Telling about National Income and GDP

1. MEASUREMENT OF
NATIONAL INCOME
Name : S.Sheela

2. Introduction
National income is considered as the most comprehensive measures of the
performance of an economy. However, its measurement is an extremely
complicated task.
 When the process of production takes place, then the factor incomes are
paid to factors of production for their factor services. It means, there is an
‘Income Flow’ corresponding to the ‘Output Flow’.
 Factors of production spend their income on purchase of goods and services
by making consumption ‘Expenditure’.

3. Thus, production gives rise to income results in expenditure, which in turn, generate income again. Similarly,
National Income of a country can be measured by 3 different methods :
1. Value Added Method ( Product Method ).
2. Income Method.
3. Expenditure Method.

4. VALUE ADDED METHOD ( PRODUCT METHOD )
This method is used to measure national income in different phases of
production in the circular flow. It shows the contribution (value added) of each
producing unit in the production process.
 Every individual enterprise adds certain value to the products, which it
purchases from some other firm as intermediates goods.
 When value added by each and every individual firm is summed up, we get
the value of national income.

5. Concept of Value Added
• Value added refers to the addition of value to the raw material (
intermediate goods ) by a firm by virtue of its productive activities. It is the
contribution of an enterprise to the current flow of goods and services. It is
calculated as the difference between value of output and value of
intermediate consumption :
Formula :Value Added =Value of Output – Intermediate Consumption

6. Example of Concept of Value Added
Suppose a baker needs only flour to produce bread. He purchases flour as inputs worth Rs.500
from the miller and then by virtue of its productive activities, converts the flour into bread and
sells the bread for Rs.700.
In given example :
Flour is an input ( Intermediate goods ) and its value of Rs.500 is termed as value of
‘Intermediate Consumption’.
Bread is the Output and its value of Rs.700 is termed as ‘Value of Output’.
Difference between the value of output and intermediate consumption is termed as ‘Value
Added ‘. It means, that the baker has added a value of Rs.200 to the total flow of final
goods and services in the economy.
Value added by each producing enterprise is also known as the GrossValueAdded at
Market Price (GVA mp). It means, value added by baker (Rs.200) can be termed either as
Value Added or GVA mp.
Sum total of GVA mp of all producing enterprise within the domestic territory of a country
during one year is equal to GDP mp (Gross Domestic Product at Market Price), i.e.
𝐺𝑉𝐴 𝑚𝑝 = 𝐺𝐷𝑃 𝑚𝑝.

7. Intermediate Consumption and Final Consumption
Intermediate Consumption refers to the expenditure incurred by a production
unit on purchasing those goods and services from other production units,
which are meant for resale or for using up completely (i.e. further production)
during the same year. In the given example, expenditure on flour is
intermediate consumption.
Final Consumption refers to the expenditure on goods and services meant for
final for final consumption and investment. In the given example, expenditure
on bread is final consumption.

8. Value of Output
Value of Output refers to market value of all goods and services produced
during a period of one year.
How to measure theValue of Output ?
i. When the entire output is sold in an accounting year, then :Value of
Output = Sales.
ii. When the entire output is not sold in an accounting year, then the unsold
stock is added to the value of sales. Unsold stock is the excess of closing
stock over opening stock and its termed as ‘ Change in Stock ‘.
It means,Value of Output = Sales + Change in Stock.
Where, Change in Stock = Closing Stock – Opening Stock

9. Problem of Double Counting
In measuring the National Income, the value of only final goods and services is
to be included. However, the problem of double counting arises when value of
intermediate goods is also included along with value of final goods. Double
counting refers to counting of an output more than once while passing
through various stages of production.

10. Let us understand this through the famous example of Farmer,
Miller and Baker.
Famer : suppose, famer produces 50kg of wheat and sells it for Rs.500 to
miller (flourmill). For farmer, wheat of Rs.500 is a final product. ( If
intermediate cost for farmer to be zero, then his value added will be Rs.500)
Miller : For miller, wheat is an intermediate good. Miller converts what into
flour and sells it for Rs.700 to a baker. Now, flour Rs.700 is a final product for
the miller. (Value added by miller = 700 – 500 = Rs.200).
Baker : For baker, flour is an intermediate good. Baker manufactures bread
from flour and sells the entire bread to final consumers for Rs.1000. Bread of
Rs.1000 is a final product for the baker. (Value added by baker = 1000 – 700
= Rs.300).

11. Let us present the data in a chart :
FARMER MILLER BAKER CONSUMER
SellsWheat for
Rs.500
Sells Flour for
Rs.700
Sells Bread for
Rs.1000
Output Wheat Flour Bread
Value of
Output
Rs.500 Rs.700 Rs.1000
Value of
Input
Zero Wheat =
Rs.500
Flour =
Rs.700
Value
Added
Rs.500 Rs.200 Rs.300

12. Income Method
Income Method measures national income from the perspective of factor
income. Under this method, incomes received by all the residents of a country
for their productive services during a year are added up to obtain the national
income. According to this method, all the incomes that accrue to the factors of
production by way of wages, profits, rent, interest, etc. are summed up to
obtain the national income.

13. Expenditure Method
Factor income earned by factors of production is spent in the form of
expenditure on purchase of goods and services produced by firms.
 This method measures national income as sum total of final expenditure
incurred by households, business firms, government and foreigners.
 This total final expenditure is equal to gross domestic product at market
price, Final Expenditure = GDP mp.
 This method is also known as ‘ Income Disposal Method’.

14. National Income Estimation in India :
National Income od India constitutes total amount of income earned by the
whole nation of our country and originated both within and outside its
territory during a particular year.The National Income Committee in its first
report wrote, “A national income estimate measures the volume of
commodities and services turned out during a given period without
duplication”.
The estimates of national income depict a clear picture about the standard of
living of the community.The national income statistics diagnose the economic
ills of the country and at the same time suggest remedies.The rate of savings
and investment in an economy also depend on the national income of the
country.

15. Estimates of National Income During the Post – Independence Period :
National Income Committee’s Estimates
After independence, the Government of India appointed the National Income
Committee in August 1946 with Prof.P.C.Mahalnobis as its Chairman and
Prof.D.R.Gadgil and Dr.V.K.R.V.Rao as its two members so as to compile a
national incomes estimates rationally on a scientific basis.The first report of
this committee was prepared in 1951.
In its first report, the total national income of the year 1948-49 was estimated
at Rs.8830 crore and the per capita income of the year was calculated at
Rs.265 per annum.The committee continued its estimation works for another
three years and the final report was published in 1954.

16. Methodology of National Income Estimation in
India :
In India, the estimation of national income is being done by two methods, i.e.,
product method and income method.

17. India’s 2020 National Income
India’s per capita net National Income or NNI was around 135 thousand
rupees in 2020.The per – capita income is a crude indicator of the prosperity
of a country. In contrast, the gross national income at constant prices stood at
over 128 trillion rupees.

18. India’s 2021 National Income
Per capita national income in India FY 2015 – 2021. India’s per capita net
national income or NNI was around 126 thousand rupees in financial year
2021. In contrast, the gross national income at contrast prices stood at over
128 trillion rupees.