This document discusses various concepts related to measuring national income, including: 1. There are four main methods of measuring national income - the product method, income method, expenditure method, and value added method. 2. The income approach to gross national product (GNP) involves adding up all income payments to the factors of production. 3. The expenditure approach to GNP involves totaling personal consumption expenditures, gross private domestic investment, net foreign investment, and government expenditures. 4. Other concepts discussed include net national product, disposable income, real income, and per capita income. Challenges in measuring national income, especially in developing economies, are also outlined.

1. Definition –
According to marshal
The labour and capital of a country acting on its
natural resources produce annually a certain net
aggregate of commodities material and immaterial
including services of all kinds.
Pigou – National income included that income
which can be measured in terms of money.
In the words of Pigou
• National income is that part of objective income
of the community, including of course income
derived from abroad which can be measured in
money.
D:KNS BANAFARNational Income

2. MODERN POINT OF VIEW -
Simon Kuznets –
The net out put of commodities and services flowing
during the year from the country’s the year from the
country’s productive system in the hands of ultimate
consumer’s
METHODS OF MEASURING NATIONAL INCOME
There are Four Methods of Measuring National
Income
1. Product method
2. Income method
3. Expenditure methods
4. Value added methods

3. 1. PRODUCT METHOD –
• According to this method, the total value of
final goods & services Produced in a country
during one year is calculated at market price.
• To find out the GNP, the data of all productive
activities, such as agricultural products wood
received from forest mineral received from
mines, Commodities Produced by Industries.
• the contribution of production made by
transport, communication, insurance
companies, lawyers, doctors, teachers etc. Are
collected and assessed at market prices.

4. •In this method only final goods and services are
included and the inter diary goods and services are
left out.
2. Income method –
• According to this method the net income
payments received by all citizens of country in a
particular year are added up
•Ie. That is net incomes that accurse to all factors
of production by way of net rent. Net wages, net
interest and net profits all are added together.
•The data pertaining to income are obtained from
different sources.

5. For Instance
Income tax department in respect of high income
group and in case of workers from their wage bills.
3. Expenditure method
• According to this method, the total expenditure
incurred by the society in a particular year is added
together and includes
• Personal consumption,
•Net Domestic Investment,
•Govt. Expenditure on goods & services
•Net foreign investment this concept is based on the
assumption that national income equals national
expenditure.

6. 4. Value Added Method
• An other method of measuring national income
as value added method by industries.
•The difference between the value of material
outputs and inputs at each stage of production is
value added.
• Conversion of raw material into finished product
is called processing & processing is a part of value
addition.
•Processing conservation of raw material into
finished product before it has to offer to ultimate
consumer’s

7. MARGINAL EFFICIENCY OF CAPITAL
• Marginal efficiency of capital is the highest rate of
return expected from an additional unit of a capital
assets over its cost.
MARGINAL RATE OF SUBSITUTION
•The marginal rate of substitution is the rate of
exchange between some unit of good x and y
which are equally preferred.
Direct tax –
• Tax levied by government on income and wealth
received by households and business

8. Indirect Tax –
• A tax levied by government on goods and services
are called indirect tax.
Ex.- Sale taxes on commodities & services.
Value Added Tax (VAT)
• A General tax applied at each point of exchange
of goods or services, from primary production, to
final consumption. It is levied on the difference
between the sale price of output and the cost of
input.

9. CONCEPTS OF NATIONAL INCOME
• There are a number of concepts pertaining to
national income
For Instance
• Gross national product (GNP)
• Net national product (NNP)
•Net national product at factor cost
•Net domestic product at factor cost
•Personal income
•Disposable income
•Real income

10. (a) Gross national Product (GNP)
• GNP is the total measure of the flow of goods and
services at market value
• From current production during a year in a country
including net income from
ABROAD
GNP includes four types of final goods and services
• Consumers goods and services to satisfy the
immediate wants of people
• Gross private domestic investment in capital goods
consisting of fixed capital formation, residential
construction finished and unfinished goods.

11. • Goods and services produced by government.
•Net exports of goods and services
That is ie the difference between value of
export and imports of goods and services, known
as net income from abroad
In this concept GNP there are certain factors
that have to be taken in to account.
1. GNP is measure, of money in which all kinds of
goods and services produced in a country
during one year are measured in terms of
money at current prices are then added
together.

12. 2. Estimating GNP of Economy, the market price of
only final product should be taken in to account.
• Many of the products pass through a number of
stages before they are ultimately purchased by
consumers.
• if those products were counted at every stage
they would be included many a times in national
product and consequently the GNP would increase
too mach
•To avoid double counting therefore, only the final
products and not the intermediary goods should be
taken in to account.

13. •Goods and services rendered
3. Free of charge are not included in GNP.
Because it is not possible to have a correct
estimation of their market prices
For example
• Bringing up of a child by the mother
• Imparting instructions to his student by a teacher
4. The transactions which do not arise from the
produce of current year or which do not contribute
in any way to production, are not included in GNP

14. Example –
• The sale and purchase of old goods and shares,
bonds and assets of existing companies are not
included in GNP.
• Because they do not make any addition to the
national products and goods are simply
transferred.
• like wise, payment received under social security,
E.G. unemployment insurance allowance old age
pensions are also not included in GNP
• Because the recipients do not provide any service
in lieu of them.

15. • But the depreciation of machines, plants and other
capital goods is not deducted from GNP.
5. The income earned through illegal activities is not
included in the GNP.
• Although the goods sold in the black market are
priced and fulfill the needs of peoples.
• But as they are not useful from the social point of
view, the income received from their sale and
purchase is always excluded from GNP.

16. Three Approaches to GNP
1. The income approaches to GNP.
2. The expenditure approaches to GNP.
3. Value added approaches to GNP.
(1) Income Approaches to GNP
The income approach to GNP consists of the
remuneration paid in terms of money to the factors of
production annually in a country.
(i) Wages and Salaries
(ii) Rents – House, land, shop, etc.
(iii) Interest
(iv) Devi dent –
(v) Undistributed corporate profits.
(vi) Mixed income partnership.

17. (vii) Direct taxes
(viii) Indirect taxes
(ix) Depreciation
(x) Net income earned from abroad
(i) Wages & salaries –
• Wages & salaries earned through productive
activities by workers and entrepreneurs.
it includes all sums received or deposited during a
year by way of all kinds of contributions,
provident fund, insurance etc.

18. (ii) Rent
• Total rent includes the rent of land, shop house,
factory, etc.
• Estimated rents of all such assets as are used by the
owner the selves.
(iii) Interest
• Interest is profit which goes to the owner of capital
• Income by way of interest received by individual of
country from different sources.
(iv) Dividends –
• Dividends earned by the share holders from
companies are included in the GNP

19. (v) Undistributed corporate profits
• Profit which are not distributed by companies and
remained by them are included in the GNP.
(vi) Mixed Income
• These include profit of unincorporated business,
self employed person and partnership
• They form part of GNP
(vii) Direct taxes –
• Taxes levied on individuals, corporations and
other businesses are included in GNP

20. (viii) Indirect taxes –
• The government levies a number of indirect
taxes, like excise duties and sales tax.
• These taxes are included in the prices of
commodity. Commodities.
• But the revenue goes to the Government
treasury.
• Therefore, the income due to such taxes is
included to the national income.

21. (ix) Depreciation –
• Every corporation makes allowance for
expenditure on nearing out and depreciation of
machines, plants and other capital equipment.
• Since this sum also is not a part of the income
received by factors of production, it is, therefore,
also included in GNP.
(x) Net income Earned from Abroad
• This is the difference between the value of
exports of goods and services and the value of
imports of goods and services.

22. • If this difference is positive, then it is added to
GNP.
• And if it is negative it is deducted from GNP
Thus GNP according to income method =
Wages and salaries + Rent + Interest + Dividends +
Undistributed corporate profit + Mixed income+
Direct taxes + Indirect taxes+ Depreciation + Net
Income from Abroad

23. (2) EXPENDITURE APPROACH TO GNP
• From expenditure view point GNP is the sum total of
expenditure incurred on goods and services during
one year in a country
Following item has to be included –
• Private consumption expenditure
• Gross domestic private investment
• Net foreign investment
• Government expenditure on goods and services

24. (i) Private Consumption Expenditure –
• It includes all types of expenditure on personal
consumption by the individuals of a country.
• It comprises expenses on durable goods like car,
motor bike, scooter, T.V. sets etc.
• Expenditure on single used consumers goods
like milk, bread, butter, butter oil, clothes etc.
• Expenditure incurred on services of all kinds like
fees for school, Doctor, Lawyer and Transport
these are taken as final goods.

25. (ii) Gross Domestic Private Investment –
• The expenditure, incurred by private enterprise
on new investment and on replacement of old
capital.
•It includes expenditure on House construction,
factory building, all types of all types machinery,
plants and capital equipments.
•The inventory includes produced but unsold
manufactured and semi manufactured goods
during the year and the stock of Raw material,
which have to be accounted for in GNP.

26. (III) Net Foreign Investment
• It means the difference between exports and
imports or export surplus.
•Every country exports to or imports from certain
foreign countries.
•The important goods are not produced in the
country or within the country and hence can not
be included in national income

27. •But the exported goods are manufactured within
the country.
•Therefore, the difference of value between
exports (x) and Imports (M) whether positive or
negative is included in the GNP.
(iv) Government Expenditure on Goods and
Services
• The expenditure incurred by the government on
goods and services is a part of GNP.
•Central, state or local governments spend a lot on
their employees police and army.

28. •Torunn the offices the governments have also to
spend on contingencies which includes paper, pen,
pencils and various types of stationery, cloth,
furniture, cars, etc.
•It also includes the expenditure on government
enterprises
•But expenditure on transfer payments is not added,
because these payment are not in exchange for goods
and services produced during the current year.
Thus GNP according to expenditure method =
private consumption. Expenditure (c)+ Gross domestic
private investment (I) + Net foreign investment (x-m) +
Government expenditure on goods and services (G) +
C+ I+ (x-M) +G

29. (3) Value Added Method –
1. Domestic income
2. Private income
3. Personal income
4. Disposable income
5. Real income
6. Per capita income
(i) Domestic Income/Product
• Income generated (or earned) by the factors of
production within the country from its own
resources is called domestic income or
domestic product

30. Domestic Income includes
• Wage and salaries
•Rents including house rent
•Interest
•Dividends,
•Undistributed corporate profit
•Mixed income
•Direct taxes
•Since domestic income does not include income
earned from abroad it can also be shown as
Domestic income = National income – Net income
earned from abroad

31. (ii) Private Income –
• Private income is income obtained by private
individuals from any source productive or other
wise.
•It can be arrived at from NNP at factor cost by
making certain additions and deductions.
•The additions includes transfer payment such as
pensions, unemployment allowances, sickness and
other social security

32. Remittances =
Benefits, gifts and remittances from abroad,
•Wind fall gains from lotteries or from horse racing
and interest on public debt.
•The deduction includes income from Govt.
department as well as surpluses from public under
takings, and employees contribution to social
security scheme like provident funds, life insurance
etc.

33. • Thus private income = National income (or NNP at
factor cost) + transfer payment + Interest on public
debt – social security – profits and surpluses of public
under takings.
Personal Income
• Personal income is the total income received by the
individual of a country from all sources before direct
taxes in one year
•Personal income is never equal to the national
income.

34. •Personal income is derived from national income
by deducting undistributed corporate profit, profit
taxes and employees contributions to social
security scheme.
• Personal income = National income –
undistributed corporate profit- profit taxes – social
security contributions + Transfer payments +
Interest on public debt.

35. Disposable income
• Disposable income or personal disposable income
means the actual income which can be spent on
consumption by individuals and families.
• The whole of the personal income can not be
spent on consumption, because it is the income
that accrues before direct taxes have actually
been paid.
• In order to obtain the disposable income direct
taxes are deducted from personal income.

36. Thus disposable income = personal income –
Direct taxes.
• But the whole of the disposable income is not
spent on consumption and a part of it is saved.
• Therefore, disposable income is divided into
consumption expenditure and saving
Thus disposable income = consumption
expenditure + saving.

37. Real Income
• Real income is national income expressed in
terms of a general level of prices of a particular
year taken as base
• National income is the value of goods and
services produced as expressed in terms of
money at current prices.
Real NNP = NNP for the Base year index (=100)
X
Current year current year index

38. Per capita income –
• The average income of the people of a country in a
particular year is called per capita income for that
year.
• The concept also refers to the measurement of
income at current prices and at constant prices.
For instance in order to find out the per capita
income for 1981 at current prices, the national
income of a country is divided by the population of
the country in that year.

39. Per capita income for 1981 =
National income for 1981
Population in 1981
Similarly, for the purpose of arriving at the
real per capita income also, this very formula is
employed
Real per capita income for 1981 =
Real National income for 1981
Population in 1981

40. Difficulties in The Measurement of National Income
• There is the difficulty of defining ‘Nation’ in national
income.
• National income is always measured in money but
there are a number of goods and services which are
difficult to assessed in terms of money.
• Painting is hobby M.F. hussain S.Laxman.
• The greatest difficulty in calculating national income
is of double counting finished and intermediate
products
• Income earned through illegal activities such as
gambling illicit extraction of wine etc. is not included
in national income.

41. Problems of Measurement in a Developing
Economy
1. Non monetized sector
2. Lack of occupational specialization (Dairy,
Poultry, Cloth market)
3. Non market transactions (Kitchen Garged
Produce)
4. Illiteracy – (Did not maintain records)
5. Non availability of data (Data related to crop
production, forestry, fisheries, animal
husbandry

42. Monetary Policy
Objectives
The principal objectives of monetary policy are:
• The safe guarding of country’s gold reserves
• Price stability
• Exchange stability
• Elimination of cyclical fluctuation
• Achievement of full employment
• In the case of under- developed economies
accelerating economic growth.

43. Reckless = widely or impulsive =
Dear Money –
• Dear money means that the borrowing rates or
interest rates are high
Cheap money
• Cheap money means that interest rates are low
• The price of money, in short is the rate of interest.
When Dear Money
• When there is a state of galloping or hyper –
inflation
• When there is hectic speculative activity
• When there is reckless investment by industrialists.

44. Carefulness Prudent = Carefully foresight
• When credit creation by the banks has crossed all
prudent bounds
• When balance of payment is heavily against the
country
• Threatens to continue unfavorable
• A dear money policy is indicated.
• It is deflationary move.
• It will apply a break on senseless capital investment
• It will stem the rising tide of prices
• It will muzzle the mad career of speculator
• It will ultimately put the balance of payment
position of country on a stable footing

45. Muzzel = Prevent from expressing opinion freely
When cheap money
• Cheap money policy, on the other hand
• Cheapening of credit services is a tool for
(A) Combating slump = (Sudden great fall in price)
(Battle – fighting)
(B) Fighting unemployment
(C) Financing development programme.
• When cheap money policy is adopted, the
government has to borrow in the open market.
• In case there is dearth of credit, the prices of
security/securities will rise and the demand for
them will fall.
• The government will have to rely institutional
investor.

46. Monetization =
• Cheap money policy means the monetization of
public debt, i.e.. The public debt is turned into
liquid cash.