National Income - Concept & Measurement

1. National Income
Dr. A.K.Panigrahi

2. Meaning of National Income
• National income is the money
value of all the final goods and
services produced by a country
during a period of one year.
National income consists of a
collection of different types of
goods and services of different
types.

3. Meaning of National Income
•Since these goods are measured in
different physical units it is not
possible to add them together. Thus
we cannot state national income is so
many millions of meters of cloth.
Therefore, there is no way except to
reduce them to a common measure.
This common measure is money.

4. Example
•If the value of a meter of cloth is Rs.
20 and the total cloth produced is
100 meters, then the money value of
cloth is Rs. 2000. In this way we can
find out the value of other goods
and services and the total value of
all the goods and services produced
during one year.

5. Basic Concepts in National income
• Gross domestic product
• Gross domestic product at constant
price and at current price
• Gross domestic product at factor
cost and Gross domestic product at
market price

6. Basic Concepts in National income
• Net domestic product
•Gross national product
• Net national Product
• Net national product at factor
cost or national income

7. Gross Domestic Product
• Gross domestic product is
the money value of all final
goods and services
produced in the domestic
territory of a country during
an accounting year.

8. Gross Domestic Product at Constant
price and Current price
• GDP can be estimated at current
prices and at constant prices. If
the domestic product is
estimated on the basis of the
prevailing prices it is called gross
domestic product at current
prices.

9. Gross Domestic Product at Constant
price and Current price
• If GDP is measured on the basis of
some fixed price, that is price
prevailing at a point of time or in
some base year it is known as GDP
at constant price or real gross
domestic product.

10. Market prices versus factor cost
• A commodity when goes to the market,
indirect taxes are imposed on it. This is the
market price. When we deduct the net
indirect taxes we get factor cost.

11. GDP at Factor cost and GDP at Market
price
• Conceptually, the value of GDP
whether estimated at market price or
factor cost must be identical. This is
because the final value of goods and
services must be equal to the cost
involved in their production.
• GDP F.C = GDP M.P – IT + S.

12. Gross Domestic Product
• Gross domestic product (GDP) is a
measure of the income and expenditures
of an economy.
• It is the total market value of all final goods
and services produced within a country in
a given period of time.

13. The Measurement of GDP
GDP is the market value of all final
goods and services produced within a
country in a given period of time.

14. The Measurement of GDP
• Output is valued at market prices.
• It records only the value of final goods, not
intermediate goods (the value is counted
only once).
• It includes both tangible goods (food,
clothing, cars) and intangible services
(haircuts, housecleaning, doctor visits).

15. What Is Counted and Not Counted in
GDP?
GDP includes all items produced in the economy and
sold legally in markets.
GDP excludes services that are produced and consumed
at home and that never enter the marketplace.
Caring labor, the work that is normally produced by
women.
Because GDP does not count it, it diminishes its
importance.
GDP also excludes black market items, such as illegal
drugs.

16. Net Domestic Product
• While calculating GDP no provision
is made for depreciation allowance
(also called capital consumption
allowance). In such a situation gross
domestic product will not reveal
complete flow of goods and services
through various sectors.

17. Net Domestic Product
• A part of is therefore, set aside in
the form of depreciation allowance.
When depreciation allowance is
subtracted from gross domestic
product we get net domestic
product.
• NDP = GDP – Depreciation.

18. Gross National Product
• Gross national product (GNP) is the total
income earned by a nation’s permanent
residents (called nationals).
• It differs from GDP by including income
that our citizens earn abroad and
excluding income that foreigners earn
here.

19. Net National Product (NNP)
• Net National Product (NNP) is the total
income of the nation’s residents (GNP)
minus losses from depreciation.
• Depreciation is the wear and tear on the
economy’s stock of equipment and
structures.

20. GNP and GDP tend to be used as synonyms,
although GDP is definitely the preferred measure
among economists
• GDP
• measures all
production within
India, by whoever
happens to be
working here;
• GNP
• measures the
production of all
Indians, wherever
they happen to be
working.

24. Personal Income and Disposable
income
• Personal income and disposable
income are two concepts of national
income very commonly used in
advanced countries. Personal
income may be defined as the
current income of persons or
households from all services.
Personal income is not a measure of
production.

25. Disposable Income
• All personal income is not at the
disposal to be spent on consumption.
Individuals have to pay personal direct
taxes to the government. They are free
to spend only after the payment of
taxes.
• DPI = Personal income – Personal
Direct taxes.

26. Disposable Personal Outlay
• The disposable personal income may
be spent fully or individuals may
save. What remains after saving is
called the personal outlay.
Disposable income is equal to
consumption and savings.
• Disposable outlay = Disposable
income – Savings.

27. Measurement of National Income
Since factor income arise from the production of
goods and services, and since incomes are
spent on goods and services produced, three
alternative methods of measuring national
income are possible.
• Production based
• Spending based
• Income based

28. Methods
• Value Added Method or Production Method.
• Income Method.
• Expenditure Method.

29. Production or Value Added
Method
• This method is also called the value-added method. This
method approaches national income from the output
side.
• Under this method, the economy is divided into different
sectors such as agriculture, fishing, mining, construction,
manufacturing, trade and commerce, transport,
communication and other services.
• Then, the gross product is found out by adding up the
net values of all the production that has taken place in
these sectors during a given year.

30. Production or Value Added
Method
• In order to arrive at the net value of production of a given industry,
intermediate goods purchase by the producers of this industry are
deducted from the gross value of production of that industry.
• The aggregate or net values of production of all the industry and
sectors of the economy plus the net factor income from abroad will
give us the GNP. If we deduct depreciation from the GNP we get
NNP at market price. NNP at market price – indirect taxes +
subsidies will give us NNP at factor cost or National Income.
• The output method can be used where there exists a census of
production for the year. The advantage of this method is that it
reveals the contributions and relative importance and of the different
sectors of the economy.

31. Precautions:
The following precautions should be taken while
measuring NI of a country through value added
method.
1. Imputed rent values of self occupied houses should be
included in the value of output.
2. Sale and purchase of second – hand goods should not
be included in measuring value of output of a year.
3. Value of production for self consumption are to be
counted.
4. Value of services of housewives are not included.
5. Value of intermediate goods must not be counted.

32. Income Approach
• Measures by summing the following components
– Employee Compensation
– Proprietor’s Income
– Corporate Profits
– Rent
– Interest Income
– Indirect Business Taxes
– Net Income from foreigners

33. Income Method
• This method approaches NI from distribution side.
• National Income is obtained by summing up the
individuals of a country.
• This method of estimating NI has the great advantage of
indicating the distribution of national income among
different income groups such as landlords, owners,
workers, entrepreneurs.

34. Precautions:
1. Transfer payments are not included.
2. Imputed rent are included.
3. Illegal money is not included.
4. Windfall gains are not included.
5. Corporate Profit tax are not included.
6. Death duties, gift tax, wealth tax are not included.
7. Receipt from the sale of second hand goods are not
included.
8. Income equal to the value of production used for self
consumption used by farmers and others are included.

35. Expenditure Approach
• Considers total spending on all final goods &
services during the year
• It is a demand based concept
• Includes:
– Personal Consumption
– Durable Goods & Non-Durable Goods and Services
– Gross Private Investment
– Government Consumption and Gross Investment
– Net Exports of Goods and Services
• So, GDP = C + I + G + (X-M)

36. Measurement of National Income -
Expenditure Approach
• Expenditure Approach:
According to this method the money value of all
expenditure on final product will add up to GNP from
which capital consumption and net indirect tax (indirect
tax-subsidy) are deducted.
NI = GNP - Capital Consumption - Indirect Tax +
Subsidy
where,
GNP = C + I + G + NX

37. • (1) Consumption Expenditure (C):
It includes expenditure by household (a) durable goods
such as, automobile, refrigerators etc, (b) non-durable
goods such as: food, shirts etc and (c) services such as
doctors, education etc.
(2) Gross Investment (I):
It includes
• (a) all final purchase of machinery, equipment, and tools
by business enterprise in given time period-change in
capital stock
• (b) all current construction
• (c) changes in inventories: changes in stocks of finished
goods and goods in process as well as changes in the
raw material that businesses keep on hand. Inventories
can be negative, positive or zero

38. (3) Government Expenditure (G):
This includes all governmental spending (central, state and
local) on the finished product of business and all direct
purchases of resources such as labour etc, it excludes all
govt. transfer payments, because it doesn't reflect any
current production.
(4) Net Exports (NX) = Export - Import :
This includes the difference between the imports and
exports, called net exports. it is the component of the total
demand for our goods. it can be negative positive or zero.

39. Thank You
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