National Income Meaning, Concepts of National Income, Measurement of National Income and Difficulties in the measurement of National Income

1. National Income
Prof. Nithin Kumar S
Assistant Professor of Economics
JSS Banashankari Arts, Commerce and
Shantikumar Gubbi Science College
Vidyagiri, Dharwad - 580004

2. Meaning
• National income refers to the income of a
nation in one financial year
• It is the market value of goods and services
produced in a nation in one year
• It reveals the total income of all individuals
and institutions of a nation in a year
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3. Definitions
Alfred 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. This is the true net annual income or revenue
of the country or the national dividend”
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4. • A C Pigou – “National Income is that
part of the objective Income of the
community, including of course income
derived from abroad, which can be
measured in money”
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5. • Fisher – “The national dividend or income
consists solely of services as received by ultimate
consumers, whether from their material or from
their human environments. Thus, a piano or an
overcoat made for me this year is not a part of
this year’s income, but an addition to capital.
Only the services rendered to me during this year
by these things are income.”
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6. • National Income Committee of India
(1951) – “A National Income estimate
measures the Volume of Commodities and
services turned out during a given period
counted without duplication.”
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7. Interpretation of National
Income
It represents the total receipts of a nation
It represents the total expenditure of a
nation
It represents the total value of production
of a nation in one year
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8. Concepts of National Income
Per Capita Income (PCI)
Gross Domestic Product (GDP)
Gross National Product (GNP)
Net Domestic Product (NDP)
Net National Product (NNP)
Gross Value Added (GVA)
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9. Per Capita Income
• Per Capita income is the average income per
head in the country
• To obtain Per Capita Income the National
Income of a country is to be divided by its
population
Per Capita Income =
𝑵𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆
𝑺𝒊𝒛𝒆 𝒐𝒇 𝑷𝒐𝒑𝒖𝒍𝒂𝒕𝒊𝒐𝒏
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10. Gross Domestic Product (GDP)
• Gross Domestic Product is the total Value of final goods and
Services produced within the country and measured at market
prices during a year
• GDP at Market Prices refers to the total market value (i.e.,
Money Value) of all final goods and services produced within
the country by the nationals of the country and by the foreign
nationals staying in the country during a year
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11. • Thus,
GDP = C+I+G+(X-M)
 C = Consumption Expenditure
 I = investment Expenditure
 G = Government Expenditure
 X = Export
 M = Import
• GDP at Factor Cost
 GDP at Factor Cost Can be obtained as follows
 GDP at Factor Cost = GDP at Market Prices + (S-T)
 S = Government Subsidies
 T = Indirect Taxes
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12. Gross National Product
 Gross National Product (GNP) is defined as the
total (gross) market value of all final goods and
services produced by the nation in a year including
imports
 It also refers to the sum of all factor income earned
in one year, during the process of production of
the national output
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13. • In an open economy ( which is open to international trade), GNP may be
obtained by adding up:
a. The Value of all consumer goods (C) and services which are currently
Produced
b. The value of all capital goods (I) produced which is defined as Gross
Investments
c. The value of government Services (G) measured in terms of government
expenditure on goods and services for the benefit of the community
d. The value of the difference between total Exports (X) and the total
imports(M)
e. The net income earned abroad by the nationals of the country. i.e. the
difference between income received (R) and income paid (P)
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14. • Thus,
GNP = C+I+G + (X-M)+ (R-P)
 C = Consumption Expenditure
 I = Investment Expenditure
 G = Government Expenditure
 X = Export
 M = Import
 R = Income received
 P = Income Paid
 Thus, GNP Represents the final goods and Services ready for consumption,
valued at current Market prices
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15. Net Domestic Product (NDP)
• NDP refers to the Gross Domestic Product minus
Depreciation of Fixed Assets
• It is the net value of the output of final goods and
services produced in the country during a year
• Thus, NDP can be calculated as follows
NDP = GDP - Depreciation
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16. Net National Product (NNP)
• NNP refers to the to the gross National Product minus
depreciation of Fixed Assets
• It is thus the value of the net output of goods ad
services produced in a country in a year
• Therefore, when the amount of depreciation of fixed
capital asset is deducted from the gross national
product, we get the net national product
• NNP = GNP - Depreciation
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17. Personal Income (PI)
• It refers to the sum of all incomes actually
earned and received by all individuals and
families during a given year
• Personal Income is different from National
Income. Entire Production by Industry and
government is income received by the
country
• A Part of this income goes to the government
in the form of Corporate Income Taxes
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18. • Some firms may retain their profits to meet the future
emergencies
• A portion of National Income goes to Social Security
Funds
• It is used to finance Social Security Payments to the aged,
sick and the unemployed
• These are the items to be deducted from national income
benefits
• Then transfer payments are to be added to National
Income
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19. • Then,
 Personal Income = National Income –
Undistributed Corporate Profits – Social
Security Contributions + Transfer
Payments
The Concept of Personal Income helps to
estimate the potential purchasing Power of
the people
It is considered a measure of welfare of the
consumers in the country
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20. Disposable Income
• It is the income left with the people after
the payment of Personal Direct Taxes
Disposable Income = Personal Income
– Personal Direct Taxes
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21. • Disposable Income Data tells us how much income is actually
left at the disposal of the people for their personal expenditure
• This Concept is useful for studying the purchasing power of
the consumers
• Entire amount of disposable income is not spent on
consumption
• A portion of it is saved
• So,
• Disposable Income = Consumption Expenditure -
Savings
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22. Real Income
• Real income is the national income
expressed in terms of the base year’s price
index
• National Income figures do not indicate
the real situation of the economy as they
are estimated at current Prices
• Real Income data provide us a picture of
economic changes that have taken place
over a period of time
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23. National Income (NI) or National
Income at Factor Cost (NIFC)
• It refers to the Sum of all incomes earned by the factors of production (Land,
Labour, Capital and Organisation) in the form of Rent, Wages, Interest and
Profit during a given year
• Thus, it refers to the national income at factor cost
• To obtain National income at Factor Cost, Subsidies should be added and
Indirect Taxes are to be Subtracted From NNP
• National Income at Factor Cost = NNP – Indirect Taxes + Subsidies
• The Concept of National Income at Factor Cost is important because it explains
the way in which the total National Income is distributed among the Factors of
Production
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24. Gross Value Added (GVA)
• Gross value added (GVA) is the measure of
the total value of goods and services
produced in an economy( area, region or
country).
• The amount of value-added to a product is
taken into account.
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25. Calculation of GVA
• GVA can be defined as output produced
after deducting the intermediate value of
consumption.
• This can also be mentioned as :
• GVA= Gross Domestic Product +
Subsidies on products – Taxes on
products.
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26. Difference between GVA and
GDP
• The difference between GVA and GDP is
that GVA is the value added to the product
to enhance the various aspects of the
product
• whereas GDP is the total amount of
products produced in the country.
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27. Methods of
Measurement of
National Income

28. • National income can be viewed in terms of
a triple identity between outputs, income
and expenditure.
• Following three methods are used to
compute national income:
Output method
Income method and
Expenditure method
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29. Output Method
• Output method is also known as product method
or census method or inventory method or
commodity service method.
• Under output method the net value of all
commodities and services produced in the country
during a year are added up.
• Thus obtained sum is called the final product total.
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30. • In the output method the national income
is calculated as follows:
• National Income= NNP at factor
cost – Depreciation + Value of
exports-Value of imports + Net
receipts from abroad+ Subsidies -
Indirect Taxes
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31. • Symbolically,
• T= (C+I+G-D) + (S-T) + (X-M) + (R-P)
• Y = National Income
• C+I+G = Domestic Output
• D = Depreciation
• S = Subsidies
• T = Indirect Taxes
• X = Exports
• M = Imports
• R = Receipts from Abroad
• P = Payment made Abroad
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32. • While calculating the national income through output
method following precautions must be taken:
1. Only final goods must be taken into account and the
intermediate goods must be excluded in order to avoid
double counting.
2. New capital assets produced during the period under
consideration must be included.
3. The net payments from foreign sector must be added to
the value of interest output.
4. Depreciation and replacement expenditure must be
excluded.
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33. • Double counting is a common possibility
under output method.
• To avoid double counting two approaches
are suggested.
• They are Final Goods Approach and
Value Added Approach
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34. • The value of only final goods and services
is taken into consideration, under the final
goods approach of estimating GNP.
• But the value added at each stage of
production process is counted and
summed up together to obtain final value,
under the value added approach.
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35. Value added Approach
Production Stages Market
Value
Cost of
Intermediary
Goods and
Services
Value Added
(National
Income)
i. Cotton Fiber Rs.
150
-- Rs. 150
i. Cloth Rs.
300
Rs. 300 Rs. 300
i. Printing Charges Rs. 50 Rs. 50 Rs. 50
Final value of Saree Rs 500
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36. • The value added in each stage of production
is Rs. 150+ Rs. 300+Rs 50 = Rs. 500.
• The final goods approach as well as the
value added approach gives the same result.
• The following table shows the estimation of
national income through output method.
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37. Items Rupees (in Crore)
Agriculture, forestry and fishing 1500
Mining and Quarrying +500
Manufacturing +1200
Construction +750
Gas, Electricity and water +300
Transport and Communication +1000
Distributive Traders +1500
Insurance, banking and finance +1000
Public Administration and defence +750
Public health and Educational Services +1000
Other Services +500
Total Domestic Output 10000
Less: Stock Appreciation -1250
Residual Error -250
Net Property Income from Abroad -500
GNP at Factor Cost 8000
Less: Capital Consumption -750
National Income 7250
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38. • The output method can be expressed
through the formula
• O = C+I.
• Where O refers to Output.
• C refers to Consumption and
• I refer to investment.
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39. Income Method
• Income method is also called income received
method, flow of income method or factor
income method.
• Under income method, the net incomes received by
the individuals and business enterprises are found out
and added up.
• Thus obtained sum is called the factor payment total.
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40. • National income is obtained as follows,
when income method is used.
• National Income = Total Rent +
Total Wages + Total interest + Total
Profit= Total factor payments
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41. • Symbolically,
• Y = (w+r+i+π ) + (X-M) + (R-P)
• Where
• w = wages
• r = rent
• i = interest
• π = profit
• X = exports
• M = imports
• R = foreign receipts and
• P = foreign payments
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42. • Following precautions must be taken, when calculating the
factor payment total.
• The net incomes are only to be included and not the gross
incomes.
• Only those payment are to be included which represent a cost
Payment to a factor of production for a contribution towards
production.
• Payments due to the employer's own factors (implicit costs)
must be counted on the basis of market price for their use.
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43. • Goods and services for which no money
payment is made are to be excluded. For
example the services of the house wife or the
production made for self-consumption are
not being included in the national income.
• Undistributed profits kept in the form of
reserve funds are to be included.
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44. Income Method
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Items Rs (Crore)
Income: Wages, Salaries etc., 5000
Profits: Private and Public Corporation +2500
Rent +1000
Interest +500
Total Domestic Income 9000
Less: Stock Appreciation -1250
Residual Error -250
Plus: Net Property income from Abroad +500
GNP 8000
Less: Capital Consumption -750
National Income 7250

45. Expenditure Method
• Expenditure method is also known as outlay method
or consumption investment method or consumption
saving method.
• Since one man's expenditure is another's income, total
income of a country can be estimated by finding out its
total expenditure.
• This method considers only the present consumption
expenditure and investment expenditure.
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46. • When expenditure method is used,
national income is obtained as follows:
• National Income = Total domestic
expenditure - Indirect taxes –
Depreciation + Subsidies + Exports
– Imports
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47. • Symbolically
• Y = (C+I+G) + (S-D) + (X-M) + (R-P)
• Where
• C = consumption expenditure
• I = investment expenditure
• G = government expenditure
• S = subsidies
• D = depreciation
• X = exports
• M = imports
• R = foreign payment
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48. • The expenditure method may be expressed
through the formula Y = C+I
• where
• Y = income
• C = consumption expenditure and
• I = investment expenditure
• Samuelson calls it flow of product approach
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49. Expenditure Method
Items Rs (Crores)
Consumer Expenditure (C) 5500
Public Authorities current Expenditure on goods/services (G) +3000
Gross Capital Formation (investment) at home, including increase in stocks (I) +2500
Total Domestic Expenditure at Market Prices 11000
Less: Exports and income from abroad -1250
Less: Tax on Expenditure -5000
Plus: Subsidies +250
GNP at Factor Cost 8000
Less Capital Consumption -750
National Income 7250
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50. Difficulties in the Calculation
of National Income
• While measuring the national income a number of
difficulties are to be encountered because of the
complexities involves in its measurement. These
difficulties are broadly divided as,
1. Conceptual difficulties
2. Practical difficulties and
3. Specific difficulties in developing countries
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51. Conceptual Difficulties
• The items to be included to and excluded
from national income estimate create
conceptual difficulties.
• Following are the conceptual difficulties
arising while estimating the national
income
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52. 1. Unpaid Services
2. Output from Hobbies
3. Defence and Judicial Expenditure
4. Regulated Prices
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53. Practical Difficulties
• A number of practical difficulties are to be
encountered while estimating national
income. Important among them are the
following
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54. 1. Double Counting:
2. Problem of Over Estimation or Under
Estimation
3. Problem of Value of Inventories
4. Provision of Depreciation Allowances
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55. Specific Difficulties in
Developing Countries
• Besides the above problems, certain
specific difficulties are to be encountered
in developing countries like India or
Pakistan.
• Important among them are the following
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56. 1. Lack of Data
2. Study of Inconsistence
3. Input-output Analysis
4. Economic Planning
5. Possible Tax Base
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