National income of country containing GST methods of GDP delflator

1. National Income
• It is the money value of all final goods and services produced by a
country during a period of one year.
• It is basically the sum of all incomes of the people of a c?untry.

2. Some Quotes
• "The labour and capital of country acting upon 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 of revenue of the country or national
dividend."
Marshall
• "National income is the net output of the commodities and services flowing during the
year from the country's productive system in the hand of the ultimate consumers"
Simon Kuznets
• "National income or product is the final figure you arrive at when you apply the
measuring rod of the economy to its land, labour, and capital resources."
Samuelson

3. Need for the Study of National Income
• To measure the size of the economy and level of country's economic performance.
• To trace the pace of economic growth in comparison to other countries as well as
to pervious years.
• To know the relative importance of the various sectors of the economy and their
contribution towards national income.
• To help the government to formulate the national policies such as monetary policy,
fiscal policy and other policies.
• To formulate planning and evaluate plan progress.

4. Need...
• To know a country's per capita income which reflects the economic welfare
of the country.
• To know the distribution of income for various factors of production in the
country.
• To arrive at many macro economic variables namely, Tax - GDP ratio, Current
Account Deficit - GDP ratio, Fiscal Deficit - GOP ratio, Debt - GOP ratio etc.

5. National Income Aggregates
• There are various concepts of national income known as national
income aggregates:
Gross Domestic Product {GDP)
Net Domestic Product (NDP)
Gross National Product {GNP)
Net National Product {NNP)
Per Capita Income

6. Gross Domestic Product
• It is money value of all final goods and services produced in the domestic territory of
a country during one year.
• It is the total value of everything produced in a country, regardJess of if its citjzens or
fore1gners produced it.
• It is the sum of private consumption, gross investment in the economy, government
investment, government spending and net foretgn trade (the difference between
exports and imports).
• GDP= private consumption+ gross investment+ government investment+
government spending+ (exports-imports)
j

7. - - - - -- ~ ---- - ---
. GDP (FC) ''.
- _.. ~
GDP (MP)
-- - - .
GDP I
_
{~Of!l_
inal_
L
GDP at Factor Cost measures the cost to businesses to employ the different factors
of production.
GDP at Market Price include the prices consumer will pay for the goods on the
market.
The difference between GDP at factor cost and market prices is subsidies and taxes
levied by the government.
GDP at Factor Cost = GDP at Market Price - Indirect Taxes + Subsidies

8. • Nominal GDP is GDP evaluated at current market prices. Therefore, nominal
GDP will include all of the changes in market prices that have occurred during
the current year due to inflation or deflation. It is the market value of the final
production of goods and services within a country in a given period using that
year's prices
• Real GDP is GDP evaluated at the market prices ofsome base year. For
example, if 1990 were chosen as the base year, then real GDP for 1995 is
calculated by taking the quantities of all goods and services purchased in 1995
and multiplying them by their 1990 prices. Nominal GDP adjusted for changes
in the price level, using prices from a base year (constant prices) instead of
"current prices" used in nominal GDP; real GDP adjusts the level of output for
any price changes that may have occurred over time.

9. • GDP Deflator: it is a price index used to adjust nomina1 GDP to find real
GDP; the GDP deflater measures the average prices of all finished goods and
services produced within a nation
1
s borders over time.
Nominal GDP
GDP Deflator = Real GDP x 100

10. Net Domestic Product
• The net domestic product (NOP) is an annual measure of the
economic output of a nation that is adjusted to account for
depreciation and is calculated by subtracting depreciation from the
gross domestic product (GDP).
• When depreciation allowance is subtracted from gross domestic
product we get net domestic product.
• NDP =GDP-Depreciation

11. Gross National Product
• Gross national product is the money value of all goods and services produced
by a country's citizens and citizen-run businesses, regardless of whether they're
living in the country or outside of it.
• GNP does not include any income produced by foreign residents or businesses
run by foreign res1dents, even if that income was produced in the country.
• Thus in order to estimate the gross national product of India, we have to add
Net factor Income fro abroad in gross domestic product.
•GNP= GDP+ NFIA

12. Net National Product
• It can be derived by subtracting depreciation allowances from Gross National
Product (GNP). It can also be found out by adding the net factor income from
abroad to the Net Domestic Product (NDP).
• NNP = GNP - Depreciation
or
NNP = NDP + NFIA
• If NFIA is positive NNP will be more than NDP.
• If NFIA is negative NNP will be less than NDP.
• If NFIA is zero NNP will be equal to NDP.

13. Per Capita Income
• It is also known as the income per person i.e., the mean income of the peope
in a country.
• It is often used as average income of the country.
• Due to the limitations of national income as an indicator of development,
economists like Rostow, Leibenstein, etc. favoured the use of per capita income
as an index of development.
iii
Ill
.
GDP Per
Capita Formula
■Ii.II
GDP of the Country
Population of that Country

14. Measurement of National Income
There are three different angles to calcuiate national income:
• Economy is classified into individuals and househoids owing different factors of
production getting paid for factor services. This classification is used to calculate
national income through income method.
• Production units are classified into three different sectors; primary, secondary and
tertiary sector. This classification is used to calcu1ate national income through vaiue
added method.
• Economy is also viewed in terms of consumption, investment and saving. This basis
is used to calculate national income through expenditure method.

15. Income Method
• There are mainly four factors of production land, labour, capital and
~ntrepreneursh1p. Land gets rent, labour gets wages and salaries, capital gets
interest and entrepreneurs gets profits ad their remuneration.
• In income method national income measured by adding the factor incomes of
the factors of production.
• Transfer payments such as old age pensions, unemployment allowances etc.
are not counted as they are income without contributing in production
activities.
• Only those income are counted which are received for production of goods or
services.

16. Important Points in Income Method
• Transfer payments are not included.
• Imputed rent of self occupied houses are included.
• Illegal incomes are not included as they are difficult to est~mate.
• Windfall gains are not induded.
• Income from sale of second hand goods are not included.

17. Value Added Method
• This is also called production method or output method.
• In this method economy is classified into sectors like agriculture, industry,
forestry, services, etc.
• Value added by different sectors while producing final goods and services
are added.
• The value-added method of calculating national income focuses on the
value added to a product at each stage of production.

18. Important Points in Value Added Method
• Intermediate goods are not to be included.
• Sate and purchase of second hand goods and services are not
included.
• Production of services for self consumption like services of housewife,
gardening, etc. are not included.

19. Expenditure Method
• One man's expenditure is another man's income, thus national income can
be calculated by adding all the total expenditure.
• Expenditure refers to all the purchases made by residents, government, or
business enterprises.
• In this method national income can be calculated by adding private
consumption expenditure, government consumption expenditure,
investment expenditure, net exports.
National Income =C(household consumption)+ G (government
expenditure) + I (investment expense) + NX (net exports).

20. Important Points in Expenditure Method
• Purchase of second hand goods are not included.
• Purchase of financia~ assets lik~ shares, bonds, debentures, etc. are
not included.
• Expenditure on intermediate goods are not included.

21. Difficulties in Measurement of National Income
• Data: collection of accurate and reliable data is very difficult.
• Double Counting: another issue related to calculation of national incom-e 1s the
problem of douole counting.
• Prevalence of Non-Monetized Transactions: here are certain transactions ike
agriculture in which a major part of output is consumed at the farm level itself which
does not com-
e into the market at all.
• Illiteracy: a majority of people in India are illiterate and they do not keep any
accounts about the production and sates of their products.
• The Calculation of Depreciation: another difficulty is calculation of depredation on
capital consumption. There are n_o accepted _standard rates of depreciation
applicable to the various categones of machme.

22. • Illegal income: different people can earn income through illegal activities, such as
bla~k marketing, gambling, smuggling, etc. But these incomes are not included in
national incomes which make national income less than the actual amount.
• Transfer payment: transfer payment like pension, unemployment allowances, etc.
are apart of individual income and are also a part of government expenditure. So, it
creates problem whether it should be included in national income or not.
• Frequent changes in price level: national income is the money value of goods and
services. Money value depends upon the market price of goods and services. But
the market price of goods and services often changes which creates the problem in
measuring national income.
• Choice of Method: selection of method while calculating National Income is also
an important task. The wrong method leads to poor results.

23. Factors Determining National Income
• Quantity and quality of factors of production.
• Technical know how in the country.
• Political stability.

24. Important Facts
• The first estimate of National Income was prepared by Dadabhai Naroji for the year
1867-68.
• The first scientific estimate was made by Prof. V.K.R.V Rao for the year 1931-32
• Government of India appointed the National Income Committee in 1949, with P.C.
Mahalanobis as the Chairman.
• The task of national income accounting in entrusted to the Central Statistical
Organisation (CSO).