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1. Learning Outcomes

After studying this module, you shall be able to

Learn about the rationale for the study of national income accounts
Identify the different constituents of national product as well as its alternative aggregates.

2. Introduction

Why study National Income Accounts?

The basic economic processes in any society are carried out through numerous transactions every
day. Buying and selling of food, cloth, cars and houses, sale and resale of shares and other
financial assets, as well as services like schools, doctors, domestic help, restaurants and social
security benefits given by the government like old age pension are all part of these transactions.
Not all these transactions constitute national income, as we will see in the coming lecture.

Macroeconomics is concerned with the questions of production, distribution and growth of

material output. Hence, the need to measure the material output of any society, which is
essentially, the rationale for understanding of national income.

3. Unpacking some basic definitions

3.1 What is national product?

National product/ domestic product is the money value of the goods and services produced within
the domestic territory (domestic product) or by the residents of a country (national product) in a
given period of time, typically a year.

In other words, abstracting from the difference between domestic and national product for the
moment, national income is simply put, the money value of transactions representing current
production of goods and services.

This definition can be better understood by expanding on some of the concepts used implicitly.

3.1.1 Current production of goods and services

In any economy there are many goods which get sold and resold between several buyers. For
example, mobile handsets, cars and computers. According to the definition of national income,
these goods would have been included in the national income estimate of the year in which these
were produced. If we were to include every re-sale transaction of these goods in our national
accounts, our national product estimate would be a serious overestimation. Hence, any sale of
goods that have previously been included in the national income accounts is not included at the
time of its resale. For instance, let us consider a car worth Rs. 4 lakhs, manufactured in the year

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2010. This car is resold to another buyer for Rs 3.5 lakhs, three years later, in 2013. Since the car
was produced and sold first in the year 2010, the national income of that year would have
included this transaction. However, the latter transaction, that is the resale of the car three years
later will not be included in the national income of the year 2013. Hence, the transactions of
resale of second hand good remains excluded from the national income.

This is even truer for goods such as shares and other financial assets which are continuously sold
and resold in the financial markets. As each sale does not actually represent any new production
undertaken in the economy, it does not get included in national income. However, the first time
the company issues equities in the market to raise money to set up industry, the value of sales
enter national income as it reflects current production. Additionally, the Gross Domestic Product
or GDP (one of the alternative measures of national income to be explained later in the lecture) as
per the definition, excludes any capital gains or losses on the assets when they are re-sold.

Another distinction exists in the case of intermediate goods and final goods, wherein for the
purposes of national income only the latter is included. The conceptual details will be elaborated
upon later, but for now, we can take an example to further the explanation. Suppose a certain
number of units of cotton are produced in 2012 and sold to a cloth manufacturer for Rs. 10,000 in
the same year. The manufacturer uses this cotton to produce certain units of cloth, which in turn
sell for Rs. 12000 in the market, all within the same year. As cotton has been included in the
national income as part of the first transaction, its value should not be included again as part of
the valuation of the cloth.

3.1.2 Transfer payments

There are some transactions in an economy that even though valuable from a welfare point of
view signify no corresponding production of any new good or service. For instance, the old age
pensions or merit scholarships given by the government are simply transfers of purchasing power
or re-distribution of the already existent goods and services produced in a society. These
payments are not given in lieu of any productive activity undertaken by the recipient. In other
words, these transactions are different from the wages that are given supposing to a construction
worker in return for his labour services. Hence, any transfer payment in the form of social
security will not be included in the national product of the economy.

3.1.3 Immeasurable activities

Many activities are often excluded from the national income on account of simply problems of
measurement. These are activities usually which are not sold in the market, such as time spent in
household work, even though part of the productive set of activities carried out in an economy. In
addition there are several other activities which are included in the national income but have
associated costs which remain excluded from the national income. For instance, the production of
bricks in the kiln might be included as part of the production in the national income, but what
about the pollution it causes? The cost of environmental degradation is a depletion of sorts, and
yet remains excluded from getting captured in any of the variants of national income. Although
there are several reasons to incorporate the productive activities of unpaid domestic work and
costs of environmental degradation, they remain excluded because of practical difficulties of
measurement. Ofcourse, efforts are being made by different countries to incorporate some of
these activities in their estimates.

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Another set of activities that remain excluded from the national income are those which are not
legal. For example, the value of goods that are smuggled or the production of drugs and narcotics
cannot be included in the national income.

3.2 Alternative aggregates of national product

By making certain adjustments to the national accounts, it is possible to attain alternative
concepts of national product which might help in understanding the various aspects of the
economy better. The relationship between the variants of national income- GDPMP, GDPFC,
GNPMP, GNPFC, NDPMP, NDPFC, NNPMP, NNPFC will be explained in detail in the next section.
For now, we elaborate on the points of distinction between these aggregates.

3.2.1 Goods produced in the country Vs residents of the country

An estimate that includes goods and services produced in a country poses a question as to which
boundary should be considered. We can include the goods and services produced within the
territorial bounds of the country. Or alternatively, we can also consider the goods and services
produced by all the residents of the country. It is not very difficult to imagine, in the world we
live in, to see the difference between these two concepts. There are several nationals who are
temporarily placed in a foreign country. Similarly, we know there are several foreign nationals,
temporarily situated in our own country and contribute to the production carried out here. Would
their contribution be included in the national product of our country or the country of which they
are the resident ?

In national income accounts, these two different boundaries lead to two variants of the national
product. The goods and services produced within the territorial bounds of a country, in a given
period are part of the domestic product. On the other hand, goods and services produced by the
residents of a country, wherever their temporary base might be (within the country or in a foreign
location) are considered a part of the national product.

The difference between the national and domestic income/product (the interchangeable use of
income and product will be explained in the later lectures) is the net factor income from abroad
(NFIA). As the name suggests, factor income from abroad refers to the remuneration earned by
various factors in a foreign country. For instance, if the Indian residents provide labour service
abroad or own a equity in a firm abroad or even lend capital to companies abroad, they would be
earning wages and salaries, profits and interest respectively, in return. All of these comprise the
factor incomes from abroad. Conversely, foreign nationals in India earn factor incomes (wages,
salaries, profits and interest) here. Thus, the excess of factor incomes earned by the Indian
nationals abroad over the factor income paid to the foreign nationals in India is called the net
factor income from abroad.

Who is a resident? According to the report published by CSO- NAS, Sources and Methods, 2007,

stati
entity who may be expected to consume goods and services, participate in production or engage

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status of an individual is the stay of one year or more. Thus, residents cover Indian nationals and
non-nationals residing in the country for one year or more, government agencies (comprising all
departments, establishments and bodies of its Central and State Governments and Embassies and
Consulates
and other entities of the Government located abroad), business enterprises and non-profit
organizations

Formally,

(Factor incomes earned by - (Factor incomes paid to = Net factor income from abroad

Indian residents abroad) foreign nationals in India) or NFIA

While calculating the national income for India we need to include the net of these factor incomes
from abroad. Hence, in order to obtain the national income we add the net factor income from
abroad to the domestic income.

Formally,

GDP + NFIA = GNP

Or GNP - NFIA = GDP

where, GDP refers to Gross Domestic Product and GNP refers to Gross National Product.

Now, how is existence of various aggregates of national income helpful to us? This distinction
between a domestic and national income might allow us to make certain inferences about the
nature of our economy. For instance, if there is significant difference between the national and
domestic product of a country such that domestic is greater than national, it would signify an
increased presence of foreign nationals in the country contributing to our production.

3.2.2. Depreciation
In the course of production the fixed capital (plants and machinery) undergoes routine wear and
tear which signifies the extent of consumption of fixed capital. Additionally, over time the
machinery tends to becomes outdated or obsolete, even if perfect in the working condition. To
avoid over estimating the national product, we create a provision for this wear and tear or
depreciation as well as the routine obsolescence. Hence, if we have a gross estimate of the
national product, subtracting the depreciation would give us the net national product.

Formally,

GDP/GNP - Depreciation = NDP/NNP

or, NDP/NNP + Depreciation = GDP/GNP

where, NDP refers to Net Domestic Product and NNP refers to Net National Product.

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3.2.3 Market value national product at market prices or factor cost

In any economy, the government is responsible for raising the revenue and expending it on
certain items of importance in the society. The taxes levied and the subsidies (for certain goods
and services) provided are instances of these revenue sources and expenditures. More
specifically, the taxes levied by the government on the goods and services sold in the market
(either excise duties or sales tax) are called indirect tax. The excess of the taxes levied on the
goods and services over the subsidies is called the net indirect tax.

ie, Indirect tax - Subsidies = Net indirect tax

The levying of indirect tax and provision of subsidies by the government, changes the market
price of the goods from the cost at which it is produced in a factory (after remunerating all the
factors of production). In other words the net indirect taxes create a wedge between the valuation
of national income at market price and at factor cost.

National product at market price is the valuation of product at the prices paid in the market, which
would include the amount levied by the government as net indirect tax. On the other hand,
national product at factor cost is the valuation of the product which excludes net indirect tax,
implying the valuation reflects only the factor cost of producing the goods and services.

Consider a farmer who produces wheat worth Rs.100 in a given year. Now if the government
decides to give a subsidy of 5 % whereby the producers sells the same wheat in the market for Rs
95. The valuation of wheat produced at factor cost will be Rs100 and at market price will be Rs
95. In another example, consider a producer of cigarettes who produces cigarettes worth Rs 100.
The government decides to levy a tax at 10%, which makes the market price of the same
cigarettes Rs 110. For the economy as a whole we calculate the national income in the following
way, assuming these are the only two producers.

Formally,

GDPFC / NDPFC + Net indirect tax = GDPMP/ NDPMP

and GNPFC / NNPFC + Net indirect tax = GNPMP/ NNPMP

where, GDPFC/NDPFC refers to Gross/Net Domestic Product at factor cost and GDPMP/ NDPMP
refers to Gross/Net Domestic Product at market price. And, GNP FC / NNPFC refers to Gross/Net
National Product at factor cost and GNPMP/ NNPMP refers to Gross/Net National Product at
market price.

3.2.3 Eight alternative concepts of national product at a glance

Now let us look at the alternative measures of national product, namely GDP MP, GDPFC, GNPMP,
GNPFC, NDPMP, NDPFC, NNPMP, NNPFC. Some of these measures are used extensively by the
government in its own reports and documents, while others are not, however they are all
important a conceptual point of view.

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1. GDPMP - Indirect taxes = GDPFC

2. GDPFC - Depreciation = NDPFC

3. NDPFC + NFIA = NNPFC

4. NNPFC , which is national income.

3.3 From national income to disposable income

There are other categories related to national income which might be more useful from the point
of view of incomes at the disposal of government, private sector and households. Now, let us look
at the categories of National Disposable Income, Private Income, Personal Income and Personal
Disposable Income.

What is the disposable income for the economy, seen as a whole? For that we consider the
expression of National Disposable Income, which is the maximum amount of goods and services
that any domestic economy has at its disposal. Apart from goods and services produced it
includes transfers from rest of the world such as aids, gifts, repatriation income. These transfers,
as the name suggests are not in lieu of providing any factor service by the residents of the
country. The term current is used to denote that the impact is on the incomes and expenditures,
and not the wealth.

National Disposable Income = NNPMP + net current transfers from rest of the world

Instead of the national disposable we might be interested in looking at the private income which
is the income of the private sector that is firms and households taken together (excluding
government).

Private Income = NDPFC accruing to private sector + NFIA + current transfers from rest of
the world( net) + current transfers from the government to the private sector + national
debt interest

Apart from the factor income (both domestic and NFIA) accruing to the private sector (not
government) we add transfers made by the government to the private sector as well as current
transfers from rest of the world. National debt interest is the interest government pays on loans
taken from the private sector and since it is assumed that these loans are taken for consumption
purposes (not production) by the government the interest on the same are treated as transfers (not
factor payment). Lastly, it is assumed that all transfers from rest of the world accrue to the private
sector not to the government.

Personal income refers to income of the households. The part of profits of private corporations
not distributed among the households either because they are paid to the government as profit tax
or as kept by corporation as retained earnings are subtracted here, since they are not at the
disposal of households. Transfers given by corporations and government to households are added
to the private income. The government transfers include transactions such as old age pensions,

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education scholarships etc. Transfers given by corporations include transactions such as Diwali
bonuses, which are not part of the wages and salaries of the employees.

Personal income = Private income Corporate profit tax Undistributed profits by

corporations + Transfers by corporations and government to households

The entire personal income, however, is not at the disposal of the individual. These households
are also required to pay taxes, such as income tax and non- tax payments such as dues and fines,
from this personal income. Hence, we consider another concept for this purpose, namely Personal
Disposable Income. This personal disposable income is the income at the disposal of the
household part of which they may spend on consumption and the rest as savings.

Personal Disposable income = Personal income personal tax payments non-tax payments

4. National Accounts and Statistics

4.1 Sources of data

The organization that collects, maintains and publishes data on the national accounts in India is
National Statistical Organisation (NSO). Within NSO, Central Statistics Office (CSO) has the
main task of coordinating of statistical activities as well as evolving and maintaining of the
statistical standards. Its activities include compilation of National Accounts; conduct of Annual
Survey of Industries and Economic Censuses, compilation of Index of Industrial Production, as
well as Consumer Price Indices.

4.2 Data

The macroeconomic variables explained in the sections above can be better understood by
glancing through the table below.

Statement 19: Summary of National Accounts Aggregates [At Current Prices]-

2004-05 Series

Income aggregates 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

(Rs. Crore)
GDPFC 2967599 3402316 3941865 4540987 5228650 5791268
GDPMP 3239224 3706473 4283979 4947857 5574449 6164178
GNPFC 2945224 3376200 3912087 4521099 5207534 5765726
NNPFC 2623995 3006469 3487172 4031881 4632304 5118594
NFIA -22375 -26116 -29778 -19888 -21116 -25542
Net National 2987591 3419191 3955374 4606246 5179153 5734809
Disposable Income

Source: CSO

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5. Summary

National product/ domestic product is the money value of the goods and services
produced within the domestic territory (domestic product) or by the residents of a
country (national product) in a given period of time, typically a year.
There are several alternative aggregates to express this national product, namely, GDP MP,
GDPFC, GNPMP, GNPFC, NDPMP, NDPFC, NNPMP, NNPFC. National income or product is
NNPFC.
To identify the way households spend the income between consuming the goods and
services produced in the economy, or saving the rest, we need to look at the aggregates
such as disposable income.
These macro aggregates can be comprehended better with the help of concrete data,
available to us from data collecting bodies such as CSO.

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