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. 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 accept to reduce them to a common measure. This common measure is money National income is the sum of wages, rent, interest and profit or the sum of the earnings of the factors of production” – Shapiro “National product is the sum total of final goods and services produced by labour and wealth of a nation during a period of one year”- Brooman

1. NATIONAL INCOME
Unit-1
Principles of Macro Economics
Dr. Geeta Negi
Deptt. Of Economics
Govt. Degree College Solan H.P.

2. 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.

3. 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 accept to reduce them to a
common measure.
 This common measure is money

4. DEfinition of national Income
 “National income is the sum of wages, rent,
interest and profit or the sum of the earnings of
the factors of production” – Shapiro
 “National product is the sum total of final
goods and services produced by labour and
wealth of a nation during a period of one
year”- Brooman

5. Basic Concepts to Understand National Income
 Stock and Flow
 Domestic Territory of a Country
 Depreciation
 Normal Resident of a country
 Final Goods and Intermediate Goods
 Value Added
 Factor Income and Transfer Income

6. Basic Concepts to Understand National Income
 Market Price versus factor Cost
 Net Indirect Taxes
 Gross Product versus Net product
 Net factor Income From Abroad
 Domestic Product versus National Product

7. Stock and flow

8. Domestic Territory of a Country
Domestic territory is a very important concept in
national income accounting. In layman’s
language, domestic territory means the political
frontiers of a country.
 Ships and aircrafts owned and operated by normal
residents between two or more countries
 Fishing vessels, oil and natural gas rigs and
floating platforms operated by the residents of a
country in the international waters where they
have exclusive rights of operation
 Embassies, consulates and military establishments
of a country located abroad

9. Depreciation
Fall in the value of fixed capital goods in the
process of production is known as depreciation.
The reasons are:
 Normal wear and tear
 Foreseen obsolescence
 Normal rate of accidental damages

10. Normal Resident of a country

11. Final Goods Vs Intermidiate Goods

12. Value added
• Value added is the difference between value
of output of an enterprise and the value of
intermediate consumption
Value Added = Value of Output- Intermediate Consumption

13. Factor Income and Transfer Income
• Factor Income: Payment to factors of
productionin exchange for their contribution
made to the production process. For ex.;
wages,rent, interest and Profit
• Transfer Payments: The individuals and
households in an economy get some payments
without rendering any services. For ex.; Old
age pension, scholarships.

14. Market Price versus factor Cost
• The basis of difference between market price
and factor cost is net indirect taxes.
• The factor cost includes the payments to
factors of production while market price with
factor payments also includes the net indirect
taxes in it.
• The net indirect taxes goes to the govt. not to
the factors of production.

15. Net Indirect Taxes
 Indirect Taxes: Those taxes which are imposed by
govt. on production, sale or import of goods. It
tends to increase the market prices of goods and
services
 Subsidies: Monetary help by govt. to the
producers with a view to encourage the
production of certain commodities. It accrues to
the factors of production. Subsidies tends to
reduce the market price of a product
Net Indirect taxes = Indirect taxes- Subsidies

16. Gross Product versus Net product
The basis of difference between gross and net
national or domestic product or income is
depreciation or consumption of fixed capital.
Net Product or Income= Gross Product or Income – Depreciation or
Consumption of Fixed Capital
Gross Product or Income = Net product or Income + Depreciation or
Consumption of Fixed Capital

17. Net Factor Income from abroad
Net factor income from abroad is the difference
between the factor income earned from abroad
by the normal residents of a country and income
paid for the factor services rendered by the non-
residents within the domestic territory of the
country.
Net factor income from abroad =Factor Income From Abroad by the normal
residents- factor Income of the non-residents in the domestic territory

18. Domestic Product versus National Product
 The concept of domestic product is a narrow
concept in comparison to the concept of
national product.
 The basis of difference between the two is net
factor income from abroad.

19. Related aggregates of National
Income
• Gross Domestic Product at Market Price
• Gross National Product at Market Price
• Net Domestic Product at Market Price
• Net National Product at Market Price
• Net domestic Product at Market Price
• Net domestic Product at Factor Cost
• Net National Product at Factor Cost/ National
Income

20. Related aggregates of National
Income
• Private Income
• Personal Income
• Disposable Income

21. 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
GDP = C + I + G +Xn
where Xn = (X- M)

22. GDP at MaRket Prices (GDPMp )
• It is a money value of all final goods and
services produced within the domestic
boundaries of a country during an accounting
year.
GDPMp = P x Q
Where, P Price and Q Quantity

23. Gross national product (GNPMp)
• It is a broader concept than GDP.
• It is the aggregate of the market value of all
final goods and services produced in an
accounting year including net factor income
from abroad.
GNPMp = GDP + Net Factor Income From Abroad

24. Net National Product at Market price
(NNPMp)
• Net national product at market price is the
market value of the final goods and services
produced within the domestic country of a
country in an accounting year exclusive of
depreciation and inclusive of net factor income
from abroad.
NNPMp = GDPMp - Depreciation + Net Factor
Income from Abroad

25. Net Domestic Product at Market
price (NDPMP)
• It is the market value of the final goods and
services produced within the domestic
territory of a country during an accounting
year, exclusive of depreciation.
NDPMP = GDPMP - Depreciation
NDPMP = NNPMP - Net Factor Income
From Abroad

26. Gross Domestic Product at Factor Cost
(GDPFC)
• It is the sum of total factor income (rent +
interest+ wages + profit) generated within the
domestic territory of a country during a year.
GDPFC = GDPMP – Net Indirect Taxes
Net Indirect Taxes = Indirect Taxes -
Subsidies

27. Net National Product at Factor Cost (NDPFC) or National Income
• Net National Product at factor cost is also
known as national income.
• It is the sum total of compensation of
employees, operating surplus and mixed
income and net factor income from abroad.
NNPFC = NDPFC + Net factor Income From Abroad
NNPFC = NDPMP +Net factor Income From Abroad –
Net Indirect Taxes

28. Private income, Personal income & Disposable
Income
• Private income: it is the income of the private sector
obtained from any source (productive or unproductive)
• Personal income: it is the total of all current income
actually received by households and individuals of a
country from all sources including factor income and
transfer payments.
• Disposable Income: It is the income from all sources
remaining with individuals or households after
deduction of all direct taxes and compulsory payments
to the govt. It reflects the purchasing power of the
households.

29. Private income, Personal income &
Disposable Income
Private income = National Income + Transfer Income From Govt.
+ Current Transfer From Rest of The World + Interest on National
Debt - Property and Entrepreneurial Income of Govt. –Saving of Non-
Departmental Enterprises
Personal income = Private income - Corporate Saving (or
Profits) – Corporate Tax
Disposable Income= Personal income – Direct Personal Taxes -
Miscellaneous Receipts of Govt. Administrative Deptt.(Fees and
Fines paid)

30. Formulas
 NDPMp = GDPMp – Depreciation
 NNPMp= GDPMp – Depreciation+ Net factor income
from abroad
 NDPfC = NDPMp - Net Indirect Taxes ( Taxes -
subsidies)
 GDPfC= NDPfC + Depreciation
 NDPfC= GDPMp – Depreciation + Net factor income
from abroad - Net Indirect Taxes
 NNPfC = NDPfC +Net factor income from abroad
 Personal Disposable Income = Consumption + Saving

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