methods of Calcu;ating National Income

1. NationalIncome

3.  Meaning and concept of National Income.
 National Income Concepts: GDP,GNP, NNP,PCI, PI, DPI
 Circular flow of National Income.
 Methods of Calculating National Income.
 Difficulties in measurement of National Income.

5. GDP is the market value of all final
goods and services produced within
a country in a given period of time.

6.  Market prices are used to measure GDP
 Why?
 Because market prices measure the amount people are
willing to pay for different goods
 Market prices are expressed in terms of money.
 Thus GDP is the sum of all money values of all final goods
and services produced within the domestic territory of a
country during an accounting year.

7.  Means all items produced and sold in the economy.
 Sold in legal markets.
 However GDP excludes
 Goods produced and sold illicitly such as illegal drugs.
 Items that are produced and consumed at home, and
therefore, never enter the market place.

8.  GDP includes only final goods and not intermediate goods.
 This is because the value of the intermediate good is already
included in the final good.
 Adding the market value (price) of the intermediate good
would lead to Double Counting.
 Double counting leads to an incorrect estimation of GDP.

9.  Both tangible goods (food, clothing, cars) and intangible
services (haircuts, house cleaning, doctors visit)
 Eg. When you buy a novel of your favourite author, you are
buying a good, and the purchase price is a part of GDP.
 Similarly when you attend a musical concert of your favourite
band, you are buying a service, and the ticket price is also a
part of GDP.

10.  GDP includes goods and services currently produced.
 It does not include items produced in the past.
 Eg. When Ford produces and sells a new car, the value of the
car is included in GDP.
 But when a person sells a used car to another person, the
value of the car is not included in GDP.

11.  Means within the domestic territory of a country.
 Items are included in a nations GDP if they are produced
domestically, regardless of the nationality of the producer.

12.  Means GDP is calculated during an accounting year.
 This means GDP is measured quarterly (3 months) or yearly.
 Its usually quarterly multiplied by 4 with seasonal changes.

13.  These three are the
lifeline of the economy.
 Each activity is a
consequence of the
other.
 All chasing each other.

14. Assumptions –
 only 2 sectors i.e households & Firms.
 Closed economy

15.  GDP MP is always inclusive of Depreciation.
 Depreciation means loss in the value of fixed assets
in use on account of
i. Normal wear and tear
ii. Accidental damage
iii. Or outdated (obsolete) due to change in
technology
 By deducting Depreciation from GDPMP we get
NDPMP (Net Domestic Product)
 GDPMP - Depreciation = NDPMP

16.  Domestic Income/ product is estimated at market price as well as
factor cost.
 Market price includes
a) Impact of subsidies which tend to lower the price &
b) Impact of indirect taxes which raise the price
 Factor cost is free from impact of subsidies & indirect taxes. So
domestic product at market price can be converted into domestic
product at factor cost by deducting Net indirect taxes
 Net indirect taxes – (Indirect tax – subsidies)
Thus
 Domestic Product MP – Net indirect taxes = Domestic Product FC

17. National income means the value of goods and services produced by a
country during a financial year. Thus, it is the net result of all
economic activities of any country during a period of one year and is
valued in terms of money.

19. First estimate
• GDPMP - Depreciation = NDPMP
• NDPMP – (Net Indirect taxes) = NDP FC
• Net Indirect Taxes = Indirect Taxes - Subsidies
• NDPFC + NFIA = NNPFC
• GDP : Gross Domestic Product
• NDP : Net Domestic Product
• NNP: Net National Product
• MP: Market Price
• FC: Factor Price

20. • Adding value at each level of
production.
• Value addition is done by the
producing enterprise in the
economy during an accounting
year.

21. Producers Stages of
Production
Value of
Output
(Rs.)
(1)
Value of input
(Rs.)
(2)
Value Added
(Rs.)
(1)-(2)=(3)
Farmer Wheat 700 --- 700
Miller Flour 1000 700 300
Baker Bread 1300 1000 300
Shopkeeper Households 1400 1300 100
Total 4400 3000 1400

22.  Value of the sale and purchase of second hand goods is not included in value
added. Because, value of second hand goods is already accounted for during the
year they were produced.
 Goods produced for personal use will also be included in estimating value
added. Because, these goods are like those produced for market. They are
simply not sold owing to their own need by the producer.
 Value of intermediate goods is not included in the estimation of value added.
Because, value of intermediate goods is already included in the value of final
goods.
 Commission earned on account of the sale and purchase of second hand goods
is included in the estimation of value added. Because commission is reward for
the services rendered.
 Imputed rent on the owner occupied house is also taken into account. Because,
all houses have rental value, no matter these are self-occupied or rented out.
 Services for self-consumption is not considered while estimating value added.
Simply because, it is difficult to estimate their market value, like, for example,
services of housewives.
 Income from illegal activities is not included in national income.

23.  Problem of Double counting:
This problem arises due to unclear distinction between a final &
intermediate good.
 Not Applicable to Tertiary Sector:
This is because output cannot be measured in physical terms. Hence
there is also no input output relationship.
 Exclusion of Non marketed Products:
There are several goods & services which are difficult to be assessed
in terms of money. Like painting as a hobby. It has an opportunity
cost in terms of time & resource involvement, but does not go to
National Income data.

24.  Final Product Method:
In the previous eg. Final market value of the bread is Rs 1400.
So GDP of the economy is Rs.1400
 Value added method:
Means the difference between value of output and value of
input. This means 4400-3000= Rs.1400

26.  This measures the value of all spending on goods and services in
the economy.
 This is calculated by summing up the spending by all the different
sectors in the economy.
 These include:
a) Spending by households, known as Consumption (C)
b) Spending by firms, known as Investment (I)
c) Spending by Governments (G)
d) Spending by foreigners on exports minus spending on imports. (X-
M)

28.  Only final expenditure is to be taken into account to avoid double
counting……ie expenditure on intermediate goods & Services must
be avoided.
 Second hand goods are not to be included.
 Expenditure on Shares and bonds is not to be included. As such
expenditure do not cause any production or value addition.
 Expenditure on transfer payments by the government like old age
pension / scholarship etc is not included as again transfer
payments do not cause any value addition.
 Imputed Value ie estimated value of expenditure on goods
produced for self consumption should be taken into account, as
these goods are reflected in GDP.

29.  In this method, the total sum of the factor payments
received during a given period is estimated to obtain the
value of Domestic Income. Depending on the way, the income
is earned.
It can be classified into following components:
(i) Compensation of employees (wages)
(ii) Operating surplus (rent, profit and interest)
(iii) Mixed income of self-employed
 GDP is adjusted with NFIA to get National Income

30.  NDPFC = Sum total of factor Incomes generated within the
domestic territory of a country during an accounting
year. It is briefly called domestic Income.
 National Income (NNPFC) is adjusted with NFIA
 NNPFC = NDPFC +NFIA

31. a) Income from illegal activities like smuggling, theft,
gambling, etc, should not be included.
b) Corresponding to production for self consumption, the
generation of income of economy to be taken into account.
c) Brokerage on the sale/purchase of shares and bonds is to be
included.
d) Income in terms of windfall gains should not be included
e) Transfer earnings like old age pensions, unemployment
allowances, scholarships, pocket expenses, etc, should not
be included.

32.  PCI is the average income earned per person.
 It refers to an individual share of National Income.
 It is calculated to understand the economic growth &
development of a country.
 PCI = National Income / Total Population
 India is one of the largest economies in the world in terms of
GDP.
 However as a result of low PCI, India is considered as a
developing country.
 Higher PCI means higher standard of living. Hence developed
economies have higher PCI compared to developing
economies.

33.  National Income can be sub divided into smaller categories.
The part of National Income which is received by households
is called as Personal Income(PY)
 PY = NY – undistributed profits – corporate profits – social
security contributions + Transfer payments
 Undistributed profits are deducted as it is a part of income
earned by the firms. Similarly Corporate tax is imposed by
the govt. on the earnings made by the firms. Hence both
undistributed profits & corporate tax are deducted from NY
as it does not accrue to the households.

34.  DPI is that part of the aggregate income which belongs to the
households.
 They may decide to consume a part of it and save the rest
 Calculated as:
DPI = Personal Income – Taxes
Taxes here implies income and non income taxes.

35.  Flow Concept
 Value of the final goods
 Macroeconomic concept
 Monetary measure
 Adds to net exports
 It’s a measure of economic progress

36.  Non monetary transactions are not included
 Problem of double counting
 Transfer Income
 Income from illegal activities not included
 Capital gains are excluded
 Imputed value estimation are not accurate
 Inadequate statistical data
 Lack of occupational specialisation