NATIONAL INCOME -
CONCEPTS
NATIONAL INCOME
• It is the flow of production of
goods and services in the
economy
• Goods and services produced in
a given year is measured by
national income
Definition
Prof Fisher defines national income
as, “National income means the
services enjoyed by the ultimate
consumer with the help of their
physical or human resources”
Features
• Macro Concept
• Flow Concept
• Time Period
• Money Value
• Duplication
• Depreciation
• Net income from abroad
EVERYTHING PRODUCED
EVERYTHING PRODUCED BY THE
WITHIN THE COUNTRY
RESIDENTS PLUS THE INCOME FROM
ABROAD
GNP
• It refers to aggregate
market value of all final
goods and services
produced in the country
during a year.
• It is the sum total of
consumption, investment,
government expenditure
and net exports
• All are measured at current
market prices
FORMULA OF GNP
IN OPEN ECONOMY
C+I+G+X-M
FORMULA OF GNP
IN CLOSED ECONOMY
C+I+G ONLY
GDP • It refers to sum total of the
value of goods and services
• produced in the country by
the nationals of the country
• It refers to the money value of
goods and services produced
within the geographical
boundaries of the country
• Whatever that is produced by
the Indians or foreigners
working in India
• Income earned by Indians
outside India will not be
included in GDP
FORMULA OF GDP
GDP = GNP – NET FACTOR INCOME
FROM ABROAD
NDP
• When depreciation cost is
deducted from GDP, then we get
NDP
• Net Domestic Product is the net
output of the economy after
deducting depreciation
NDP
FORMULA
NDP = GDP - DEPRECIATION
NNP
• Net National Product is the net
output produced in the country in a
year
• The value of NNP is obtained by
deducting depreciation from GNP
NNP
FORMULA
NNP = GNP - DEPRECIATION
DEPRECIATION
• It is the wear and tear of an asset
• When the value of asset falls down
after a certain time period after using
it
CIRCULAR FLOW OF
INCOME AND
EXPENDITURE
- SANIKA GHOTANKAR
20
TWO SECTOR
MODEL
21
THREE SECTOR
MODEL
22
FOUR SECTOR
MODEL
METHODS OF
CALCULATING NI
METHODS
PRODUCT/OUTPUT INCOME EXPENDITURE
OUTPUT METHOD /
PRODUCT METHOD
• This method is also known as “inventory” method
• This method takes the total sum of final goods and
services produced in the country in a year in monetary
terms
• This method is calculated in following way
• = Total Product multiplied by Market Price
OUTPUT METHOD /
PRODUCT METHOD
• This method takes into account different products by
different sectors such as
• Agriculture
• Industry
• Service
• Trade
• E-Commerce
• Transport
• Communication
Final Raw
Goods OR Materials
and , Inputs
Services
PRODUCT/OUTPUT
METHOD
• Under product method, either the value of final goods
and services or the value of raw materials that are
required to make that commodity is considered
• If the value of final product and raw materials is
considered then it will lead to double counting
• So either value of final product or raw materials are
considered
EXAMPLE
PIECE OF CLOTH 500 Rs
TAILOR 200 Rs
FASHION 100 Rs
SHOPKEEPER COMISSION 200 Rs
1000 Rs
OR
FINAL VALUE OF DRESS 1000 Rs
INCOME METHOD
• According to this method, total of all incomes earned
by all factors of production gives us the national
income
• Production of goods and services involves the use of
land, labour, capital and enterprise
• Thus, it includes
❑ Rent
❑ Wages
❑ Interest
❑ Profit
INCOME METHOD
• Another important source of income is
mixed income of self-employed
FORMULA
RENT + WAGES + INTEREST + PROFIT + MIXED INCOME
PRECAUTIONS
• It does not include transfer payments
• It does not include income from illegal activities
• It does not include sale of second hand goods
• It does not includes windfall gains
EXPENDITURE METHOD
• Under Expenditure method , all expenditures are
added.
• Expenditure on consumer goods and services by
individuals and households
• Government expenditure on goods and services
• Investment expenditure on machinery, tools , etc.
• Net exports i.e. Exports - Imports
FORMULA
C+I +G+X–M
PRECAUTIONS
• Second hand goods are not included
• Transfer payments are not included
• Purchase of old shares and bonds are not included
DIFFICULTIES FACED IN
CALCULATING NI:
• Unpaid services like service of housewives
• Double counting
• Income from illegal activities
• Existence of Unorganized sector
• Calculation of depreciation
• Value of Government services
DIFFICULTIES FACED IN
CALCULATING NI:
• International transactions
• Profits of Multinational Companies
• Lack of reliable & insufficient data due to
illiteracy
• Untrained staff
• Huge variety of goods & services
• Inflation