National Income & Related Concepts

Rationale & Inception

The official estimates of national income and related aggregates were developed to meet the requirements for planning and policy purposes. Soon after Independence, the Government of India set up a High Powered Expert Committee in 1949 known as 'National Income Committee' under the Chairmanship of Prof. P.C. Mahalanobis. Mahalanobis. In accordance with the methodology and the pattern of presentation recommended by the National Income Committee, the first official estimates of national income were prepared by the Central Statistical Organisation (CSO) with base year 1948-49. 1948These estimates at constant (1948-49) prices along with (1948the corresponding estimates at current prices and the accounts of the Public Authorities were published in the publication, 'Estimates of National Income' in 1956.

National Income

National income is the money value of all the final goods and services produced by a country during one year.

National Income at current prices

Goods and services are valued at the prices prevailing in the markets in that particular year. E.g. National Income of 2004-05: goods and 2004services are valued at prices prevailing in the year 2004-05. 2004-

National Income at constant prices

Goods and services are valued at the price prevailing in the base year. year. E.g. National Income of year 2004-05 at 200419931993-94 prices (prices of goods and services prevailing in year 1993-94). 1993-

Base Years
Base years of the National Accounts Statistics series have been shifted from 1948-49 to 1960-61 in August 194819601967, from 1960-61 to 1970-71 in January 1978, 19601970from 1970-71 to 1980-81 in February 1988 and 19701980from 1980-81 to 1993-94 in February 1999. 19801993In line with this practice, the CSO introduced the New Series of National Accounts Statistics with 1999-2000 as 1999the base year, on 31st January, 2006 (hereinafter will be referred as New Series).

Choice of Base year

National Accounts Statistics have mostly been revised decennially changing the base to a year synchronizing with the year of decennial Population Census => primarily because in the base year estimates, the information on work force has played an important role and workforce estimates were obtained from the Population Census. 19931993-94 instead of 1990-91 => it was observed that the data on 1990worker participation rate (WPR), captured by the National Sample Survey Organisation (NSSO) was better than the one estimated through the Population Census. Accordingly, the CSO used the workforce estimates based on National Sample Survey (NSS) workforce participation rates from the NSS 1993-94 (50th Round) 1993survey results, and revised the base year of national accounts to 19931993-94. In continuation with this practice, the new series of national accounts released on 31st January, 2006 adopted 1999-2000 as the 1999base year, as it has used the data on WPR from the NSS 55th round Quinquennial survey on Employment and Unemployment, conducted in 1999-2000. In the new series, the WPR data has been used in 1999conjunction with population data of the Population Census, 2001.

Guiding Principles for New Series

The three major components influencing the present revision exercise include revision of base year to a more recent year (for meaningful analysis of the structural changes in the economy), complete review of the existing data base and methodology employed in the estimation of various macro-economic aggregates including choice of macrothe alternative databases on individual subjects and to the extent feasible, implementing the recommendations of the System of National Accounts (1993 SNA) prepared under the auspices of the Inter Secretariat Working Group on National Accounts comprising of the European Communities (EUROSTAT), International Monetary Fund (IMF), Organisation for Economic Cooperation and Development (OECD), United Nations and World Bank. Thus, the new series has been introduced by the CSO after a comprehensive review of both the databases and the methodology employed in the estimation of various macro-economic aggregates macro-

Per Capita Income

National Income per head of population. NY PCY = ----------------Population

Some Basic Concepts

Domestic Territory of a Country

Includes: Territory lying within the political frontiers, including territorial waters of the country Ships & aircrafts operated by residents of te country between 2 countries Fishing vessels, oils & natural gas rig, floating platforms operated by residents of the country in international waters or engaged in extraction in area in which the country has exclusive rights of exploitation. Embassies, consulates & military establishments of the country located abroad.

Normal Residents of a Country

Resident => a person who ordinarily resides in a country and whose centre of interest lies in that country. Normal residents => covers both individuals and institutions. It includes nationals and non-nationals residing in a noncountry.

Exceptions
International organisations like World Health Organisation, World Bank, IMF, ILO Resident HHs & individuals cover all individuals living within the domestic territory except the following:
Foreign visitors for recreation, holidays, medical treatment, study tours, conferences, etc. Crew member of foreign vessels, commercial travelers & seasonal workers. Officials, diplomats & members of armed forces of a foreign country Employees of international organisations who are not citizen of the country in which the office is located Foreigners who are the employees of non-resident nonenterprises and who have come to the country for installing machines or equipment purchased from their employers.

Stock variables
Measures of economic activity at a point in time. time.

Examples of Stock Var.

Wealth (an accumulation of savings over time) Debt (an accumulation of borrowing over time) Capital Stock (Factories, Machinery, Inventory, Infrastructure) The Money Supply Any Balance Sheet measures (Assets, Liabilities, Owner's Equity)

Flow Variables

Economic activity measured per unit of time .

Examples of Flow Var.

Income (Household, Per-Capita, National) PerBudget Deficits Investment Expenditure Consumption Expenditure Any Income Statement measures (Sales Revenue, Gross Profit, Expenses)

Closed Economy
A country which has no economic relations with other countries. All other countries (except the one under consideration) are grouped into one category rest of the world .

Open Economy
A country having economic relations with the rest of the world.
Selling goods and services to foreigners (exports) Purchasing goods and services from the rest of the world (imports) Selling shares, bonds, debentures to foreigners Lending and borrowing Sending gifts to foreigners and receiving gifts from them Normal resident going to foreign countries to work there, and foreign residents coming and working in the domestic territory of the country.

Net Factor Income from Abroad

Income attributable to factor services rendered by the normal residents of a country to the rest of the world less factor services rendered to them by the rest of the world. Includes: Net compensation of employees Net income from property and entrepreneurship (interest, rent, profits and dividends); and Net retained earnings of resident companies abroad.

Basic Economic Activities

Production Consumption Capital Accumulation

Production

Any activity which produces a commodity or increases the value of a commodity already produced.

All goods and services sold in the market Goods & services not sold in the market but provided free of cost or at nominal price Produced Goods which do not reach the market (self-consumption) (selfOwn account production of fixed assets by government, business enterprises, etc. Imputed rent of owner occupied houses.

Exclusions
Domestic services rendered within the household by housewives and other family members leisure time activities like growing fruits, flowers and vegetables in the kitchen garden, painting the house, repairing electrical appliances and household furniture .

Consumption
Using up of goods and services to satisfy human wants. Destruction of utility.

Points to note

No time gap between the production and consumption of services. services. Durable goods continue to provide service for some time . But they are treated as consumed the moment they are purchased. Goods destroyed in accidents, natural disasters, etc. are excluded.

When do we take account?

Production of goods: at the point of production. goods: Production of services: at the moment they are services: rendered. Trading services: at the point of sale. services: Government service: counted when cost is service: incurred to produce these services. Consumption: Consumption: at the point when commodities are purchased.

Capital Formation
Surplus of production over consumption in an accounting year. That which adds to further production.

Construction of New Assets (buildings, roads, bridges, transport equipment). Production of machine and equipment Increase in the stock of raw materials, semi-finished goods and semifinished goods during an accounting year.

Income Concepts

Net Domestic Product at Factor Cost

Also called Domestic Factor Income (DFY) NDP (FC) is defined as the net value added by all the producers within the domestic territory of the country.

NDP (FC) = Wages + Rent + Interest + Profit + Mixed Income of the self-employed selfNDP (FC) = compensation of employees + operating surplus + mixed income of self-employed self-

Gross Domestic Product

GDP (FC) = NDP (FC) + D

Where D = depreciation

GDP (MP) = GDP (FC) + N.I.T

Where N.I.T = net indirect taxes = I.T. S I.T = Indirect Taxes S = Subsidies

Gross National Product

GNP (MP) = GDP (MP) + NFA
Where NFA = Net Factor Income from abroad

Important features of GNP

Expressed in terms of money. Includes only those items which are produced during the time for which GNP stands (flow concept). Accounts for only those goods traded through the official market. Intermediate goods not included. Excludes non-productive transactions and nonsecondsecond-hand sales.

National Income
Factor income accruing to the normal resident of the country. NNP (MP) = GNP (MP) D NNP (FC) = NNP (MP) NIT = W + R + I + P + Mix Y + NFA = National Income (NY)

NFA (6) NIT (5) 4 5 6

D (4) Wages (1) R+I+P (2) Mixed Income (3) NDP (FC) 1

3 GDP (FC)

3 GDP (MP)

3 GNP (MP)

3 NNP (MP)

3 NNP (FC) NY

Important relations
Gross Net = Depreciation M.P. FC = N.I.T National Domestic = NFA

Quick Review
NDP (FC) W + I + R + P + Mix Y GDP (MP) NDP(FC) + D + NIT (=IT - S) Widest concept of NY? GNP (MP) = NDP(FC) + D + NIT (=IT - S) + NFA = GDP (MP) + NFA National Income (NY) NNP (FC) = NDP (FC) + NFA = GNP (MP) D NIT

Estimates of GDP, NDP, NNP and Per Capita Income 1999-2000 to 2004-2005 (at current prices) (Rs. crore) Year GDP at factor cost (Rs. Crore) 1993-94 Series 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Growth rates (%) 2000-01 2001-02 8 9.4 7.7 8.7 8 9.3 7.6 8.6 7.9 9.6 7.2 8.9 6 7.7 5.3 6.9 1761838 1902999 2081474 2254888 2519785 2830465 New Series 1792292 1930184 2097446 2255574 2543396 2843897 NDP at factor cost (Rs. Crore) 1993-94 Series 1579479 1705104 1863795 2021936 2266148 2553334 New Series 1605643 1727452 1876285 2019972 2286826 2549139 NNP at factor cost (Rs. Crore) 199394 Series 1564048 1686995 1848229 2008770 2252070 2535627 New Series 1590212 1704719 1856217 2003282 2268576 2531223 Per capita income (Rs.) 199394 Series 15625 16555 17823 19040 20989 23241 New Series 15886 16729 17883 18988 21142 23222

Estimates of GDP, NDP, NNP and Per Capita Income 1999-2000 to 2004-2005 (at constant prices) (old series at 1993-94 prices and new series at 1999-2000 prices) (Rs. crore) Year GDP at factor cost (Rs. Crore) 1993-94 Serie s New Seri es NDP at factor cost (Rs. Crore) 1993-94 Serie s New Seri es NNP at factor cost (Rs. Crore) 199394 Seri es 1008114 1050338 1115171 1266005 New Serie s Per Capita Income (Rs.) 1993-94 Seri es New Ser ies

1999-00 2000-01 2001-02

1148367 1198592 1267945

1792292 1870388 1978056 2226041

1019296 1062492 1125480 1274074

1605643 1675633 1775952 2004703

1590212 1653088 1755281 1986858

10071 10308 10754 11799

15886 16223 16910 18517

2003-04

1430548

Other Income Concepts

Sectors of the Economy

Economy = Government + Private Government = central, state & local Private = households (HH). Firms = government + HH

Private Income
Private Income = NDP (FC) Income from property & entrepreneurship accruing to government savings of non-departmental enterprises non+ National Debt Interest + NFA + current transfers from government + other transactions from rest of the world.

Personal Income
Current Income of persons or HHs from all sources. Personal Income = Private Income savings of private corporate sector net of retained earnings of foreign sector Corporation Tax

Personal Disposable Income

Income at the disposal of the HHs from all sources. PDY = Personal Income Direct Taxes paid by HHs miscellaneous receipts of government.

Methods to Measure National Income

Circular Flow of National Income

Production

Income

Expenditure

Three phases of the circular flow

Production: Production: sum of net value added by all the producing enterprises (including the government) Distribution: Distribution: total income generated in the production of goods and services Disposition: Disposition: sum of expenditures of the three spending units (general government, consumer households and producing enterprises).

Product (Value Added) Method

Measures the contribution of each producing enterprise in the domestic territory of the country.

Steps to measure VA
Identify the producing enterprises Classify them into industrial sectors according to their activities Estimate the net value added by each enterprise as well as of each industrial sector Adding up the values added by all the sectors.

An Example
Value of Stage of Value of Intermediate Production Output Consumption Wheat Flour Bread Sale Total Nil 500 700 900 2100 500 700 900 1000 3100 Gross Value Added 500 200 200 100 1000

Producer Farmers Miller Baker Shop keaper

Estimate the following: Value of output Value of intermediate consumption Value of depreciation

Value of Output = Volume of physical output x Market Price Value of intermediate consumption = price paid by the enterprise.

Include:
Own account production of fixed assets by government, enterprises & households Production for self consumption Imputed rent of owner-occupied houses owner-

Not included:
Sale of second-hand goods secondBrokerage and commission earned by dealers of second hand goods are a part of current production.

GDP (MP) = NVA by Primary sector + NVA by Secondary sector + NVA by Tertiary sector NDP (FC) = Value of Output Value of intermediate consumption D - NIT

Income Method
For every rupee s worth of goods & services produced, a rupee s worth of income is generated. Income Method should give the same value of National Income as Value Added Method.

Steps involved:
Identifying the producing enterprises which employ factor inputs Classifying factor payments Estimating factor payments

NDP (FC) = Wages + Rent + Interest + Profits + Mixed Income of selfselfemployed National Income = NDP (FC) + NFA

Include:
Value of production for self consumption. Imputed rent of owner occupied houses.

Exclude:
All transfer payments Illegal incomes Windfall gains (lotteries) Death duties, gift tax, wealth tax Corporation tax Income tax

Expenditure Method
National Income is the sum of all final expenditures, including: including:
Expenditure on private consumption (C) Gross investment (both private & public) (I) Expenditure on government (federal, state & local) (G) Foreigner s expenditure on our exports (X) net of our expenditure on imports from abroad (M).

GDP (MP) = C + G + I + X

GDP (MP) = PFCE + GFCE + Gross Fixed Capital Formation + Change in stocks + Net Exports of goods & services.

Private Final consumption expenditure

PFCE = volume of sales in market x retail price (in domestic market) Includes direct purchase in domestic market by nonnon-resident HHs (deduct this) (deduct Add direct purchase by resident HHs abroad Production for self consumption is also a part of final consumption = volume of production x prices prevailing in neighbourhood market. Include imputed rent of owner occupied houses.

Government Final Consumption Expenditure

Includes: Compensation of employees Net purchase of goods and services by the government = total volume of sales to the government x retail prices in the domestic market Purchases from abroad

Gross Capital Formation

Investment = Gross Fixed Capital Formation + Changes in stocks GFCF
Construction Machine and Equipment

Expenditure on construction
Found out by either: Total money spent on construction, or Value of inputs used CommodityCommodity-flow approach = Volume of material inputs used in construction x price paid by builders at site

Includes:
Own account production of fixed assets by producing sectors Purchase of new houses by consumer households Work in progress at site of construction Capital repairs like major alterations of old buildings, or adding a new room to an existing building.

Machine & Equipment

Final Expenditure method = Volume of final sales x retail price prevailing in the market CommodityCommodity-flow approach = Volume of machine produced in the current year x prices paid by the purchasers

Change in stocks
Physical change in stocks with producers x market price Physical change in stocks = Stocks at the end of the previous accounting year (opening stock) stocks at the end of the current accounting year (closing stock)

Includes:
Stocks of raw materials, work-in-progress work-inand finished products (inventories) held by enterprises and households Stocks of strategic materials, food grains and other commodities of special importance to the nation, in the possession of the government. Livestock raised for slaughter by enterprises.

Find out the Gross Value Added at Market Price:

A sells intermediate goods worth Rs.400 to B. B sells the manufactured goods worth Rs.400 to C and worth Rs.200 to D. C sells his goods to D for Rs.500. D sells the final goods to the consumer household for Rs.850.

Happy Counting!!!