IMPORTANT CONCEPTS BEFORE UNDERSTANDING NATIONAL INCOME

 Subsidies – are government expenses that are generally extended to business firms, farmers among
other groups to defray their production costs or to reduce prices for consumers. Subsidies are
also called negative taxes because they impose expenses on government budgets instead of
contributing revenues.
 Indirect Taxes – are government revenues that result from taxes that are not received directly from
the earned incomes of households, businesses etc. Thus sales taxes, highway tolls, excise taxes etc are
forms of indirect taxes as opposed to direct taxes that are extracted from earned incomes.
 Market prices – are the prices at which goods and services are sold in various markets to households
and firms. Thus GDP at market price for example refers to the total final output of all final goods and
services produced within the national frontiers of a country by its citizens and the foreign residents
who reside within those frontiers that are sold at market prices in various markets.
 Factor costs – are the actual production costs at which goods and services are produced by the
firms and industries in an economy. Factor costs are really the costs of all the factors of production
such as labor , capital, energy, raw materials like steel etc that are used to produce a given quantity of
output in an economy.
 Factor costs are also called factor gate costs since all the costs that are incurred to produce a given
quantity of goods and services take place behind the factory gate i.e. within the walls of the firms,
plants etc in an economy. Thus the term GDP at factor cost refers to the total final output of all final
goods and services produced within the national frontiers of a country by its citizens and the foreign
residents who reside within those frontiers that are assessed at production or factor cost prior to
leaving their respective factory gates for various markets where they are bought and sold.
 Capital Consumption Allowances – are the total or aggregate costs of the wear and tear or
depreciation of the capital stock i.e. machinery, tools, plants, roads, power grids, buildings, bus fleet,
trains, railways etc within an economy usually within a given year. Another name for the CCAs is the
depreciation of capital stock or its depreciation costs.
 All the macroeconomic aggregates at market prices whether GDP, GNP, NDP or NNP or Per
capita GDP, Per capita GNP, Per capita NDP or Per capita NNP include indirect taxes and exclude
subsidies.
 All the macroeconomic aggregates at factor costs whether GDP, GNP, NDP or NNP or Per capita
GDP, Per capita GNP, Per capita NDP or Per capita NNP include subsidies and excludes indirect
taxes.

NATIONAL INCOME
 National Income is the total value of goods and services produced annually in a country.
 According to National Income Committee – “a national income estimate measures the volume of
commodities and services turned out during a given period, counted without duplication”.
 National Income is calculated by Central Statistical Organisation (CSO).
 CSO was established in 1956.
 CSO publishes annual national accounts statistics (NAS). It classifies the whole economy among
14 sub-sectors.
 CSO works under the Department of Statistics. It is assisted by National Sample Survey
Organisation (NSSO).
 The first estimate of national income was done by Dadabhai Naurojee for the year 1867-68 in his
book ‘Poverty and Unbritish Rule in India’.
 First scientific estimation of national income was done by V.R.V. Rao in 1931-32.
 First official attempt was made by Prof. P. C. Mahalnobis in 1948-49, who submitted his report in
1954.
 National Income at Constant Prices (with reference to some base year in past) is
also known as Real National Income. It eliminates the effect of rising prices.
 National Income at current prices – goods and services are valued at prices
prevailing in the current year for which National Income is calculated.
 Base year is taken as 1999-2000 (from 2005-06). Earlier the base year was 1993-94.

Gross Domestic Product (GDP)

 It is the money value of all the final goods and services produced within the geographical boundary
of a country in a year.
 The money value is calculated at the market price.
 GDP at market price (nominal GDP) means the money value of all the final goods and services
produced in the geographical area of a country during a given period time measured at the ruling
prices.
 GDPMP = GDPFC – Subsidies + Indirect Taxes
 GDPFC = GDPMP – Indirect Taxes + Subsidies, or
 GDPFC = GDPMP – Net direct taxes (Net direct taxes = Indirect taxes paid – subsidies received)
 Real GDP - GDP evaluated at a set of constant prices.
 GDP Deflator – Ratio of nominal to real GDP.
Net Domestic Product (NDP)

 NDP = GDP – DEPRECIATION (Consumption of fixed capital)

 Aggregate value of goods and services produced within the domestic territory of a country which
does not include the depreciation of capital stock.
 It is estimated as the ruling price of all such goods and services minus consumption of fixed capital.

Gross National Product (GNP)

 GNP = GDP + (X – M)
X = Profit earned by an Indian outside India
M = Profit earned by a foreigner in India

Net National Product (NNP) at Market Price

 NNPMP = GNPMP – DEPRECIATION

 Depreciation occurs due to maintenance and technological obsolescence.
 In India, GDP is calculated on the basis of factor cost of NNP.
 Price of a product on the basis of production is known as ‘factor price’.
 Market Price = Factor price + Tax
 Market Price = Factor cost + (Indirect taxes – Subsidy).
 Market price is always more than Factor price.

Net National Product (NNP) at Factor Cost

 When NNP is measured at factor cost, it is known as ‘National Income’.

 NNPFC = NNPMP – Indirect taxes + Subsidies
 National Income = NNP at market price – Net Indirect Taxes (i.e. total indirect tax – subsidy)

Personal Income

 Personal income (PI) = NI – Undistributed profits – Net interest payments made

by households – Corporate tax + Transfer payments to the households from the
government and firms.

Personal Disposable Income

 It is that income which is available for consumption and savings.
 Personal Disposable Income – Personal Income – (Direct taxes + fines, fees, etc + social security
contribution by the employer).

Measurement of National Income

1. Value Added Method (Product Method) – Calculating the net value of the final goods and
services produced in an economy during a year. It includes (a) consumer goods, (b) gross domestic
private investment, (c) production in government sector, (d) net exports (exports – imports).
 Primary sectors (agriculture, forestry, fishing, mining & quarrying) use this method.
2. Income Method – The sum total of net incomes earned by working people in different sectors and
commercial enterprises.
 National Income = Total Rent + Total Interest + Total Wages + Total Profit.
 In India the method of estimation adopted is a combination of product method and income
method.
 Tertiary sector or service sector (banking, insurance, transport, communication & trade,
finance & real estate, etc.) use this method.
3. Expenditure Method (Consumption Method) = total consumption + total savings. Secondary
sectors (manufacturing, construction, electricity, gas & water supply) use this method.

Important Points to Remember

 In any developing country GDP is always more than the GNP.

 In any developed country GNP is always more than the GDP.
 In India GDP is always greater than GNP.
 National disposable income = Net National Product at market prices + Other Current Transfers
from the rest of the World.
 Gross = Net + Depreciation.
 National = Domestic + Net factor income from abroad.
 Private Income = Factor income from net domestic product accruing to the
private sector + National debt interest + Net factor income from abroad + Current
transfers from government + Other net transfers from the rest of the world.
 Per Capita Income = net national product / population.
 Purchasing Power Parity – Introduced by International Comparison Program of United
Nations. PPP Index is constructed by taking into account what a unit of currency can purchase in
its own country as compared to what a dollar can purchase in the United States of a certain
representative internationally traded goods or services.
 Items not included in estimation of National Income –
1. Input (intermediate consumption).
2. Transfer payments (unilateral payments).
3. Old goods.
4. Shares and bonds in stock exchange.
5. Black money.
6. Wind fall games e.g. prizes, winnings from lotteries.
7. Household services.