NATIONAL INCOME

National Income is the total income earned by the residents (people and businesses) of a country
in one year. It includes wages, profits, rent, interest, etc., earned within the country and from
abroad.

 National Income is created through the continuous flow of income among different sectors.
 Major Players involved in the economy:
o Households/Individuals
o Business Firms/Investors
o Government
o Foreign Nationals
 To make it simple, only Households and Business Firms are considered for basic
understanding.

Circular Flow of Income

 Supply Side:
o Households supply factors of production:
 Labour
 Land
 Capital
 Entrepreneur
o Business firms use these factors to produce goods and services.
 In Return, business firms pay:
o Wages for Labour
o Rent for Land
o Interest for Capital
o Profit for Entrepreneurship
 Key Point:
o Household Income = Business Firms' Expenditure
o Hence, one's income is another's expenditure in the economy.

Methods of Measuring National Income

Method Meaning
Income Method Adding up all factor incomes (Wages, Rent,
Interest, Profit) earned by households.
Product/Output/Production/Value Added Adding the market value of all goods and
Method services produced in the economy.
Expenditure or Consumption Method Adding total expenditures made on final goods
and services.

In January 2015, the Ministry of Statistics and Programme Implementation (MoSPI) launched a
New Series of National Income Estimation.
  This New Series follows System of National Accounts (SNA) 2008, which is an
international guideline.

Measures of National Income:

Measure Full Form Easy Meaning Formula
GDP Gross Domestic Total value of goods & services GDP = Sum of Value
Product produced within a country in a year. Added by all sectors (at
market prices)
NDP Net Domestic GDP minus Depreciation (loss of NDP = GDP –
Product value of assets like machines over Depreciation
time).
GNI Gross National GDP + Incomes earned by Indians GNI = GDP + Net Factor
Income from abroad – Incomes earned by Income from Abroad
foreigners in India. (NFIA)
NNI Net National GNI after subtracting Depreciation. NNI = GNI –
Income (Pure income of Indians) Depreciation
GNDI Gross National GNI + Net Current Transfers from GNDI = GNI + Net
Disposable Income rest of world (gifts, remittances etc.). Transfers
NNDI Net National GNDI – Depreciation. (Income NNDI = GNDI –
Disposable Income available for spending/saving after Depreciation
adjusting losses)
GDIG Gross Domestic Total investments (buildings, Part of Expenditure
Investment by machinery, infrastructure etc.) made Method (Government
Government by Government inside the country. sector investment)
GDIH Gross Domestic Total investments made by Part of Expenditure
Investment by Households (buying houses, land, Method (Household
Households valuables etc.). sector investment)

 Factors of Production
Factors of production are the basic resources used to produce goods and services.

There are four factors:

 Land → Natural resources (land, minerals, water).

 Labour → Human effort (workers, employees).
 Capital → Money, machines, tools used for production.
 Entrepreneur → The person who organizes the business (owner, manager).

 Tax on Production
Taxes that a company must pay to the government for running the production, whether or not
they produce or sell anything.
  Examples: Land revenue tax, License fees for opening a factory, Registration fees

 Factor Cost
Factor cost means the total cost of using factors of production (land, labour, capital,
entrepreneur). Ie, The money you pay to workers, landowners, investors, and yourself.

It includes:

 Wages (for labour),

 Rent (for land),
 Interest (for capital),
 Profit (for entrepreneur).

Factor Cost=Compensation to Employees+Operating Surplus or Mixed Income+Consumption of Fix

ed Capital

 Gross Value Added (GVA)

GVA = Final Output – Intermediate Consumption

It shows how much value your business added to the raw materials and services.

Simple example:
If you sell bread for ₹80 and use inputs worth ₹30 (flour + electricity),
then GVA = 80 - 30 = ₹50.

It shows the new value you created.

 Compensation to Employees (CE)

The total payment you make to your workers.

It includes:

 Wages and salaries,

 Bonuses,
 Contributions to PF (Provident Fund),
 Free benefits (like free meals, uniforms, insurance).

Example:
If your bakery pays ₹20,000 salary + ₹5,000 bonus to workers, then CE = ₹25,000.

 Operating Surplus or Mixed Income (OS/MI)

 Operating Surplus → Profit earned by businesses other than wages and salaries.
 Mixed Income → When a person earns both profit and wage, like a shopkeeper working in
his own shop.
Example:
After paying salaries and bills, the remaining bakery profit is called Operating Surplus.

If a farmer both works in the field and earns profit, it is Mixed Income.

 Incorporated and Unincorporated Enterprises:

 Incorporated Enterprises: These are separate legal entities (like companies or LLPs). They
can enter into contracts, borrow funds, and have their own assets and liabilities distinct from
the owners.
 Unincorporated Enterprises: These are not separate legal entities. The owners are
personally liable, and the business operations and assets are directly tied to the owners (e.g.,
proprietorships or partnership firms).

 Consumption of Fixed Capital (CFC)

This is the loss of value of machines, buildings, or equipment due to wear and tear. It is like
depreciation — natural aging or using of assets.

Example:
If your bakery oven gets old and its value falls by ₹5,000 per year, then ₹5,000 is your Consumption
of Fixed Capital.

GVA at Basic Price

 GVA at Basic Price = GVA including production subsidies and excluding production taxes.
 "Basic price" means:
→ Real price producers get before any production taxes are added.

GVA at Basic Price= GVA at Basic Price=GVA+Production Subsidies−Production Taxes

Meaning:
Government helps producers (through subsidy) and taxes them too. We adjust both to find the
basic reward for production

GVA at Factor Cost

 GVA at Factor Cost = GVA at Basic Price, but only the reward to factors of production
(labour, capital).
 No production taxes or subsidies involved.
 GVA at factor cost = Wages + Profit + Depreciation

GVA at Factor Cost=GVA at Basic Price−(Production Taxes−Production Subsidies)

Meaning:
Only workers, owners, machines’ earnings. No tax burden or subsidy benefit counted.

Example

Imagine a company:

Item Value (₹)

Output (Sale) 100
Intermediate goods used 40
Production Tax 6
Production Subsidy 2

Step 1: GVA = Output – Intermediate Consumption

= 100 – 40 = 60

Step 2: Net Production Tax = Production Tax – Subsidy

=6–2=4

Step 3: GVA at Basic Price = GVA + Subsidy – Tax

= 60 + 2 – 6 = 56

Step 4: GVA at Factor Cost = GVA at Basic Price – Net Production Tax
= 56 – 4 = 52

Production Method
1.1. Gross Domestic Product (GDP)
 GDP is the total money value of all goods and services produced inside a country during
one year.
 It tells us how much wealth the country created through production.
 It doesn't count sales, profits, or spending directly — only production value.

GDP at Market Prices

 GDP at Market Prices means the value of goods and services at the prices paid by
consumers, including taxes and after adjusting for subsidies.
 GDP at Market Prices=GVA at Basic Prices+(Product Taxes−Product Subsidies)
 or simply:

GDP at Market Prices= GVA at Basic Prices + (Product Taxes−Product Subsidies)

Or
GDP=GVA at Basic Prices Net Product Taxes
 Term Simple Meaning Examples
Product Extra money collected by the Excise duty (on petrol, alcohol), Sales tax/GST,
Taxes government on each product Import/export duties
sold.
Product Money given by the government Food subsidies (ration shops), Petrol subsidy,
Subsidies to make some products cheaper. Fertilizer subsidy, Subsidized insurance for
farmers

Why add taxes and subtract subsidies to calculate GDP?

 Taxes raise the market price, so we add them to GVA.

 Subsidies lower the market price, so we subtract them from GVA.
 Goal: We want to know the final price people are actually paying in the market.

Example

Imagine in India for 1 year:

 GVA at Basic Price = ₹100 crore

 Product Taxes = ₹20 crore
 Product Subsidies = ₹5 crore

Then,

Net Product Taxes=20−5=15 crore

GDP=100+15=115 crore

Thus, GDP = ₹115 crore.

Resident Units
Meaning:

 Resident units are businesses, shops, offices, banks, factories, etc. operating inside the
country.
 They must stay and produce for at least 1 year inside the country.
 Even Indian embassies, military bases abroad are counted as resident units.

(But foreign embassies inside India are not counted.)

Economic Territory
Meaning:

 Economic territory means the area that is economically controlled by our government.
 It includes:
o Land (states, islands, airspace, waters)
 o Indian embassies and military bases abroad
o Special areas like Free Trade Zones, Offshore Finance Centres
 It excludes:
o Foreign embassies located inside India
o International organizations inside India

1.2. Net Domestic Product (NDP)

 NDP means the Net (real) production happening inside a country.
 It is found by subtracting the wear and tear (damage) of machines, factories, etc., from
GDP.

NDP=GDP−Consumption of Fixed Capital

Why GDP is mostly used instead of NDP?

 Measuring Consumption of Fixed Capital is very hard — you need:
o Present value of assets
o Lifespan of different machines
o How fast they lose value
o Good data and expert statisticians
 Many countries don't have good enough data to calculate it properly.
 Different countries use different methods, so NDP becomes difficult to compare
internationally.

Thus, GDP is used more commonly because:

 Easier to calculate.
 Easily comparable between countries.

But, NDP is economically better if you want to study the real strength of the economy
because it removes all wear and tear losses.

INCOME METHOD
[Link] NATIONAL INCOME (GNI)

GNI is the total income earned by all residents (individuals and institutions) of a country
from production activities, both inside and outside the country.

1. GNI = GDP + Net Primary Income from Rest of the World (ROW)
  GDP = Value of goods & services produced within the country.
 GNI = GDP plus the net income from abroad (rest of the world).

2. What is Primary Income?

Primary income = Income earned by residents from production or ownership of productive

assets (e.g., land, capital, labor).

It includes:

 Compensation of employees (wages/salaries)

 Property income (interest, rent, dividends, profits)
 Entrepreneurial income

Does not include:

 Taxes on income or wealth

 Social security benefits
 Pensions or gifts (these are called current transfers)

3. Components of Primary Income

Type Meaning Example

Compensation to Wages earned for labor input Salary from working abroad
employees
Property income Income from lending/renting Interest from foreign bonds
capital/land
Entrepreneurial income Profit from business Indian company earns profit
abroad

4. Net Primary Income from ROW

Incomes received by Indian residents from foreign countries MINUS incomes paid to foreigners
working or investing in India

Net Primary Income from ROW =

Net Compensation of Employees + Net Property and Entrepreneurial Income

If Net Income from ROW is:

 Positive, then GNI > GDP

 Negative, then GNI < GDP

5. Final Formula for GNI

GNI = GDP + Net Compensation of Employees from ROW + Net Property &
Entrepreneurial Income from ROW
6. Net Property Income

It refers to the income earned from ownership of financial and natural assets, such as:

 Rent from land/buildings

 Interest from loans or deposits
 Dividends from shares and investments
 Royalties from patents, copyrights, etc.

Net Property Income = Property Income RECEIVED from the Rest of the World (ROW)
– Property Income PAID to the Rest of the World (ROW)

Example India’s GDP = ₹100 lakh crore

 Compensation earned by Indians abroad = ₹3 lakh crore

 Compensation paid to foreigners in India = ₹1 lakh crore
 Net property income from abroad = ₹2 lakh crore

Then:, Net Primary Income from ROW = (3 – 1) + 2 = ₹4 lakh crore

GNI = ₹100 + ₹4 = ₹104 lakh crore

Difference between GDP and GNI

Point of GDP (Gross Domestic Product) GNI (Gross National Income)
Comparison
Meaning Measures the total value of goods and Measures the total income earned
services produced within the country by residents, including from
abroad
Focus Production measure Income measure
Catch Word "Product" "Income"
Includes Value of output produced by all Incomes earned by residents,
resident producers within the country whether earned domestically or
abroad
Excludes Income earned by residents from Output produced by foreigners in
abroad and excludes income sent India, and includes income from
abroad by foreigners abroad
Formula Sum of value added of all resident GNI = GDP + Net Primary
producers in the economic territory Income from Rest of the World
(ROW)
Use in National Used to measure domestic economic Used to measure income level of
Accounts performance a country's residents
UN SNA Emphasizes 'P' = Product – it's about Emphasizes 'I' = Income – it's
Clarification production about what residents receive
Example A foreign company producing in India An Indian earning salary abroad
adds to India’s GDP but not GNI adds to India’s GNI but not GDP
  GDP = what is produced within the country.
 GNI = what income residents actually receive (including from abroad).

2.2. Net National Income (NNI)

 Net National Income (NNI) is the total income earned by the residents of a country after
deducting depreciation (also known as Consumption of Fixed Capital) from Gross
National Income (GNI).
 It reflects the actual income available for consumption and saving.

NNI = GNI – Consumption of Fixed Capital (CFC):

 Consumption of Fixed Capital represents the reduction in the value of capital assets due
to wear and tear, usage, or obsolescence.
 NNI is also known as National Income in simple terms.
 It gives a real picture of income because it removes the effect of depreciation.

Per Capita Income:

Per Capita Income = NNI / Population

 This tells us the average income per person in the country.

 Used to compare living standards across countries or over time.

Example: If

 GNI = ₹200 lakh crores

 Consumption of Fixed Capital = ₹20 lakh crores
Then , NNI = 200 – 20 = ₹180 lakh crores

2.3. Gross National Disposable Income (GNDI)

 Disposable Income is the income available to be either spent or saved by the residents of
a country.
 GNDI represents the total income available to the entire economy (i.e., all residents) for
final consumption and gross saving.

GNDI = GNI + Net Current Transfers from Rest of the World (ROW)

Where,

 GNI = Gross National Income

 Net Current Transfers from ROW =
Transfers received from abroad – Transfers paid abroad
Why GNDI is Different from GNI?

 GNI includes only income generated from production and factor incomes.
 GNDI adds net current transfers (free payments) from Rest of the World (ROW) to GNI,
which do not arise from productive activity, but still increase income available for
spending/saving.

Current Transfers

Current Transfer = One-way payment made without expecting anything in return.

 No asset is acquired, no goods/services exchanged.

 These are made out of social responsibility or legal obligation.

Examples of Current Transfers:

 Old age pension

 Unemployment benefits
 Disaster relief funds
 Foreign remittances
 Interest paid on public debt
 Taxes paid to the government

Types of Current Transfers:

(a) Current Taxes on Income & Wealth:

 Includes income tax, wealth tax, and corporate taxes paid to the government.

(b) Social Contributions & Benefits:

 Contributions = Paid to schemes like EPF, Pension Schemes by workers/employers

 Social benefits are a type of current transfer received by households from the government
or institutions, Social insurance schemes, Public or private institutions without giving
anything directly in return. They are meant to help people during specific life situations like
unemployment, illness, old age, poverty, or child-rearing.
o PM Suraksha Bima Yojana,
o PM Jeevan Jyoti Bima Yojana,
o Indira Gandhi National Old Age Pension Scheme

(c) Other Current Transfers:

 Insurance claims/premiums (non-life)

 Aid transfers between governments (e.g., disaster relief)
 Transfers from NGOs (NPISHs)
 Remittances between resident and non-resident households

 Transfer within residents (domestic): No net effect on GNDI

 Transfer between resident and non-resident units (ROW): Affects GNDI
 # If net current transfers from ROW are positive, GNDI > GNI
# If net current transfers from ROW are negative, GNDI < GNI

o GNDI is the best measure of income available to a country for actual use (spending/saving).
o It reflects the real disposable income when international gifts, grants, remittances, and aid
are included.

Expenditure Method of GDP Calculation

The Expenditure Method calculates GDP based on the total expenditure incurred on final goods
and services in an economy during an accounting year.

 Why this works? Because, Income = Expenditure = Output (as per circular flow of income)

GDP (Expenditure Method) – Formula (SNA 2008 Standard)

GDP = PFCE + GFCE + GCF + (Exports – Imports) + Discrepancies

Symbol Full Form Meaning

PFCE Private Final Consumption Spending by households and NPISHs on
Expenditure goods/services
GFCE Government Final Consumption Government spending on public
Expenditure goods/services
GCF Gross Capital Formation Investments in fixed assets + inventories +
valuables
(X – M) Exports – Imports Net Exports (foreign spending on domestic
goods – vice versa)
Discrepancies Adjustment for mismatch in values (explained
below)

I. Private Final Consumption Expenditure (PFCE)

 Expenditure by households and NPISHs on final goods/services.
 Includes food, clothing, education, health, electricity, etc.
 Includes both domestic and international spending:

PFCE = Final Consumption Expenditure by Resident Households in Domestic Market

+ Final Consumption Abroad – Final Consumption in Domestic Market by Non-
residents

Note: Corporations do not have final consumption. Their purchases are considered intermediate
consumption or remuneration in kind.

II. Government Final Consumption Expenditure (GFCE)

 Expenditure by general government and NPISHs for:
 o Collective consumption (e.g., police, roads, defense)
o Individual consumption (e.g., free food, disaster relief, health services)

Goods/services provided free or subsidized by the government are considered social transfers in
kind and are part of GFCE.

III. Gross Capital Formation (GCF)

 Refers to investment in:
o Fixed assets (buildings, machinery, etc.)
o Inventories (raw materials, work-in-progress, unsold stock)
o Valuables (gold, artworks, etc.)

GCF = Value of New Assets – Disposals of Old Assets

IV. Net Exports (Exports – Imports)

 Exports add to domestic GDP because foreign countries are buying from us.
 Imports are subtracted because that spending benefits foreign GDP.

Net Exports = Exports – Imports

V. Discrepancies
Discrepancies refer to the difference or mismatch that arises when calculating GDP using different
methods (mainly between the Output Method and the Expenditure Method).

Since GDP can be calculated in three ways—Output, Income, and Expenditure—it is expected that
all three should ideally give the same value. However, due to practical limitations, there is often a
gap between the GDP values calculated by each method. This gap is called "Discrepancies".

 Arise due to:

o Time lag between production and consumption
o Loss or damage during transport/storage
o Recording mismatches in data

Discrepancies are added or subtracted to reconcile GDP estimates from different methods (Output
vs. Expenditure).

Exam Tip: Match GDP Methods

Method Basis Formula

Output Method Value added GDP = GVA at basic prices + Taxes – Subsidies
Income Method Factor GDP = Wages + Rent + Interest + Profits + Mixed
incomes income
Expenditure Spending GDP = PFCE + GFCE + GCF + (X – M) + Discrepancies
Method