Meaning of national income
The concept of National Income Accounting (NIA) was formulated by Sir
William petty and Gregory king in the 17th century. Gregory king is known as the
father of modern national income accounting. Later, Prof. Simon kuznet
developed national income accounting more systematically. Also, United nations,
world bank, International monetary fund (IMF) started playing a leading role in
developing a uniform national income accounting system. In 1968,UNO
developed Standard National Accounts (SNA).
NI accounting is defined as the method or technique used in the construction of NI
accounts. First estimate on national and per capita income was prepared in India
by Dadabhai Naoroji in 1876. The first scientific estimate was made by Prof.
V.K. Rao for the year 1931-1932.
In NI accounting, there is a separate account for each section of the economy like
production sector account .household sector, government sector, rest of the world
sector account, etc. National income accounting clearly distinguishes between
productive and non-productive activities. The non productive activities are
excluded from national income accounts.
FUNCTIONS OF NATIONAL
Two basics functions of national income
To identify specific economic achievements
of a country.
To provide an objective basis for evaluation
and review of policies.
Uses of National Income
The national income accounts have wide applications and serve as an effective
tool of analysis. NI accounts are extremely useful in:
Estimating national income of the country.
Comparing national income of different countries.
Describing and explaining the level of economic growth of a country.
Estimating the contribution of each factor of production in the national
Estimating the contribution of each sector in the national income.
Planning especially for economically backward countries.
Suggesting effective policies for altering the levels of production and
Implementing and testing economic theories or models that aim to
explain or forecast economic behaviour.
Good: In economics a good is defined as any physical object ,natural or
man-made, that could goods which help in production. These goods are
used for generating income.
Intermediate Goods: refers to those goods which are used either for final
consumption or for resale. These goods do not command a price in the
Consumption Goods: Those goods which satisfy human wants directly.
Capital Goods: Those final fulfil needs of mankind directly.
Investment: Addition made to the stock of capital during a period is called
investment. It is also called capital formation.
Depreciation: is expected fall in value of fixed capital goods
due to normal wear and tear and obsolescence.
Gross Investment: Total addition of capital goods to the
existing stock of capital during a time period at market price.
Net Investment: is a measure of net availability of new capital
or new addition to capital stock in an economy.
Net Investment =Gross investment- Depreciation
Stocks: Variables whose magnitude is measured at a
particular point of time are called stock variables.
Flows: Variables whose magnitude is measured over
a period of time are called flow variable.
Economic Territory: Economic (or domestic)
Territory is the geographical territory administrated
by a government within which persons, goods, and
capital circulate freely.
Normal Resident of a country: is a person or an
institution who ordinarily resides in a country and
whose centre of economic interest lies in that
Basis of distinction between GROSS and NET is
Gross = Net + Depreciation
Basis of distinction between NATIONAL and DOMESTIC
is Net factor income from abroad.
National = Domestic + Net factor income from abroad.
Basis of distinction between MARKET PRICE and
FACTOR COST is NET INDIRECT TAXES. (i.e., Indirect
Market Price = factor cost + Net indirect taxes
Gross domestic Product at Market Price
(GDPmp) is the market value of all the final
goods and services produced by all producing
units located in the domestic territory of a
country during a financial year.
Net Domestic Product at Market Price
(NDPmp) NDPmp = GDPmp – Depreciation
Gross National Product at Market price
(GNPmp): is the market value of all the final goods
and services produced by all producing units (in the
domestic territory and abroad) of a country during a
GDPmp + NFIA = GNPmp
National Income (NNPfc): is a measure of factor
earnings of the residents of a country both from
economic (Domestic) territory and from abroad
during an accounting year.
NNPfc = NDPfc + NFIA =National Income
MEASUREMENT OF NATIONAL INCOME
METHODS OF MEASURING NATIONAL INCOME ARE:
VALUE METHOD OR PRODUCTION
According to this method, NI is measured in terms of payments made to
primary factors of production. So it is also called Factor payment method
or distributed share method. The components of NI are given by the
NI or NNPfc = 1.Compensation of employees
2. Operating surplus (rent+royality+interest+profit)
3. Mixed income of self-employed
( NDPfc OR Domestic Factor Income = 1+2+3)
4.Net factor income from abroad
VALUE ADDED METHOD (OR PRODUCT
OR OUTPUT METHOD)
It is defined as that method, which measure the national income by
estimating the contribution of each producing enterprise to
production in the domestic territory of the country in an accounting
Value of Output = Quantity X Price
= sales + Change in stock
Value added = value of output – value of intermediate consumption.
National income = sum total of net value added at factor cost
across all producing units of an economy.
Estimation of national income
1.Gross value added in primary sector
2.Gross value added in secondary sector
3.Gross value added in tertiary sector
= Gross Value Added (GVAmp) or GDPmp (1+2+3)
= Net Value Added (NVAmp) or NDPmp(1+2+3-4)
5.Net Indirect Taxes
= Net Domestic Income or NVAfc (1+2+3-4-5)
6.Net Factor Income From Abroad
=National Income or NNPfc (1+2+3-4-5+6)
The expenditure method of measuring National Income is also called
Income disposal Method or consumption and Investment method.
Expenditure method is a method which measures the final
expenditure on gross domestic product at market price during an
According to expenditure method, GDPmp is the aggregate of all the final
expenditure in an economy during a year, i.e.,
Y= C+ I + G + (X-M)
C=Private Final Consumption Expenditure
I =Final Investment expenditure or Capital formation
G=Government Final Consumption Expenditure
RELATED AGGREGATES OF
PRIVATE INCOME: it is the income which accrues
to the private sector from all sources.
PRIVATE INCOME= Income from Net domestic
product accruing to the private sector + Net factor
income from abroad + Net transfer payments from
the government + Transfer payment from rest of the
world + Interest on National debt.
PERSONAL INCOME=It is the sum total of income
actually received by a person from al sources
including factor income and transfer income.
Personal income= Private income – Corporation tax –
Corporate saving or undistributed profit.
Real National Income: It is defined as the
value of current output at some base year
Nominal National Income: It is defined as the
value of current output at current year price.
The GNP Deflator = Nominal GNP X 100
Green GNP is defined as, GNP which
would attain a sustainable use of
natural environment and equitable
distribution of benefits of
Some Limitations of GDP or GNP as
measures of growth
Ignores income distribution
Ignores environmental degradation
Does not include activities that do not go
through the formal markets sectors
Does not include “illegal” activities like drug
trafficking, prostitution, moonlighting
Circular flow diagram
summarizes the transactions between the
different economic agents
agents: households, firms (business),
government, and foreigners (rest of the world)
Circular flow diagram
Assumption: The economy composed of households
and firms only
Households: own factors of production, consume
goods and service
Firms: hire factors of production to produce goods
The Circular Flow
Taxes Government Gov endin
gs Financial markets Inve