Prof. Prabha Panth,
National Income Concepts
1. Gross Domestic Product:
GDP: The total value of all final goods and
services accruing to an economy in one
GDP = C+ GI + G + (X – M),
C = Consumption expenditure of HHs.
GI = Gross Investment by Firms,
G = Government expenditure,
X – M = Value of exports – value of imports.
• GDP includes the value of all expenditure
within the economy regardless of who earns
• GDP includes the value of all final goods, not
• Final goods: e.g. Cars, not steel to produce
• Not unfinished goods.
• Including intermediate goods leads to double
2. Gross Domestic Product or GNP:
GNP = GDP + FA
FA is Net foreign income from abroad.
It includes income earned by Indians from other
Deducts income earned by foreigners working in
If FA is positive, GNP > GDP.
If FA is negative, GNP < GDP.
3. Net National Product at market
prices NNP = GNP –
Depreciation value of capital,
buildings and other assets.
Also called NNP at market
prices, since the value of all
goods and services is taken at
the market prices.
4. NNP at factor cost or NY
NY = NNP at market prices – taxes +
Subsidies reduce the market price,
Indirect taxes such as excise duties and
sales taxes, increase the market price,
over value output.
These have to be adjusted to get NNP at
factor cost or NY.
NY = C + S
5. Personal Income:
PY = NY at factor cost + transfer payments –
(corporate taxes + undistributed profits + SS
All income earned is not received by HH, and
all income received may not be earned.
• SS = social security payments such as life
insurance premiums, provident fund
• Transfer payments include gifts, bequeaths,
bonus, dividends, pensions, scholarships
6. Disposable Income: DY = PY – direct personal taxes
Households pay income tax, deducted from PY to get
DY. DY = C + S
7. Per capita income: PCY = NY/Population
The size of PCY is taken as an index of the standard of
living of the population, and the level of
development of an economy.
8. Real Income = NY/Price Index
Inflation raises the money value of all goods and
services. To show real increase in output, the NY has
to be deflated with the price index.