the ppt includes all the basic concepts of national income. the different components of national income as well as the method to calculate national income.

1. NATIONAL INCOME
Dr.Sangeeta
Srivastava
EK PRAYAAS INITIATIVE

2. • INTRODUCTION
• AN ECONOMY CONSISTS OF BASIC ECONOMIC ACTIVITIES OF
PRODUCTION, CONSUMPTION AND INVESTMENT. THESE ARE THE VITAL
PROCESSES OF THE ECONOMY. IN CARRYING OUT THESE ACTIVITIES
‘PRODUCERS PRODUCE GOODS AND SERVICES. CONSUMER BY THESE
GOODS & SERVICES AND THEREBY GENERATE INCOME.
• INCOME GENERATED IN THE PRODUCTION PROCESS FLOW IN CIRCULAR
ORDER IS CALLED CIRCULAR FLOW.
• CONCEPT OF CIRCULAR FLOW OF INCOME
• CIRCULAR FLOW IS A CONTINUOUS PROCESS. THERE IS NO END TO IT
BECAUSE THERE IS NO END OF HUMAN WANT. LEVEL OF ECONOMIC
ACTIVITIES CAUSES INCOME AND PRODUCT TO FLOW IN A
CIRCULAR MANNER. THE BASIS OF THIS FLOW IS THE ECONOMIC
INTERDEPENDENCE OF CONSUMER AND SELLER, BETWEEN WHOM THE
CIRCULAR FLOW OF PRODUCTION GOODS AND SERVICES, INCOME AND
EXPENDITURE TAKE PLACE.
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3. Two sector economy or model
This is the simplest form, in this model it is assumed that there are only two
players Household & firm in the economy. There is no government intervention in
the economic activity & There is no imports of goods & services, nor export.
In the economy one side of the flow is the consumer, who is an individual who
purchased goods and services for his own consumption, in order to satisfy his
wants. On the other side, firms supply various goods & services produced by the
firm to satisfy the household wants. The nature of inter dependency is such that
consumers need to pay the price for buying goods and services and firms require
various factors of production to produce these goods and services. Hence the
households provide services in terms of factor inputs to the firm & received
payment for it.
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4. Fig-1: Figure depicts the flow of income and economic activities in two sector
models.
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5. Four Sectors Economy
A four-sector model of economy includes households, businesses,
government, and foreign trade. In four-sector economy, exports are the
injections in the national income, while imports act as leakages or
outflows of national income.
Export Function: The growth of any economy and distribution of
income and wealth in a country are directly associated with exports.
Exports play a crucial role in internal trade and economic stability of a
country. Moreover, it helps in increasing foreign exchange reserves in a
country. The exports of a country are dependent on various factors.
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6. Fig-2: Four –Sector Model of Circular Flow
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7. Basic concept of National Income
National income is an important concept in economics; the total sum of money value of all the
final goods and services produced with economic territory including net income earned from
abroad is considered in national income. Any country's economic growth and development
is directly related with its level of national income. The size of an economy cannot be
compared across countries without a common standard of measurement.
National income is a flow concept analysis of economic growth and development of an
economy to help whether a country is progressing on the discussed path
of development or not. Contribution of different sectors of economy in the national
income. It helps in intertemporal comparison and decides the future path of
development.
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8. DEFINITION:
• National Income is defined as the money value of all final goods and services produced in an
economy during accounting period of time generally one year.
• National income can be defined in three different way
• 1) From production point of view
• 2) From an income point of view
• 3) From Expenditure (disposition of national income) Point of view,
• National income = Domestic income + Net factor income from abroad
• Thus, national income is the sum total of domestic income and net factor income from abroad.
•
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9. NET INCOME FROM ABROAD (NFIA)
• Difference between income rent interest normal resident of
country rest of the world factor income on by not residence in
the domestic territory of the country. It may be positive or
negative(If receipts are more than payment, NFIA is positive
and vice versa) NFIA include -
• a) Net compensation of employees
• b) Net income from property and entrepreneurship
• c) Net retained earnings from resident companies abroad.
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10. • All sector payment included in the national income because there is
corresponding slow of goods and services in the owner me.
• Transfer payment: Which is payment received without any
corresponding way this is also called old age pension charity extra
These payment without making contribution to production not
included in the national income of a country because there is no
corresponding flow of goods and services in the economy.
• Note: A pocket money receipt from your father is a transfer
payment because you do not give anything back in return and do
not tell promises to fit good dr se income expenditure vice.
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11. 1.13 Basic economic indicators of national income
Gross domestic product
It is the monetary value of all fine goods and services produced by all the people made in domestic
territory during an account year.
GDP = C + I+ G + ( X -M)
Wh-C = consumption expenditure, I = investment expenditure, G = government expenditure, X = Exports, M
= imports )
If GDP increases year by year is understood to be performing well. Income of foreign nationals
living in India is counted in GDP but income of nationals of India outside the country is not
counted in GDP.
GDP at Market Price: It include indirect taxes and exclude subsidies given by the government
GDP at Factor Cost: It includes transfer payments which do not contribute to national income.
does in order to arrive at
GDP at factor cost = GDP at market price – Indirect Tax +subsidies
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12. GROSS NATIONAL PRODUCT(GNP)
• GNP is the aggregate final output of citizens and businesses of
an economy in a year. GNP is defined as the sum of gross
domestic product and net factor income from abroad
• GNP = GDP + NFIA.
• GNP = C + I + G+ ( X - M ) + NFIA
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13. Question Gross Domestic Product – GDP Gross National Product –GNP
What is it? A measure of the total economy of a nation Same as GDP
How it’s
calculated
Measuring all income earned within a country, or
by measuring all expenditures within the country,
which should approximately match
GDP, plus income from foreign sources, less
income paid to foreign citizens and entities
Why is it
important?
It measures both the size and direction of
economic activity (growth, stagnation or
contraction) – expansions and recessions are
based on changes in GDP
Same as GDP
Who uses it? Politicians, economists, large
companies (especially multi-nationals)
Same as GDP
What does it
mean to me?
Shows the relative strength of the nation's
economy compared to that of other nations;
provides a base from which to measure economic
changes
Same as GDP
Per Capita
GDP/GNP
The Gross Domestic Product of a country divided
by its total population
The Gross National Product of a country
divided by its total population
Difference b/w GNP & GDP
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14. NET DOMESTIC PRODUCT(NDP)
• It is sum total of value of all the goods and services produced
within the domestic Territory of an economy during the
financial year excluding consumption of fixed capital
• NDP = Gross Domestic Product - depreciation
• NDP Refers to the exclusion of that part of total output which
represents depreciation wear and tear and replacements during
the year of accounting.
• Depreciation: depreciation refers to a fall in the value of fixed
assets due to the normal wear and tear and expected
obsolescence.
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15. NET NATIONAL PRODUCT(NNP)
• GNP less depreciation on asset is equal to NNP
• NNP can be measured either in term of market price or factor cost. net National Product at factor cost is the net
output of an economy evaluated effect or prices or it is the sum total of income earned by all the people of the nation
Within the national boundaries and income from abroad (visas and salaries Trends profit factor of production through
participation in the production process)
• it is also called national income this measures differs from NNP at market price in order to arrive at NNP at factor
cost thus:
• NNP at factor cost (National income)=={NNP(MP) – {Indirect taxes + Subsidies}}
• NNP(FC) (or) NNP = NNP – net Indirect taxes.
• NNP at factor cost = NNP at market prices minus indirect taxes + subsidies
• NNP at market price equal to GNP –depreciation
• Note: National income estimated at the prevailing prices is national income at current prices.
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16. National income is nothing but the measurement of aggregate production in given time period. Following are the
methods used in measurement of national income:-
1.Value-added/Output/Product Method: In this method net value of final goods and services producing country
during the year resort in which is called as gross value added and market price equivalent to GDP
Value added = Sales - Intermediate cost + Change in Stock = closing stock - opening stock.
Income method or distribution method:In this method the total net income earned by working people in different sectors
& Commercial Enterprises is obtained & added here.
Note: income at factor cost is national income calculated by income method. GNP at Factor cost = Rent + Wage
+ interest + profit + Other income + (income from abroad- payments made to foreigners) - transfer payments.
GNP at Factor cost = Rent + Wage + interest + profit + Other income + (income from abroad- payments made to
foreigners) - transfer payments.
Expenditure method: to calculate national income of a country by adding consumption expenditure of different sectors
of an economy national income through expenditure method is addition of consumption expenditure and saving of all the
people
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17. While measuring the national income of the economy some limitations are as follows;
a) National income measures domestic economy performance and not social welfare but there should be
strong, positive correlations.
b) National income doesn't measure an increase in leisure's work satisfaction, changes product quality
extra.
c) National income understands social welfare non market transactions like home-makers service and do it
yourself projector not counted.
d) It doesn't accurately reflect change in the environment like oil pills cleanup is measured as positive
output. But an increase in pollution is not counted as a negative.
e) Per capita income is a more meaningful measure of standard and total national income.
f) Problem of double counting persists.
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