tax is 10% and subsidy is 5%
 GDP at Market Price = GDP at factor cost (Rs 100) + indirect taxes (10%)- subsidies (5%)
GDP at MP = 105
NOTE: As like GDP, GNP, NNP also calculated at factor cost as well as market price.
National Income Definition :
NNP calculated at market prices is considered as national income.
Note: Prior to 2014-15 National Income was considered as NNP at factor cost.
 National income = The monetary value of final goods and services produced by domestic producers
in a year, The monetary value calculated at market prices after deducting depreciation is called
national income.
 National Income in NNP: NNPMP = NNPFC + Indirect Tax -Subsidy
 National Income in GNP:  GNP-D MP =  GNP-D FC + Indirect Tax -Subsidy
 National Income in GDP:  GDP+(X-M)-D  MP =  GDP+(X-M)-D  FC + Indirect Tax -Subsidy
Nominal National Income/ Real National Income
 GDP, GNP, NNP are calculated at current prices and at constant
prices.
 When prices of goods and services change, national income
also changes.
 Sometimes, If there is an increase in price it will appear that
the national income has increased. But national income only increases if production of real goods
and services increases
 In order to know the real change in the production of goods and services, national income is
calculated at constant, current prices
 Nominal : GDP calculated at current prices is called Nominal National Income.
 Real : GDP calculated at constant prices/base year prices is called Real National Income.
 Nominal GDP refers to the current year production of final goods and services valued at current
year prices.
 Real GDP refers to the current year production of goods and service valued at base year prices.
Base year prices are constant prices.
 Currently, the base year for GDP calculation is 2011-12.

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Chouti sir’s Indian Economy 2 in 1
GDP Deflator?
 The ratio of nominal to real GDP is a well-known index of prices. This is called GDP deflator.
Nominal GDP
GDP Deflator (%) = 100
Real GDP
 The GDP deflator is, therefore, a measure of inflation.
 If GDP deflator is 2, then it means prices are doubled as compared to base year.
 The GDP deflator is considered the better measure of price behavior because it covers all goods
and services produced in the country.
2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23
Lakh crores (TRE) (SRE) (FRE) (PE) (PAE/FAE)
Nominal 5.06 5.78 6.58 7.50 8.57 9.50 9.62 11.48 13.27
GSDP (TS)
Nominal 124.68 137.72 153.92 170.90 189.90 200.75 198.01 236.65 273.08
GDP (India)

2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23

Lakh crores (TRE) (SRE) (FRE) (PE) (PAE/FAE)
Real 4.16 4.65 5.08 5.57 6.08 6.41 6.10 6.76 7.27
GSDP (TS)
Real 105.28 113.69 123.08 131.45 139.93 145.16 135.58 147.36 157.60
GDP (India)

Is Nominal GDP better or Real GDP?

Real GDP is better than Nominal GDP because of the following reasons:
1. Helps in the determination of the effect of increased production : Real GDP helps an
economy to determine the effect of increased production levels of goods and services within a
year. Real GDP is better for this determination because even though there is no change in the
physical or actual production of goods and services, a change in their price affects the value of
Nominal GDP.
2. Better Periodic Comparison : Real GDP is better than Nominal GDP for making a periodic
comparison in the production of physical output of goods and services of a country over different
years.
3. Facilitates International Comparison : The Real GDP of an economy also facilitates a better
international comparison of the economic performance across the countries.

Base years
  
 
 

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Other Concepts of National Income

Below 4 concepts are considered as various other concepts of National Income.
1. Private Income 2. Personal Income
3. Personal Disposable Income 4. Per capita Income
1. Private Income
 Private income is income obtained by private individuals from any source, produce or otherwise
and retained income of corporations. It can be obtained from NNP at factor cost by making
certain additions and deductions.
 Private Income = National income (NNP at factor cost) +Transfer Payments + Interest on Public
Debt – Social Security – Profits and Surpluses of Public Undertakings.

2. Personal Income
 Personal income is the total income received by the individuals of a country from all sources
before direct taxes in one year. Personal income is never equal to the national income because the
former includes the transfer payments whereas they are not included in national income.
 Personal income is derived from national income by deducting undistributed corporate profits,
profit taxes, and employee’s contributions to social security schemes. Personal income is differs
than private income actually it is less than private income because it excludes undistributed corporate
profits.

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Chouti sir’s Indian Economy 2 in 1
Personal Income =National Income–Undistributed Corporate Profits–Corporate Taxes–Social Security
 Note: Taxes levied on people depends on private income
1. Transfer Payments Means a payment made or income received in which no goods or services
are being paid for, such as a benefit payment or subsidy.
2. Personal Income/Disposable Income Disposable income or personal disposable income means
the actual income which can be spent on consumption by individuals and families.
Personal Income = National Income – Undistributed Corporate Profits –Corporate Taxes – Social
Security Contributions + Transfer Payments + Interest on Public Debt.
Social Security Transfers
 Undistributed profits refer to that part of the earned income which is not given to households but
are saved by the firm for future investments.
3. Personal Disposable Income Personal Disposable Income refers to the income that is available
to the households that they can spent as they wish. All the Personal Income is not available to
individuals to spend.
 They have to pay taxes (e.g. – Income tax) and non-tax payment such as fines.
 Personal Disposable Income (PDI) = PI – Personal tax payments – non-tax payments
(such as fines etc)
 Thus, Personal Disposable Income is the part of aggregate income which belong to the households.
They may decide to consume a part of it, and save the rest.
4. Per capita Income
 Per capita Income (PCI) is a measure of average income earned
per person in a given area (City, region, country, etc.) in a specified
time period, generally a year.
 It is calculated by dividing the total income by its total population.
 PCI = Total Income / Population

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Significance of PCI
 PCI is used to evaluate the standard of living and quality of life of the population.
 A higher per capita income represents higher purchasing power.
 PCI is a measurement of prosperity for a region.
Nominal PCI & Real PCI
 Nominal PCI: Nominal Per Capita Income is the income per capita at the current year price. It
is not inflation adjusted. It is calculated by dividing nominal income or nominal GDP by the population
of a country.
Nominal PCI = Nominal GDP / Population
 Real PCI: Real Per Capita income is calculated by adjusting inflation Nominal one. It is calculated
by dividing real income or Real GDP by the population of a country.
Real PCI = Real GDP / Population
GDP Per Capita
 It is a measure of a country’s economic output that accounts for its number of people.
 It divides the country’s gross domestic product by its total population and it is the best measurement
of a country’s standard of living.
GDP Per Capita = GDP / Total Population
Important Points
 Small, rich countries, and more developed industrial countries, tend to have the highest per capita
GDP.
 A growing population will mean lower per capita GDP if total GDP growth does not keep pace
with the population.
 As developing nations grow economically, their per capita GDP tends to converge with more
developed nations.
 Economic growth is measured on the basis of the expansion of GDP. However, there are instances
when the rate of population growth is higher than the rate of increase in GDP. In such instances,
GDP increases while per capita income decreases. Therefore, per capita income is considered a
better indicator of economic growth.

National Income Calculation Methods

National Income is calculated by Using 3 methods
1. Production/Output/GVA Method
2. Income Method
3. Expenditure/Consumption Method
 A person’s income should be calculated by adding up the income earned by him from different
sources Computable (income method) (or) He may estimate the income even after calculating the
amount spent (expenditure method) (or) income even if he calculates the market value of the
goods and services produced by him (product Can be estimated method)

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Chouti sir’s Indian Economy 2 in 1
 National income is estimated using 3 methods as a source of errors in the process of calculating
national income.
 Product = Revenue = Cost
 Since 1954, CSO has divided the economy into 3 main sectors and 13 sub-sectors to calculate
national income.
1. Agriculture and allied sectors
2. Forests and forests
3. Fisheries Production Method
4. Mining
Urban
5. Construction sector
Rural Expenditure method
Registered
6. Manufacturing sector
Un Registered
7. Utility of electricity, gas, water Income method
8. Service Sector (6 sub-sectors)
Production Method
 Estimated by adding the value added by all the firms.
 Value-added = Value of Output – Value of (non-factor)
inputs
 This gives GDP at Market Price (MP) – because it includes
depreciation (therefore ‘gross’) and taxes (therefore
‘market price’)
 Simply calculating value of goods & services at each stage.
Income method
 The income method of calculating national income takes into account the income generated from
the basic factors of production. These include
the land, labour, capital, and organization. And
in addition to income accrued from these factors
of production, another important component of
Product
income is mixed income. Now let’s discuss all method
these components in detail. Expenditure
Rent from Land method
 Rent is the money you pay for the use of land. Income
While calculating income, rent refers only to method
the income earned from using any land. Rent
paid for the use of machinery and other
equipment is not accounted for as rent.

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 Now in addition to rent, another form of income is royalty. Royalty is the amount you pay to an
individual or a company in exchange for the use of assets such as coal or gas.
Compensation for Labour
 Compensation includes salaries and wages that you earn in exchange for the services and skills
that you provide for producing goods and services. It also includes travel allowances, bonuses,
accommodation allowances, and medical reimbursements.
 In addition to wages and salaries, another important component of compensation is remuneration
in the form of social security schemes such as insurance, pensions, provident funds.
Interest on Capital
 Interest refers to the charges you pay for using borrowed capital. Now, this includes the interest
paid when a company takes a loan for an investment. Similarly, when a family invests in a property
or a house, they take a loan from a bank and pay an interest for the same while repaying the loan
over a period of time. However, while calculating national income, economists consider only the
interest paid by production units.
Profits by Entrepreneurship
 Profits refer to the money that organizations make while producing goods and services. Now
companies distribute the profits they make by paying income tax to the government and dividends
to shareholders. And the amount that is left over after paying tax and dividends is called undistributed
profit.
Mixed Income
 Mixed income refers to the income of the self-employed individuals, farming units, and sole
proprietorships. Now, if you consider all these components of income, national income can be
represented as follows:
National Income =  Rent + Compensation + Interest + Profit + Mixed income
 When economists calculated national income, they divide the production units into different sectors.
Then they calculate the income for each sector and then derive the total national income. However,
while computing national income using the income approach, economists exclude transfer payments
such as gifts and donations and profits from the sale of pre-owned goods. They also exclude
income from the sale of shares and debentures.
Consumption expenditure Real Prices Nominal Prices
 
 Total consumption  
a. Government consumption  
b. Private consumption  
 Gross Fixed Capital formation  
 Net exports  
a. Exports  
b. Imports  
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Chouti sir’s Indian Economy 2 in 1

Expenditure Method
 Now that you are familiar with the income approach of calculating national income, let’s understand
the expenditure approach.
 The final expenditure approach focuses on the expenditure involved in the production of goods and
services. Now you can classify expenditure based on consumption and investment.
 Consumption expenditure includes household consumption of goods and services (C).
 It also includes government’s expenditure on goods and services to fulfill social welfare needs (G).
 Investment expenditure refers to the expenditure made by companies and production units for
raising capital (I).
 For instance, investment expenditure includes the purchase of fixed capital assets such as buildings
and equipment. Expenditure also includes an addition to the stock of raw materials.
 Investment expenditure also includes an acquisition of valuables such as precious metals or jewelry.
Expenditure also includes imports and exports made by companies and the government. And while
calculating national income, you need to calculate the net exports (NX). That is the total exports
minus total imports.
 Now while calculating national income using the expenditure approach, you need to also deduct
depreciation on capital assets and indirect taxes. Using the expenditure approach, national income
can be represented as follows:
National Income = C (household consumption) + G (government expenditure) + I (investment
expense) + NX (net exports).
 Again, you while determining income using the expenditure approach, you need to exclude
expenditure on second-hand goods, purchase of shares and bonds, expenditure of transfer payments
(unemployment benefits, pension), and purchase of intermediate products.
Expenditure method Income method Production method
NI C + I + G + (X-M) National Income = GVA =
C = Consumption  Rent + Gross Value Added
I = Investment Wages + Intermediate consumption
G = Government spending Interest +
(X-M) exports minus imports Profit

Difficulties in Estimating National Income

The estimation of national income in any country is a difficult task and in India the difficulties
are more. The major difficulties among them are as follows.
1. Inadequacy and Unreliability of Statistical Data : The most serious problem is the inadequacy,
non-availability and unreliability of statistical data. Correct statistical information regarding agriculture
and allied activities is very problematic and cumbersome to collect. Information regarding the
consumption expenditure is also suffers from reliability question and the gathering the data on the
savings of rural and urban population, particularly the rural population is difficult.

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2. Doesn't reflect Real Value of National Income : National income is always measured in
terms of money but there are certain goods and services whose measurement in terms of money
is challenging. GDP in terms of money does not reflect the real value of goods and services. For
that, we have to calculate the value of goods and services at constant prices. Utmost care is
needed in selection of the base year prices to get the real value of national income.
3. Existence of Non-Monetised Transactions: The prevalence of non- monetised transactions
in India creates another problem. A considerable part of output may not enter the market. That is,
event today, the barter system prevails in most of the far away remote areas and to some extent
in urban and semi-urban centers also. In agriculture, a part of output is consumed in the farm
sector itself. A serious difficulty arises with regard to the estimation of the imputed value of the
produce of the non- monetised sector and to add it to the value of the monetised sector.
4. Problem of Double Counting : While estimating national income, the value of goods and services
should be taken only at a single time. But sometimes it is difficult to distinguish between a final
good and an intermediate good.
5. Issues related to Unorganised Sector : In India
more than 90 percent of population are depending/
working on/ in unorganised sector. Most of them are
illiterates also. Such persons either producers or
consumers particularly of unorganised sector have
lesser idea on keep regular accounts of the quantity
and value of their output and details of their expenditure.
6. Multiplicity of Economic Activities: It is difficult
to classify the multiple economic activities of millions of people. A major part of the Indian economy
consists of household enterprises, which perform functions of different occupational categories
simultaneously. Hence, the usual industrial classification cannot be adopted here.
7. Calculation of Depreciation: The calculation of depreciation of capital assets presents another
formidable challenge. It is tough task to select standard rates of depreciation.
8. Services of Home Makers: The service rendered by mother and wife in a house is also not
accounted in national income, it under values the NI.
9. Income from Illegal Activities: Incomes obtained from illegal activities (such as gambling,
black-marketing) are not included in the national income and their exclusion results in an
undervaluation of the national income. It is revealed in 2018 that, black money accumulated in
Swiss and other offshore banks is estimated to be 300 lakh crore INR. Obviously national income
to that extent is under estimated.
10. Difficulty in differentiation: It is tough to segregate the production activities of the public sector
into consumption and investment.

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Chouti sir’s Indian Economy 2 in 1

New Methods In Calculating National Income

In, 2014-15 the central government constituted The Advisory Committee on National Accounts
Statistics (ACNAS) headed by Prof Sundaram, to make suggestions in National Income methods.
on the recommendations of committee, The following changes have been made in
1. Change of base year from 2004-05 to 2011-12
2. Consider NNP at market prices instead of NNP at factors of production to calculate national
income
3. To calculate national income according to System of National Accounts (SNA) , GVA at Basic
price was introduced
Gross Value Added (GVA)
 Gross Value Added (GVA) is the new measure to estimate the value of final goods and services
which gives wider scope of taking into account of economic activity in more close and comprehensive
manner than the earlier factor cost method.
 It is the difference in value between the final goods and services and the cost of all inputs and raw
material that directly attached to the production. Generally, GVA is calculated at basic prices.
GVA at basic price
Factors of production Factors of Income (GVA at Basic price)
Land - Rent Compensation of employees
Labour - Wages Consumption of fixed capital
Capital - Investment Mixed Income/Operating surplus
Entrepreneurship - Profit
 GVA (BP)
= NNP(MP)
 NNP (MP) = NNP(FC) (Rent+Interest+Wage+Profit) + Indirect Tax - Subsidy
 NNP(MP) Was Changed To GVA(BP) Will Be Calculated As Follows GVA BP
= CE + OS/ MI+ CFC+ Production taxes- Production subsidies

Where : CE = Compensation of Employees OS = Operating Surplus

MI = Mixed Income CFC = Consumption of Fixed Capital
Compensation of Employees (CE)
A statistical term used in national accounts, balance of payments statistics and sometimes in
corporate accounts as well. It refers basically to the total gross (pre-tax) wages paid by employers
to employees for work done in an accounting period, such as a quarter or a year.
3 Types of compensations to employees :
1. compensation in cash(liquidity) : salary, bonus, dearness allowance, travel allowance, over
time allowance, HRA, leave travel allowance etc
2. Facilities to employees: free house, free water, electricity, health, education facilities, free
park, entertainment allowances etc.
3. Social security allowances: Life insurance, PF, Pension, encouragement in entrepreneurship

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Utilization of fixed capital (CFC)
 The rewards which comes from land, buildings, capital.
example: interest, royalty, profits , dividends
Mixed income: (MI/OS)
 Mixed income refers to the income generated by own account workers (like farmers, barber
etc) and unincorporated enterprises (like retail traders, shopkeepers etc).
Production Taxes:
 indirect taxes which are levied on pre-production and post production
Production Subsidies:
 subsidies which are providing at the process of production
present GVA (BP) in India at constant prices:
2018-19 = 127 lakhs crores
2019-20 = 132 lakhs crores
2020-21 = 125 lakhs crores
2021-22 = 136 lakhs crores
2022-23 = 145 lakhs crores (Agriculture, Industries, Service combined)
National Income Estimates in India
Before Independence
National Income Estimates in India
After Independence
National income estimates before independence:
 During the British period, several estimates of national income were made by Dadabhai Naoroji
(1868), William Digby (1899), Findlay Shirras (1911, 1922 and 1934), Shah and Khambatta (1921),
V.K.R.V. Rao (1925-29) and R.C. Desai (1931-40).
 Among all these pre-independence estimates of national income in India, the estimates of Naoroji,
Findlay Shirras and Shaw and Khambatta have computed the value of the output raised by the
agricultural sector and then added some portion of the income earned by the non-agricultural
sector.
 But these estimates were having no scientific basis of its own.
 After that Dr. V.K.R.V. Rao applied a combination of census of output and census of income
methods.
Dadabai Nouroji :
 1876, for the first time dadabai calculated national income for year 1867-68
 He calculated National Income 340 crore’s,
 Per capita income was Rs 20 while population 17 crore people
 He explains India’s poverty problem in his book “Poverty and un-British Rule in India”
 In his book he explains about “Drain Theory”

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Chouti sir’s Indian Economy 2 in 1
Dr. V.K.R.V. Rao
 1931-32 he wrote a book “National Income in British India”
 According to him, National income Rs 1689 crores Per capita Income Rs 62
 he is the first person who calculated national income in ‘Scientific way”
Ministry of Trade, Indian government:
 National income calculated on August 4, 1945-46
 They calculated National Income Rs.8234 crores while Per capita Income Rs.198
Author Year of National National Income Per capita
Income calculated Rs Crores Income in Rs
Dadabai Nouroji 1868 340 20
F J Alkinson 1875 574 31
Baring, Barbar 1882 525 27
Lord Kurzon 1897-98 675 30
Williom Digboy 1899 390 17
Sir B N Sarma 1911 - 50
Pindley 1911 1942 80
Vadiya, Joshi 1913-14 1087 44
Arnarald Laston 1919-20 2854 114
Sha, Combatta 1921-22 2364 74
V K R V Rao 1931-32 1689 62
B Natarajan 1938-39 1482 67
Eastern Economist 1939-40 1934 67
Ministry of Trade 1945-46 8234 198

Limitations on National Income estimates:

 There is no uniform way of calculating national income before independence, different thinkers
taken different parameters , different regions , different methods . the criticism of one on another
is very high during this time.
National Income estimates after Independence:
 In 1949, soon after the establishment of independent India, the National
Income Committee (NIC) was formed to compile statistics and estimate
national income.
 The committee was headed by P.C. Mahalanobis and included D.R. Gadgil
and V.K.R.V. Rao.
 On recommendation of National Income Committee, the preparation of National income was
given to Central Statistical Organization (CSO)
 The Central Statistics Office is a governmental agency in India under the Ministry of Statistics and
Programme Implementation.

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 for the first time, National income scientifically calculated by this committee. it has given its first
report in 1951, submitted final report in 1954.
 This committee has given report from 1948-49 to 1950-51
 This committee calculated national income as 8710 crores
 Per capital income Rs 225.
 CSO - 1954 to 2019-20 published national income officially.
Central Statistical Office (CSO)
 The Central Statistics Office is a governmental agency in India under the Ministry of Statistics and
Programme Implementation (MoSPI). Established In May 02, 1951
 Head Quators: New Delhi
 in 2019 it was merged in National Statistical Organisation
CSO divides economic system into 3 primary sectors, 13 Sub sectors;
1. Primary Sector 2. Secondary Sector 3. Territory Sectors
1. Primary Sector
A) Agriculture and Animal Husbandry B) Forests
C) Fishiries D) Mines And Quaries
2. Secondary Sector
1) Manufacturing Sector
A) Registered Manufacturing Sector
B) Un Registered Manufacuring Sector
2) Elictricity, Gas, Water Supply
3) Construction Sector
3. Territory Sector
1) Trade, Hotels and Restaurants 2) Transport, Information , Storage
3) Banking, Insurance, Real estate and other industries
4) Politics – Governance 5) Economic Services 6) Other Services
Name of the book Name of the Author
1. Poverty & Unbritish Rule in India (1876) Dadabai Nouroji
2. An Essay on India's National Income (1925-29) [Link]
3. National Income in British India (1931-32) Dr. [Link]
4. Wealth and Taxable Capacity of India (1921-22) [Link] & Combetta
5. The Frame work of the Indian Economy J.R. Hicks, Mukharje & S.K. Gose
6. Consumer Expenditure in India [Link]
(1931-40 to 1940-41)
7. Serving India's GDP Growth Sunil Jain & Ninan
8. India's Economic Policy Bimal Jalam
9. India's Recent Economic Growth...A Closer Look [Link] Raj
10. The Market that Failed - A Decade of Neo - C.P. Chandra Sekhar &
Liberal Economic Reforms in India Jayanthi Gosh

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Chouti sir’s Indian Economy 2 in 1

CSO NATIONAL INCOME – SERIES

CSO estimates will be available in three series 1) conventional series
2) Revised series
3) New series
Conventional series
 National income calculated in 1948-49 prices
 Since 1948-49 to 1964-65 calculated national income estimates.
 Conventional series divided economic system in to 13 different categories
First Revised series 1960-61
 Revised series means changes in national income estimates
 National income calculated in present prices from 1960-61 to 1975-76
Second revised series 1970-71
 instead of 1960-61, national income calculated based on 1970-71
 they have divided 13 sub sectors into 15 sectors
Third revised series 1980-81
 1980-81 has taken base year instead of 1970-71
 from 1980-81 to 1985-86 national income estimates done with this series.
FOURTH revised series 1993-94
 changed census based national income system
 base year 1993-94 considered instead of 1980-81
Fifth Revised series 1999-2000
 base year changed to 1999-2000
 first time national accounting system was used
Sixth revised series 2004-2005
 Base year changed to 2004-05
Present series 2011-12
 The advisory committee on national accounts statistics headed by Prof K. Sundaram appointed
to use system of national accounting for calculating national income.
 Since 2008, System of National Accounting Using By International Organisations Like IMF,
World Bank, UNO, OECD
 The base year changed from 2004-05 to 2011-12

NOTE:  Corporate companies uses MCA 2 (Ministry of Corporate Affairs Form 21) to calculate production.
 Agricultural data will be calculated Based on Agricultural Census
 Unorganised production in Villages will estimate based on NSSO data
 NDFC data will collect from SEBI, IRDAI, PFRDA, RBI

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National Statistical Office (NSO):
 On May 23, 2019 NSSO Was formed, CSO merged in it
 Present NSSO officially publishing National Income statistics.

National statistical Commission (NSC):

 The National Statistical Commission of India is an autonomous body which formed in June 2005
under the recommendation of Rangarajan commission.
 The NSC was headed by Prof. Rajeeva Laxman Karandikar who was appointed as Chairperson
of the Commission on 30 Nov 2022 for a period of three years.
 commission was first headed by Suresh Tendulkar in July 12, 2006
 present commission was commenced on July 15 2019
 chairman: Rajeeva Laxman
 Members: Mukesh Mahaneya , Ashith Kumar Sandhu
 ex-officio member : B V R Subramanyam (NITI AAYOG CEO)
 NSC having 1 part time chairman , 4 full time members , 1 ex officio member (NITI AAYOG
CEO) and 1 secretary (Chief statistics of India – J C Samantha )

NOTE: i)World Statistics Day – October 20

ii) 2022 Theme – Data For Sustainable Development
iii) National Statistics Day – June 29 (Birth Day Of Mahalnobis)

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Chouti sir’s Indian Economy 2 in 1

Growth patterns of India

Period Average Annual The Hindu rate of growth is a term
Growth rate used to describe the lower rate of economic
 to   growth observed in the Indian economy
 to   during the 1950s to 1980s and it averaged
 to   around 4%. This term was coined by an
 to   Indian economist, Raj Krishna in 1978
Negative Growth rates of India
Period Growth rate
India’s GVA in 2022-23 at Agri & Allied sectors
  Current price & Share of sectors
   lakh crores
  
  lakh crores Industrial sector

  GVA   lakh crores

1st AE
  *
Service sector
 lakh crores

Share of Various Sectors in India & TS GVA at current price (%)

Year Agri &  Allied Industrial sector Service sector
sectors    
India India India
   
   
   
   
   
   
   
   
   

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 GDP, GNP, NNP, GVA and Growth Rate of India at Current and Constant Price

Year GDP GNP NNP GVA

Current  Constant  Current  Constant  Current  Constant  Constant Current

(Lcr) (Lcr) (Lcr) (Lcr) (Lcr) (Lcr) (Lcr) (Lcr)
Now

            Tcr)   Tcr)  
            Tcr) 8 104  
               
               
rd
 (3 RE)               
nd
 (2 RE)               
st
(1 RE)              
 (PE)               
st
 (1 AE)               
Note : 3rd RE 3rd revised estimates 2nd RE 2nd revised estimates 1st RE 1st revised estimates
PE = Provisional estimates 1st AE 1st Adavanced estimates Growth rate
LcrLakh crores Tcr Thousand crores

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