NATIONAL INCOME

National Income Accounting is used to measure the

NNP @ FC = National Income
economic activity in the national economy as a whole.
GDP @ market price: Total value of all final goods and services produced within a country,
measured at the prices they are sold to consumers, including indirect taxes but excluding
subsidies.

FACTOR COST (FC)

It refers to cost of all factors of production used or consumed in producing goods & services.
In other words, Factor Cost (FC) = Market Price – Net Indirect Taxes Where, Net Indirect
Taxes (NIT) = Indirect Taxes – Subsidies
Factor Cost = Market Price - Indirect Taxes + Subsidies.

MARKET PRICE
GROSS DOMESTIC PRODUCT (MP) NET DOMESTIC PRODUCT
(GDP) It refers to the actual (NDP)
Total value of marketable final transacted price of
goods and services produced goods and services. An annual measure of the
within the DOMESTIC TERRITORY economic output of a nation that
during a financial year. is calculated by subtracting
DEPRECIATION from GDP.
Example: Cars manufactured in
India by Japanese company BASIC NDP = GDP – Depreciation.
will be included in Indian GDP.
CONCEPTS
RELATED TO
GROSS NATIONAL PRODUCT NATIONAL NET NATIONAL PRODUCT
(GNP) (NNP)
INCOME:
The value of all final goods and The total value of finished goods
services produced by the and services produced by a
CITIZENS of a country in one year country's citizens overseas and
irrespective of the Geographical NET FACTOR INCOME domestically less depreciation.
Boundaries. FROM ABROAD
It is the difference b/w the
NNP is always lesser than GNP
In India’s case, GNP is lower than (Reason: the Depreciation can
its GDP as net income from factor income earned by a
country from abroad/rest never be reduced to zero and will
abroad has always been negative always be positive.)
of the world and factor
in India.
income paid to a country
NNP = GDP + NFIA - Dep.
GNP = GDP + Net Factor Income abroad/rest of the world.
from Abroad (NFIA) Net Factor Income from NNP = GNP - Depreciation
Abroad - Net Factor Income to
Abroad

TRANSFER PAYMENTS
It refers to payments made by the government to WHAT IS DEPRECIATION
individuals for which there is no economic activity It is a measure of the wearing out,
produced in return by these individuals. consumption or other loss of value of a
depreciable asset arising from use,
effluxion of time or obsolescence through
E.G. OLD AGE PENSIONS, SCHOLARSHIPS ETC . technology or market changes.
NOTE: Subsidies are given for encouraging the When you buy a new car for $35,000
production and thus does not fall under transfer and try to sell it back about a year later
payments. but the dealer offers you only $7,000.

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 ITEMS INCLUDED IN NATIONAL ITEMS NOT INCLUDED IN
INCOME NATIONAL INCOME
Final Goods (Consumer + Capital) Intermediate Goods (Raw materials)
Marketable activities Barter system transactions
Wages Charitable activities
Brokerage services Black money
Subsidies Goods produced for self - Transfer payments Externalities
consumption Imputed rental for owner Household activities by self Gains from
occupied housing. resale of goods such as houses

INCOME
PERSONAL INCOME PERSONAL DISPOSABLE INCOME
Sum of all incomes actually received The income available to the households
by all individuals during a year. over which it has the complete
authority.
PI = National Income (NI) - Undistributed
PDI = Personal Income - Direct taxes paid by
Corporate Profits - Corporate Taxes - Social
households & miscellaneous fees, fines, etc.
Security Contributions - Interest
Payments + Transfer Payments A part of PY is paid to the govt. in the
form of personal taxes or non tax
Even PI is not the income over which payments
the households have complete say. eg. user charges & Fines.

OPPORTUNITY COST
It refers to what you have to give up to buy what you want in terms of other
good and services.

VALUE OF NEXT BEST ALTERNATIVE THAT IS GIVEN UP.

PER CAPITA INCOME

Measure of average income earned per person in a given area in a specific time.
Per Capita Income = Total Income / Total Population
PCI is a measure of prosperity for a region. Higher PCI = Higher Purchasing Power.

UNDISTRIBUTED PROFITS
The part of profit earned by the firms and government enterprises which is not
distributed to the factors of production.

CORPORATE TAX
Which is imposed on the earnings made by the firms and does not accrue to the
households.

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 METHODS OF MEASURING NATIONAL INCOME
Under this method, GDP is calculated at market prices, which is the
total value of outputs produced at different stages of production.
It focuses on supply side of the product.

VALUE ADDED/
PRODUCT METHOD Value of final good ( Sweet) = Total value addition in the production stage
Rs. 150 = Rs. 50 + Rs. 100 = Rs. 150

This approach focuses on aggregating the payments made by firms to

households, called factor payments.
GDP = Wages+ Interest + Rent +Profit + Dividend + Indirect Taxes-
Subsidies+ Depreciation.

FACTORS OF PRODUCTION TYPES OF FACTOR Y

INCOME METHOD Land, Labour, Capital, Rent, Wages, Interest,
Organization Profit

Estimates GDP by summing up the expenditure incurred by all the four sectors of
macro-economics on the purchase of final goods and services produced by the firms.
GDP = C + I + G + (X - M)

CONSUMPTION EXPENDITURE (C)

It is the personal consumption made by households.
Payment of which is paid by households directly to the firms.

EXPENDITURE INVESTMENT EXPENDITURE (I)

METHOD Investment is an addition to capital stock of an economy in a given
time period.
It includes investments by firms as well as govt sectors.

GOVERNMENT EXPENDITURE (G)

It includes the value of goods and service purchased by Government.
Government expenditure on pension schemes, scholarships, unemployment
allowances, etc. are not included as they come under transfer payments.

HOUSEHOLD SECTOR PRIVATE SECTOR

Expenditure only on consumption goods Spends only on Capital goods
(Domestic + Imports) (Domestic + Imported)

GOVERNMENT EXTENAL SECTOR

Purchases both consumption and capital Exports of both capital and consumuer
goods goods
 GDP

REAL GDP NOMINAL GDP POTENTIAL GDP

It refers to current year The maximum possible
It refers to the current
production of final goods level of output an
year production of goods
and services valued at economy can sustain
& services valued at BASE
CURRENT YEAR prices in over the long term
YEAR prices.
a financial year. without causing inflation.

Represents economy's
productive capacity when
Such base year prices Nominal GDP =
all resources (labor, capital,
are constant prices. Quantity × Prices (MP) & technology) are fully &
efficiently utilized.

GROSS FIXED CAPITAL FORMATION

Refers to the growth in the size of fixed capital
in an economy.
WHY IS REAL GDP BETTER
IT COMPRISES OF: THAN NOMINL GDP?
Construction and maintenance of fixed assets such
Increase in R. GDP implies necessary
as dwellings, roads, railways etc. increase in the production of goods
Machinery and Equipment. and services which is not necessary
with an increase in Nominal GDP.
Intellectual property rights such as R&D, software etc.
Cultivated biological resources - Increment in livestock
and plantation.

To make the calculation of

Base year is the year used as
GNP/GDP easier, economists
the beginning or the reference 1 2 use a price index to find the
year for constructing an index.
real GNP/GDP.

A Price index is a
It shows a change in
BASE YEAR
number showing the
changes in the 3 4 the general price level
of an economy.
overall level of prices.

NOTE:

GDP base year from existing 2011-12 to 2022-23.

Government has formed 26-member Advisory Committee on National Accounts

Statistics (NAS) to update the GDP base year from existing 2011-12 to 2022-23.

Under chairmanship of Biswangth Goldar has been formed to identify new data
sources & refine methodology for compiling NAS.

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 It shows the extent to which A comprehensive measure of
an increase in GDP has inflation.
happened on account of 1 2 Changes in consumption pattern
HIGHER PRICES rather than an or introduction of goods & services
increase in output. are automatically reflected.

GDP DEFLATOR
It is the ratio of GDP GDP deflator is
at current prices to published on a quarterly
GDP at constant
2 4 basis since 1996 with a
Nominal GDP lag of two months.
prices. × 100
Real GDP

INDICATING INFLATION INDICATING DEFLATION

Price deflator >100 means that Price deflator <100 means that
5 6 current year price is less than
current year price is more than
base year price. base year price.

RECESSIONARY GAP INFLATIONARY GAP

Recessionary gap, or contractionary An inflationary gap measures the
gap- when a country's real gross difference between the current real
domestic product (GDP) is lower than GDP and the GDP of an economy
its GDP at full employment. operating at full employment.

INFLATIONARY GAP
It reflects the extent to which Inflationary Gap =
the economy is operating RECESSIONARY GAP Actual GDP - Potential GDP
below its potential.

RECESSIONARY PHASE EXPANSIONARY PHASE

Overall output measured by Overall output measured by

GDP decreases from 1 quarter GDP increases from 1 quarter
to another. to another.

Contraction of economy Economic growth rate = +ve .

(Growth = -ve)
Unemployment = ↓
Unemployment = ↑

(massive layoffs) Brings Reaches to a peak (Boom

Recession in the economy phase) Most unstable state
Depression = Lowest point. Overheated economy.

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 MSP
MSP is the pre- announced price at which the govt. procures crop from
farmers to ensure they get minimum return

Determined by: Recommended by commission for Agriculture

cost and prices (CACP)
Approved by: The Cabinet committee on economic affairs (CCEA)
chaired by the PM.

The Indian government announces Minimum Support Prices (MSPs) for 23

crops, encompassing 7 cereals, 5 pulses, 7 oilseeds, and 4 commercial crops.

The Indian government announces

Minimum Support Prices (MSPs) for crops:

( Common )

( Grade A )

(Medium Staple)

Long Stapler

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