GDP is the sum of final goods and services produced within a country in a year and can be measured at current or constant prices. GNP includes net income from abroad. NNP is GNP less depreciation. National income data are important for understanding an economy's aggregate production and expenditures, and difficulties in measurement include multiple counting and exclusion of non-market activities. National income is considered a measure of economic welfare as it rises with aggregate production of goods and services.

1. Chapter 18
National Income

2. Objectives
• To explain the various concepts of national income,
like GDP, GNP and NNP.
• To explain the concept of real and nominal national
income.
• To discuss and analyze the different methods to
measure national income.
• To understand the advantages of national income
calculation in global perspective.
• To appreciate the difficulties in estimating national
income.

3. National Income
• "National income or product is the final
figure you arrive at when you apply the
measuring rod of money to the diverse
apples, oranges, battleships and
machines that any society produces with
its land, labour and capital resources."
Paul A. Samuelson

4. National Income
• Calculation of national income requires adding
together all final goods and services produced in
a country in a given year.
• Various goods and services produced in the
economy cannot be added together in their
physical form; hence they need to be converted
into monetary terms.
• Thus National income is defined as the money
value of all the final goods and services
produced in an economy during an accounting
period of time, generally one year.

5. Concepts of National Income
• Gross Domestic Product (GDP)
– Gross Domestic Product at factor cost
– Gross Domestic Product at market price
• Gross National Product (GNP)
• Net Domestic Product (NDP)
• Net National Product (NNP)
• Per Capita Income
• Per Capita Disposable Income

6. Gross Domestic Product
• Gross Domestic Product (GDP): GDP is
the sum of money value of all final goods
and services produced within the domestic
territories of a country during an accounting
year.
GDP (at market price)= C+I+G+(X-M)
Gross Domestic Product at factor cost
= GDP at Market Prices –Indirect Taxes+ Subsidies

7. Gross National Product
• Gross National Product (GNP): GNP is the aggregate
final output of citizens and businesses of an economy in
a year.
• GNP may be defined as the sum of Gross Domestic
Product and Net Factor Income from Abroad.
GNP = GDP + NFIA
GNP = C+I+G+(X-M)+NFIA
• Net Factor Income from Abroad: difference between
income received from abroad for rendering factor
services and income paid towards services rendered by
foreign nationals in the domestic territory of a country

8. Net Domestic Product and
Net National Product
• Net Domestic Product
= GDP-Depreciation
• Net National Product (NNP)
= GDP–Depreciation +NFIA
Or =GNP–Depreciation
• Thus NNP is the actual addition to a year’s wealth and is
the sum of consumption expenditure, government
expenditure, net foreign expenditure, and investment,
less depreciation, plus net income earned from abroad.
= C+I+G+(X–M)–Depreciation + NFIA

9. National Income
• NNP at Factor Cost is the sum total of
income earned by all the people of the
nation, within the national boundaries or
abroad
• It is also called National Income.
• NNP at Factor Cost = NNP at Market
Prices –Indirect Taxes+ Subsidies

10. Net Domestic Product and
Net National Product
S.No. Item 2003-04 2004-05
1. National income (Net National
Product at factor cost)
2268576 2531223
2. Indirect taxes less subsidies 216828 277517
3. Net national product at market
Prices (1+2)
2485404 2808740
4 Other current transfers from rest
of the world (Net)
104819 91736
5. Net factor income from abroad -18250 -17916
6. Net domestic product at market prices 2503654 286656
National Income Data for India (Rs Crore)

11. Real and Nominal National
Income
• National income estimated at the
prevailing prices, is called national income
at current prices or Nominal National
Income, or Money National Income or
national income at current prices.
• National income measured on the basis of
some fixed price, say price prevailing at a
particular point of time, or by taking a base
year, is known as Real National Income
or national income at constant prices

12. Real National Income
• Real GDP measures changes in the physical
output in an economy, between different time
periods, by valuing all goods produced in the
two periods at the same prices
deflatorGDP
GDPNominal
=GDPReal
•GDP deflator is the ratio of nominal GDP in a year to real GDP of
that year.
•GDP deflator measures the change in prices between the base
year and the current year.

13. National Income Estimates for
India (2006-07)
Current
prices
1999-2000
Prices
Deflator
Gross national product
(GNP)
37,22,669 28,29,349 1.315
Net national product
(NNP)
32,96,639 25,22,576 1.306
Gross domestic product
(GDP)
37,43,472 28,48,157 1.314
Net domestic product
(NDP)
33,17,442 25,41,384 1.305

14. Real GDP and living standard
• Changes in nominal GDP can be due to:
– changes in prices
– changes in quantities of output produced
• Changes in real GDP can only be due to
– changes in quantities,
• real GDP is constructed using constant base-year prices.
• changes in real GDP measure changes in living standard.

15. Per Capital Income
• The average income of the people of a country
in a particular year is called per capita income.
In simple words it is income per head of a
country for a year.
PopulationTotal
IncomeNational
=IncomeCapitaPer
•Per capita income for the year 2006-07 may be
calculated at the market price prevailing during the
financial year 2006-07, i.e. current prices or at prices of
a base year say 1999-2000, i.e. constant prices

16. Per Capita Income of India
(at 1999-2000 prices)
2004-05 2005-06 2006-07
Per Capita GNP 21,722 23,313 25,217
Per capita NNP 19,297 20,734 22,483
•PCI is the single most commonly used measure of the
standard of living of the people of a nation.
•It is not a very reliable measure because it is a simple
arithmetic mean; hence the extreme values dominate.

17. Personal Disposable Income
• Personal income is the total income received by the
individuals of a country from all sources before direct
taxes in one year.
• Personal Income = National Income
– Undistributed Corporate Profits
– Corporate Taxes
– Social Security Contributions
+ Transfer Payments
+ Interest on Public Debt
• Personal Disposable Income is the income which can be
spent on consumption by individuals and families.
• Personal Disposable Income
= Personal Income – Personal Taxes

18. Methods of measuring national
income
• In equilibrium
Output=Income=expenditure
• Hence there are three approaches to the
measurement of GDP:
• Product (or Output) Method: National Income by
Industry of Origin
– Final Product Method
– Value Added Method
• Income Method or National Income by Distributive
Shares
• Expenditure Method

19. Product (or Output) Method
• The market value of all the goods and services produced
in the country by all the firms across all industries are
added up together.
• Process
– The economy is divided on basis of industries, such as
agriculture, fishing, mining and quarrying, large scale
manufacturing, small scale manufacturing, electricity, gas, etc.
– The physical units of output are interpreted in money terms
– The total values added up. (GDP at market price)
– The indirect taxes are subtracted and the subsidies are added.
(GDP at factor cost)
– Net value is calculated by subtracting depreciation from the total
value (NDP at factor cost).

20. Limitations of Product Method
• Problem of Double Counting:
– unclear distinction between a final and an
intermediate product.
• Not Applicable to Tertiary Sector:
– This method is useful only when output can be
measured in physical terms
• Exclusion of Non Marketed Products
– E.g. outcome of hobby or self consumption
• Self Consumption of Output
– Producer may consume a part of his production.

21. Income Method
• The net income received by all citizens of a country in a particular
year, i.e. total of net rents, net wages, net interest and net profits.
(GDP at factor cost).
• It is the income earned by the factors of production of a country.
• Add the money sent by the citizens of the nation from abroad and
deduct the payments made to foreign nationals (individuals and firms)
(GNP at factor cost) or Gross National Income (GNI).
Process:
• Economy is divided on basis of income groups, such as
wage/salary earners, rent earners, profit earners etc.
• Income of all the gruops is added, including income from abroad
and undistributed profits.
• The income earned by foreigners and transfer payments made in
the year are subtracted.
GNI = Rent + Wage + Interest +Profit + Net Income from Abroad-
Transfer payments

22. Limitations of Income Method
• Exclusion of non monetary income: Ignores the non-
monetized section of economic activities.
– Economic activities that contribute to national income, but due to
their non monetary nature, they go unrecorded. For e.g. a farmer
and family working in their own field.
• Exclusion of Non Marketed Services: People
undertake a particular activity that are difficult to ascertain
in money value. E.g. mother’s services to the family.

23. Expenditure Method of Measuring
National Income
• The total expenditure incurred by the society in a
particular year is added together to get that year’s
national income.
• Components of Expenditure:
– personal consumption expenditure
– net domestic investment
– government expenditure on goods and services, and
– net foreign investment
Limitations
• Ignores Barter System
• Ignores Own Consumption
• Affected by Inflation

24. Uses of National Income Data
• National income is the most dependable indicator of a
country’s economic health.
• Difference between GDP and GNP indicates the
contribution of net income earned abroad
• Necessary for Economic planning: useful aid in judging
which sectors should be given more emphasis
• A measure of economic welfare.
– higher aggregate production implies more and more goods and
services being available to people
• Helps in determining the regional disparities, income
inequality and level of poverty in a country.
• Helps in comparing the situations of economic growth in
two different countries.

25. Difficulties in Measurement of National
Income
• Non monetized transactions: Exchange of goods and services
which have no monetary payments, like services rendered out of
love, courtesy or kindness are difficult to include in the computation
of national income.
• Unorganized sector: Contribution of unorganized sector are
unrecorded. It is very difficult to identify income of those who do not
pay income tax.
• Multiple sources of earnings: Part time activity goes
unrecognized and such income is not included in national income.
• Categorization of goods and services: In many cases
categorization of goods and services as intermediate and final
product is not very clear.
• Inadequate data: Lack of adequate and reliable data is a major
hurdle to the measurement of national income of underdeveloped
countries.

26. Key Equations
• AD = C+I
• AS=C+S
• AD=AS=C+S=C+I
• Y=E=O
• Y=O=C+I
• Y=E=C+S
• C+I=Y=C+S
• Total Expenditure (E) = C + I + G
• National Income=C+I+G+(X-M)
• GDP at Market Price = C+I+G+
(X-M)
• GDP at Factor Cost = GDP at
Market Prices –Indirect Taxes+
Subsidies
• GNP = GDP + NFIA
• GNP = C+I+G+(X-M) +NFIA
• NNP = C+I+G+(X–M)–Depreciation +
NFIA
• NNP=GDP–Depreciation +NFIA
• NNP at Market Price = GNP –
Depreciation
• NNP at Factor Cost = NNP at Market
Prices –Indirect Taxes+ Subsidies
• NNP at Factor Cost = National Income=
FID+NFIA
• NNP at Factor Cost = Rent + Wage +
Interest +Profit + Net Income from
Abroad- Transfer payments
• Personal Income =National Income–
Undistributed Corporate Profits–
Corporate Taxes–Social Security
Contributions+ Transfer Payments+
Interest on Public Debt
• Personal Disposable Income=Personal
Income – Personal Taxes

27. Summary
• GDP is the sum of money values of all final goods and services produced
within the domestic territories of a country during an accounting year. It can be
measured at current or constant prices.
• GNP is the aggregate final output of citizens and businesses of an economy in
one year. NNP is GNP less depreciation.
• The average income of the people of a country in a particular year is per capita
income for that year.
• National income can be measured by product method, income method and
expenditure method.
• National income accounting data are of utmost importance for the economy of
any country; such data reveal the aggregate production of the economy and
also help to determine the total expenditure and total income of that country.
• Difficulties in measuring national income include multiple counting, exclusion of
non market transacted services, self consumption of output, inflation or
deflation, confusion about informal sector, etc.
• National income is considered as a measure of economic welfare. As national
income rises, the aggregate production of goods and services rises. Therefore,
there is a positive relation between increase in national income and welfare.