National Income

Define intermediate goods.
Intermediate goods are items purchased by firms for using them in production of some other good of
utility.
Define final goods.
Final goods are demanded by the final consumer for using these goods as they are.
NATIONAL INCOME
National income is defined as the money value of all the final goods and services produced in an
economy during an accounting period of time, generally one year.
Tools used for measuring national income:
1. Gross Domestic Product: (GDP)
GDP is the sum of money values of all final goods and services produced within the domestic territories
of a country during an accounting year.
GDP = C + I + G + (X-M)
C = Consumption Expenditure; I = Investment Expenditure; G = Government Expenditure; X = Exports;
M = Imports
GDP at factor cost = GDP at Market Prices - Indirect Taxes + Subsidies
2. Gross National Product: (GNP)
GNP is the aggregate final output of citizens and businesses of an economy in a year.
GNP = GDP + NFIA
NFIA = Net Factor Income from Abroad.
3. Net Domestic Product: (NDP)
NDP refers to the exclusion of that part of total output which represents depreciation, wear and tear and
replacements during the particular accounting year.
NDP = GDP - Depreciation.
4. Net National Product: (NNP)
NNP is the actual addition to a year's wealth and is the sum of consumption expenditure, government
expenditure, net foreign expenditure and investment, less depreciation, plus net income earned from
abroad.
NNP = GDP - Depreciation + NFIA
NNP = GNP - Depreciation
NNP = C + I + G + (X-M) - Depreciation + NFIA
NNP at factor cost = NNP at Market Prices - Indirect Taxes + Subsidies
NNP at Market Price = GNP - Depreciation
5. Nominal National Income:
If national income is estimated at the prevailing prices, it is called national income at current price or
Nominal National Income.
6. Real National Income:
If national income is estimated on the basis of some fixed price, say price prevailing at a particular point
of time, or by taking a base year, it is known as national income at constant price or real national income.
7. Real GDP:
Real GDP is the ratio of nominal GDP to GDP deflator where GDP Deflator is the ratio of nominal GDP
in a year to real GDP of that year.
8. Per Capita Income: (PCI)
The average income of the people of a country in a particular year is called per capita income.
Per Capita Income = National Income / Total Population.
Per Capita Income can be referred to as per capita income or per capita GNP or per capita GDP or per
capita NNP, depending upon which measure of national income has been used as numerator in the above
equation.
9. Personal Disposable Income:
Personal Disposable Income is the income which can be spent on consumption by individuals and
families.
Personal Disposable Income = National Income - Undistributed Corporate Profits - Corporate Taxes Social security Contributions + Transfer payments + Interest on Public debt.
Personal Disposable Income = Personal Income - Personal Taxes.
Measurement of National Income / Methods of measuring National Income:
1. Product Method:
The product method adds up the market values of all final goods and services produced in the country by
all the firms across all industries. This method is also known as national income by industry of origin.
Steps to calculate national income by product method:
1. The economy is divided on basis of industries, such as agriculture, fishing, mining and quarrying, large
scale manufacturing, small scale manufacturing, electricity, gas etc.
2. The physical units of output are then interpreted in monetary value.
3. The total value thus obtained is then added up.
4. The indirect taxes are subtracted and the subsidies are added (GDP).
5. The net value can be calculated by subtracting the depreciation from the total value thus obtained
(NNP).
a) Final Product Method:
In this method the total value of final goods and services produced in a country during a year is calculated
at market prices. No intermediary goods and services are taken into consideration.
b) Value Added Method:
This method measures the contribution of each producing enterprise of the economy. The difference
between the values of material outputs and inputs at each stage of production is the value added.
Limitations of Product Method:
a) Problem of Double Counting:
The greatest difficulty in calculating national income by the product method is that of unclear distinction
between a final good and an intermediate good. Hence the possibility of double counting cannot be fully
eliminated.
b) Not Applicable to Tertiary sector:
This method is useful only when output can be measured in physical terms. Thus it cannot be applied to
the service sector due to the absence of input output relationship.
c) Exclusion of Non Marketed Products:
National income is always measured in money, but there are number of goods and services which are
difficult to be assessed in terms of money. This leads to problem in measuring national income accurately.
2. Income Method:
In this method, national income is the net income received by all citizens of a country in a particular year
that is added up., i.e., total of net rents, net wages, net interest and net profits. This method is also known
as national income by distributive shares. National income at factor cost is national income calculated by
income method.
Steps to calculate national income by income method:
1. The economy is divided on the basis of income groups, such as wage/salary earners, rent earners, profit
earners and so on.
2. Income of each of these groups is calculated.
3. Income of all earners is added, including income from abroad and undistributed profits.
4. From (3), income earned by foreigners and transfer payments made in the year are subtracted.
GNP at factor cost = Rent + Wages + Interest + Profit + Other income + (Income from abroad - Payments
made to foreigners) - Transfer payments.
Limitations of Income method:
a) Exclusion of Non Monetary Income:

this method ignores the non-monetised section of economic activities, such as farmer working in his own
land, retailer running business in his own premises etc.
b) Exclusion of Non Marketed Services:
when people undertake particular activity which is not economic in the strict sense, but have opportunity
cost and real cost implications.
3. Expenditure Method:
whatever is earned is spent either on consumption or on investment. Therefore it is possible to
calculate national income by expenditure method. The basic assumption here is national income is equal
to national expenditure. According to the expenditure method, the total expenditure incurred by the
society in a particular year is added together to get that year's national income. such expenditure includes
personal consumption expenditure, net domestic investment, Government expenditure on goods and
services and net foreign investment.
(a) Personal Consumption Expenditure:
When the individuals receive income, they can spend it on domestic goods and foreign goods and
services. Thus it refers to payments by households for goods and services.
(b) Investment Expenditure:
This investment is divided into 3 major categories namely:
1. Capital Spending (purchase of new materials and equipments by the firm)
2. Residential Construction (construction of new housing units and renovation of existing structures) and
3. Inventory Investment (unsold portion of output)
(c) Government Expenditure:
Government Expenditure refers to Government payments for goods and services or investment in
equipments and structures.
(d) Net Exports:
Spending on imports is subtracted from total expenditure on exports.
Limitations of Expenditure Method:
a) Neglects Barter system:
A significant amount of economic activities takes place through barter, in which a commodity or service
is exchanged for another commodity or service. But these non-monetised transactions are not taken into
consideration in this method.
b) Ignores own consumption:
In developing countries, consuming own production either as final product or as an intermediary.
Example: a farmer may use part of yield as seeds, another part for own consumption and sell the
remaining in the open market. This leads to possibility of multiple counting.
c) Affected by inflation:
In this method, money spent on goods and services is taken as the measuring unit. Therefore, national
income inflates during high price rise and reduces during low inflation or deflation.
Uses of National Income Data:
1) National income data reveal the aggregate production/total expenditure/total income of the economy
for a year and thus provide database for comparisons.
2) National income data are necessary for economic planning of a country since it helps in determining
the output of each sector which gives more emphasis.
3) National income data help to determine total output, inflation, employment rate, etc., and thus are a
useful tool to the Government in taking decisions about necessary changes.
4) A sustained increase in national income of a country is an indicator of economic growth.

5) National income data help in comparing the situations of economic growth in two different countries.
6) National income data help in determining the regional disparities, income inequalities and level of
poverty of a country on the basis of per capita income and inflation indices.
7) National income data is considered as a measure of economic welfare, since welfare is associated with
better standard of living.
Difficulties in Measuring National Income:
1) Non-Monetised Transactions:
Exchange of goods and services like services rendered out of love, courtesy or kindness, which have no
monetary payments as such. These services have an economic value but no money value. Goods that are
exchanged by barter system are also not taken into consideration. Hence, the problem of inclusion and
computation of such goods and services in national income remains complex.
2) Unorganised sector:
The unorganised sector of any economy, including petty traders, unskilled labour, domestic servants and
household production units contribute substantially to the national income, but mostly goes unrecorded. It
is also difficult to indentify income of those who do not pay income taxes.
3) Multiple Sources of Earnings:
A person may have multiple sources of income, of which only one may be the main activity while the
others may be executed on a part time basis. Hence, multiple sources of earnings make collection of data
difficult.
4) Categorisation of Goods and services:
Categorisation of Goods and services vary from country to country. In this calculation only final goods
and services are taken into consideration. But some goods and services are made complex because of
complexity in determining it as final or intermediary goods.

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Define intermediate goods.

a) Exclusion of Non Monetary Income:

4) A sustained increase in national income of a country is an indicator of economic growth.

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