National Income

(Concept and Measurement)

 National Income
• National income is money
value
the of all the final goods and
services produced by a
during a country period of
National incomeone consists
year. of a
collection of different types of
goods and services of different
types.

2
 National Income
• Since these goods are measured in different
physical units it is not possible to add them
together. Thus we cannot state national
income is so many millions of meters of cloth.
Therefore, there is no way except to reduce
them to a common measure. This common
measure is money.

3
Basic Concepts in National Income
• (a) Gross National Product (GNP)
• (b) Gross Domestic Product (GDP):
• (c) Net National Product (NNP) or
National Income at Market Prices
• (e) Net Domestic Product (NDP)
• (f) Personal Income
• (g) Disposable Income

4
(a) Gross National Product (GNP)
GNP is defined as the total market value of all
final goods and services produced in a year in a
country.
In this concept of GNP, there are certain factors that have
to be taken into consideration:
First, GNP is the measure of money, in which all kinds of
goods and services produced in a country during one year
are measured in terms of money at current prices and
then added together.
Secondly, to avoid double counting, only the value of final
goods and services should be included. The values of all
intermediary goods should be excluded from GNP.
GNP includes the following:
(1) Value of final Consumers’ goods and services which satisfy the
immediate wants of the people, denoted by C;
(2) Gross private domestic investment in capital goods consisting of
fixed capital formation, residential construction and inventories of
finished and unfinished goods, denoted by I;
(3) Goods and services produced by the government, denoted by G;
and
(4) Net exports of goods and services, i.e., the difference between
value of exports and imports of goods and services, known as net
income from abroad (X-M). It also includes Net factor income from
abroad.
So, GNP = C + I + G + (X-M)
 Gross Domestic Product (GDP)
This is calculated at market prices and is known as GDP at market
prices. Dernberg defines GDP at market price as “the market
value of the output of final goods and services produced in the
domestic territory of a country during an accounting year.” It does
not include net factor income from abroad.

GDPMP = GNPMP – Net Factor Income from Abroad

(c) Net National Product (NNP) or National
Income at Market Prices
In the production of GNP, we consume or use up some fixed capital
i.e., equipment, machinery, etc. The capital goods like machinery,
wear out or fall in value as a result of its consumption or use in
production process.

This is called depreciation. When charges for depreciation are

deducted from GNP we get NNP. NNP is therefore, the market
value of final goods and services after providing for depreciation. It
is also called National Income at market price.

NNPMP = GNPMP – Depreciation

 d) National Income or Net National
Product at Factor Cost
 National Income at factor cost which is also simply called
National Income means the sum of all incomes earned by
resource (factor) suppliers for their contribution of land,
labour, capital and entrepreneurial ability which go into
the year’s net production.
 The difference between NNPFC and NNPMP arises from
the fact that indirect taxes and subsidies cause market
prices of output to be different from the factor incomes
resulting from it.
National Income
Or = NNPMP – Indirect Taxes + Subsidies
NNPFC
Net Domestic Product (NDP)
NDP is the value of net output of the economy during
the year. Some of the country’s capital equipment
wears out or becomes obsolete each year during the
production process. The value of this capital
consumption (or depreciation charges) is some
percentage of gross investment which is deducted
from GDP. Thus

Net Domestic Product = GDPFC - Depreciation

 (f) Personal Income
Personal income is the income of all incomes actually received by all
individuals or households during a given year. Personal income or income
that is received may be different from national income because some

income which are earned such as social security contributions,

corporate income taxes and undistributed corporate profits are not
actually received by households and conversely, some incomes which are
received by households like transfer payments are not currently earned
(eg.: old age pensions, unemployment benefit, relief payments etc.). Thus,

Personal Income = National Income – Social security contributions –

Corporate income taxes – Undistributed corporate profits + Transfer
payments
 (g) Disposable Income
Even whole of the income which are actually received by the
people are not available to them for consumption. This is because
the government may levy some personal taxes such as income
taxes, property taxes etc. The income that remains after the
payment of personal taxes from personal income is called
personal disposable income.

Disposable Income = Personal Income – Personal Taxes

Disposable income can be either consumed or saved.

Hence,

Disposable Income = Consumption + Savings

 Product Method
• This method is popular in U.S.A. and is
called as Total Product method or Goods
Flow Method. In India, It is known as
inventory or Product method. In this method,
the economy is classified in to three
transaction sector like industrial, services and
foreign transaction sector where
international [Link] are

2
4
 Product Method
• We calculate the money value of all
final goods and services produced in
an economy during a year. The money
value of these goods and services is
calculated at market price. The sum-
total is called the GDP at market price

1
4
Product Method
 Value Added Method
• In order to avoid double
valueadded counting at each stage
production should be calculated of
arrive at GNP. The difference between theto
value of output and input at each stage of
production is called the value added. By
summing such value added for all industries
in the economy, GNP can be found out.

1
6
Value Added Method
 Income Method

• We estimate the income earned by

various factor services engaged in
the process of production. The sum
of these Incomes provides us the
Measure of gross national
income at factor cost

1
8
 Income Method
• GNP = wages and salaries + rent +
interest + Dividends + undistributed
corporate profits
+ mixed incomes + direct taxes
+ indirect taxes + depreciation
+ net income from abroad.

1
9
 Expenditure Method
• Prof. Samuelson calls this as “ Flow
of Product Approach”. In India, it is
known as Outlay method. GNP is the
sum of expenditure incurred on
goods and services during one year
in a country.
• GNP = C + I + G + (x – m)

2
0
 Expenditure Method
• We sum up the flow of expenditure
in an economy to arrive at national
income estimates, If we add the
value of expenditure on all these
items we get the value of gross
national expenditure at market prices

2
1
Expenditure Method
 Circular Flow Of National Income
• Simple Economy
• Two sector model = Y = C + I
• Three Sector Model = Y = C + I + G
• Four sector model = Y = C + I + G +(x – m)
• The concept of circular flow shows clearly
whether the is working
efficiently economy or there is
disequilibriumwhether any
in its working. It also helps in
restoring equilibrium.
2
3
 Problems In Estimating
National Income
• Simon Kuznets national income is not limited
to the territorial boundaries of a country. We
must include income of all the residents of a
country even if they are abroad.
• Another difficulty in estimating the national
income in UDC is the prevalence of non-
monetized sector.
• Income earned through illegal activities is
not included

3
3
 Problems In Estimating National
Income
• Services rendered free of charge are not included in GNP.
By leaving out these service, national income will work out
to be less.
• Transfer payments are not included in national income as
they do not contribute to national product.
• Capital gains and losses are not included in GNP as they are
not the result of current economic activities

3
4
 Problems In Estimating National
Income
• In the calculation of national income leisure
foregone in the process of production is not
included.
• In UDC due to illiteracy, most producer do no keep
regular accounts.
• Another difficulty in the measurement
of
national income in underdeveloped
countries is lack of adequate statistical
data. 3
5