NATIONAL INCOME Class 12th

BASIC CONCEPTS
OF
NATIONAL INCOME

Income
generated
within the
domestic
territory
Is called
domestic
income
Or
Domestic
product

Indian
Resident’s
generating
Income
from the
foreign
territory
Is called
factor
income
from
abroad
(FIFA)

Foreign
Resident’s
generating
Income
from the
domestic
territory
Is called
factor
income to
abroad
(FITA)

+
Combined income of domestic
and foreign territory
(Domestic Income + FIFA -
FITA
Is called national Income
or
National Product

Concept No. 1
DPfc
+ Net Indirect Tax
- Net Indirect Tax
DPmp
Market
Price
Factor
Cost

Raw material
Labors
Electricity
Fuel
Rent
Factors
50,000
40,000
20,000
5,000
35,000
160,000
Product
160,000
etc.
10,000 Product
180,000
Govt. Tax
+35,000
(Indirect Tax)
Factory
Market
Subsidy
-15,000
Domestic
Domestic
at factor cost
at market price

Concept No. 2 GROSS NET
NDP
+ Depreciation
- Depreciation
GDP

April
May
August
Sep.
Dec.
20,000
50,000
25,000
35,000
10,000
Product
160,000
March.
20,000
Product
130,000
-30,000
(Depreciation)
Factory
Domestic
Domestic
at gross value
at net value
Reduction in the
value during the year
30,000

Concept No. 3
DP
+ NFIA
- NFIA
NP
Domestic
Product
National
Product

Product/Income
300,000
Abroad
+ 150,000
Domestic Factor income from
Domestic Territory Foriegn Territory
=
Total Income
Product
National
390,000
Abroad
Factor income to
- 60,000
+90,000

Example. construct the formula for the
following, if GDPmp is given
(a) GDP at FC
(b) NDP at FC
(c) NDP at MP
(d) GNP at FC

1. Gross domestic product (GDPMP) 50,000
Calculate
(a) GDP at FC.
(b) NDP at FC
(c) NDP at MP
Indirect tax 15,000
Subsidies 5,000
Depreciation 5,000

2. Net domestic product (NDPFC) 50,000
Calculate
(a) GNP at MP.
(b) NNP at FC
(c) NNP at MP
Indirect tax 15,000
Subsidies 5,000
Depreciation 5,000
Factor income from abroad 20,000
Factor income to abroad 7,000

Calculate NDP at FC
Particulars in crores
GNP at MP 6,000
Subsidies 200
Depreciation 100
Factor income 400
received from aboard
Indirect taxes 300

Calculate GNP at FC
NDP at MP 25,000
Subsidies 30
Depreciation 5,000
Factor income received from aboard 400
Factor income to the rest of the world 600
Indirect tax 100

Calculate Consumption of Fixed Capital
NNP at FC 4,000
GDP at MP 5,000
Net Indirect Tax 300
Net Factor income from abroad 200

Calculate Net Indirect Tax
GNP at MP 7,000
NDP at FC 6,200
Depreciation 600
Net Factor income (-) 400
from abroad

Calculate (a) Depreciation; (b) Subsidies;
(c) NDP at FC
GNP at FC 95,000
Indirect Tax 14,000
NDP at MP 1,00,422
NNP at MP 1,00,000
GNP at MP 1,07,000

MEASUREMENT
OF
NATIONAL INCOME

There are three
methods to calculate
the national income
of an economy

1. INCOME METHOD
2. EXPENDITURE METHOD
3. VALUE ADDED METHOD

INCOME METHOD
income methods
measures the national
income from the
perspective of factors of
production.

under this method income received by all the resident of a
country for their productive services during the period of one
year are added to obtain national income.

Income method is also known as
1. DISTRIBUTIVE SHARE METHOD
2. FACTOR PAYMENT METHOD

It refers to the
amount paid
to employees
by employer
for rendering
productive
services

Compensation of employees include
A. WAGES AND
SALARIES IN
CASH

C. Employer's
contribution to
social security
scheme.

3. Interest
Interest refers to
amount received
from lending of
funds to a
production unit

4.
It refers to reward
of entrepreneur for
his contribution to
the production of
goods and services

There are three components of
profit:
a. CORPORATE TAX

5. MIXED INCOME
It is the income generated
by self-employed person
and unincorporated
enterprises.

Mixed income has the
element of more than
one factor income

Calculation of National Income By Income Method
1. Compensation of employees
a. Wages & salaries in cash
b. Wages & salaries in kind
c. Employer’s contribution to social security schemes
2. Rent & Royalty
3. Interest
4. Profits
a. Corporate tax
b. Dividends
c. Retained earnings/corporate savings
5. Mixed Income/income of self employed
Operating
Surplus
NET DOMESTIC PRODUCT AT FACTOR COST (NDPfc)
ADD: Net Factor Income From Abroad (NFIA)
Net National Product at Factor Cost (NNPfc)/National Income

Question 1: calculate national income (NNPfc)
a) Income of self-employed 40,000
b) Rent 30,000
c) Dividend received by shareholders 35,000
d) Subsidies 5,000
e) Consumption of fixed capital 12,000
f) Factor income from abroad 70,000
g) Wages and salaries 25,000
h) Retained earning of corporate sector 45,000
i) Factor income to abroad 25,000
j) Indirect tax 32,000
k) Royalty 8,000
l) Private final consumption expenditure 60,000
m)Interest 10,000

Question 2: calculate : NNPfc & GNPmp
a) Compensation of employees 90,000
b) Corporate tax 30,000
c) Wages and salaries in cash 60,000
d) Net indirect tax 15,000
e) Operating surplus 120,000
f) Mixed income 70,000
g) Factor income to abroad 85,000
h) Factor income from abroad 65,000
i) Rent and royalty 38,000
j) Interest 15,000
k) Depreciation 10,000

Question 3: calculate compensation of employees from the following data:
a) National income 185,000
b) Compensation of employees ?
c) Net factor income form abroad 30,000
d) Corporate tax 25,000
e) Net indirect tax 5,000
f) Consumption of fixed capital 10,000
g) Profit 70,000
h) Interest 20,000
i) Rent and royalty 35,000
j) Mixed income of self employed 8,000

1. TRANSFER INCOME SHOULD NOT BE INCLUDED.
• Transfer income refers to an income
which accrues without applying any
factor of production or providing any
productive services.
• These are not included in national
income because these receipts are not
connected with any productive
activity and neither causes any value
addition.

It is also known
as unearned
income.

Transfer income include:
• Scholarships • Old Age Pension • Donation/Charity
• Gifts

2. Windfall gains
Windfall gains are not
included while
calculating national
income as these are
also not productive
income.

• It include incomes such as:
• Lottery Income • Horse Race

3. Income from sale of second hand goods
• Income from sale of second
hand goods are not included
as their original value has
already been counted in the
national income when it was
sold for the first time.
• However, if it is included
again it will lead to
double counting.

• But, Income generated in the form of
brokerage on sale of second hand
goods shall be included as broking
services considered productive.

4. Income from sale of shares and securities
• Shares, securities or bonds
doesn’t contribute the flow of
goods & services of an
economy, these are financial
assets and are just paper
claims. Hence income
generated from transfer of
such financial assets are not
included in national income.
• But, in this case also, an brokerage income earned on account of such
transaction shall be considered productive and will be included..

5. Indirect taxes
• Indirect taxes are not included in
national income while calculating
national income at factor cost.
• However taxes are added n order
to calculate national income at
market price.

EXPENDITURE METHOD
income methods measures the national
income from the perspective of factors
payments.

COMPONENTS OF
EXPENDITURE METHOD

1. PRIVATE FINAL CONSUMPTION EXPENDITURE
• Expenditures incurred by households on purchase of all durable
and non durable goods and services for the satisfaction of wants.

2. Govt. FINAL CONSUMPTION EXPENDITURE
• Entire amount spent by the government on providing various
services to public is called govt. final consumption expenditure.

3. Gross Domestic Capital Formation
a) Gross domestic fixed capital formation b) Inventory investment
It includes expenditures incurred by the
firm/household/govt. on capital goods such
as machinery, building, equipment etc.
It refers to amount spent by
the firms on maintain the
level of inventory.

4. Net Exports
• Difference between the value of
goods exported and the value of
goods imported is known as Net
Exports.

Calculation of National Income By Expenditure Method
1. Private final consumption expenditure(PFCE)
2. Govt. final consumption expenditure(GFCE)
3. Gross domestic capital formation(GDCF)
a. Gross domestic fixed capital formation(GDFCF)
b. Inventory investment/ change in stock
4. Net Exports (X-M)
GROSS DOMESTIC PRODUCT AT MARKET PRICE (GDPmp)
ADD: Net Factor Income From Abroad (NFIA)
Net National Product at Factor Cost (NNPfc)/National Income
Less: depreciation
Less: Net Indirect TAX

a) Net domestic capital formation 150
b) Govt. final consumption expenditure 300
c) Net factor income from abroad (-) 20
d) Private final consumption expenditure 600
e) Depreciation 30
f) Net export 50
g) Net indirect tax 90
h) Net current transfers from rest of the world 40
Ans: 990

a) Private final consumption expenditure 900
b) Gross domestic capital formation 250
c) Govt. final consumption expenditure 400
d) Net factor income from abroad (-) 40
e) Depreciation 20
f) Net import 30
h) Profit 100
i) Change in stock 50
Ans: 1360

Question 3: calculate
(i) gross domestic product at market price
(ii) National income
d) Net factor income from abroad 100
e) Consumption of fixed capital 120
f) Net export 500
h) Change in stock 80
i) Subsidies 40
Ans:
(a)GDPmp 9100
(b)NNPfc 8780

Question 4: (homework)
calculate
(i) gross domestic product at market price
(ii) National income
d) Net factor income from abroad 100
e) Consumption of fixed capital 120
f) Net export 500
h) Change in stock 80
i) Subsidies 40
Ans:
(a)GDPmp 9100
(b)NNPfc 8780

Question 5: (homework)
Ans: 5700

Question 7: (Homework)
Ans: 2500, 4700

PRECAUTIONS OF
EXPENDITURE
METHOD

1. Transfer payments
• Transfer payments are
not included as such
payments are not related
with any productive
activity and there is no
value addition in the flow
of goods & services.

2. Purchase of second hand goods
• As the second hand goods
does but effect the current
flow of goods & services,
thus; any expenditure for
purchase of second hand
goods shall not be
included in the
computation of national

• But any commission or
brokerage paid on such
purchases must be
included in the national
income.

3. Purchase of Financial Assets
• Financial assets are mere
paper claims and
involves change in
titleship only. Therefor,
amount spent on
purchase of financial
assets shall not be
included in the national

• However, any
brokerage or
commission paid on
purchase of such
financial assets shall
be included in the
national income.

4. Expenditure on intermediate goods
• Value of intermediate
goods are not included
in the national income as
their value has already
been included in the
value of final goods.
• If these are included
again it will lead to
double counting

5. Production for self-consumption
• Amount spent on
production for self
consumption shall
be included in the
national income,
cause such a
production form
part of the total
output.

The value-added
method of
calculating national
income focuses on
the value added to a
product at each
stage of production

Value added refers to the difference between the value of
inputs and the value output
VALUE ADDED
VALUE OF INPUTS VALUE OF OUTPUT = VALUE ADDED
Rs. 230 Rs. 250 Rs. 20

• Sum total of Value Added
by all the firms in an
economy is called
GROSS VALUE ADDED

• Calculation of value added
1. Gross Value Added at market price (GVAmp)
= value of output - Intermediate goods
2. Gross Value Added at factor cost (GVAfc)
= value of output - Intermediate goods - NIT
3. Net Value Added at market price (NVAmp)
= value of output - Intermediate goods - Depreciation
4. Net Value Added at factor cost (NVAfc)
= value of output - Intermediate goods - Depreciation - NIT

value of output
SALES + unsold/ change in stock + Goods used for self-consumption
(Domestic Sales +
Exports )
(Closing Stock –
Opening Stock)
+
Goods used for
self consumption
+

value of intermediate goods
Domestic
purchases
Power
charges
Imports
Fuel
charges
+
Electricity
charges
+
+
+

FIRM - A
FIRM - B
FIRM - C
X Y Z
1000
700
1500
2000
500 200 150
4150

FIRM - A
FIRM - B
FIRM - C
500
300
300
400
250
250
Unsold stock

On the basis of circular flow of income you will
be able to undertand the basic functioning of
an economy i.e. how an economy operates.
and through this topic you will be able to
understang the role of different
participants/sectors in an economy.

Assumptions Of Circular Flow
1. There are only 2 sectors in the economy
2. It is a closed economy with the absence of govt. & foreign trade sector
3. Firms sell their entire output to households
4. Households spend their entire income on goods & services which they purchase from the firms
Households
Government Foreign Trade Sector
Firms

HOUSEHOLD
Firms
Factor Services
Factor Payments
Goods & Services
Consumption Expenditure
. Land . Labour
. Capital . Etc
•.Rent . Wages
•Interest .etc
Factor Market
Product Market
Rs 5
Lakhs
Rs 5
Lakhs
Rs 5
Lakhs
Rs 5
Lakhs

Circular Flow of Income
It refers to cycle of :
Generation of income in the production process by the firms
Then its distribution among the factors of Production for their
factor services
And finally its disposition by the household on the
consumption of goods & services.
1. Production Phase
2. Distribution
Phase
3. Disposition
phase
Phases of circular flow:

1. Production Phase 2. Distribution Phase 3. Disposition phase
Phases of circular flow:
Phase of circular flow wherein
firm produces goods and services
using factor services provided by
the households(factors), it is
known as production phase.
When firm makes payment to
factors for their services, this is
known as distribution phase.
When household spends their
income on consumption of goods
& services, this is known
disposition phase.

TYPES OF CIRCULAR FLOW
REAL FLOW MONEY FLOW
 Flow of factor services from households
to firms and corresponding flow of goods &
services from firms to households is called
real flow.
 Flow of factor payments from firms to
household and corresponding flow of
consumption expenditure from households
to firms is called Money flow.
HOUSEHOLD Firms
Factor Services
Goods & Services
HOUSEHOLD Firms
Factor Payments
Cons. expenditure
 it is also known as Physical Flow  it is also known as Nominal Flow

Variables
 Anything that can be measured in quantitative terms are known as variables
STOCK VARIABLES FLOW VARIABLES
 Anything that is measured at a particular
point of time and has no specified time
dimension is a stock variable
 Anything that is measured over a period
of time and has a specified time dimension is
a Flow variable
 It is a static concept  It is a dynamic concept
 Example:
• Stock of inventory in Godown as on 15th Jan.
• Money, wealth.
• population as per census 2011
• etc.
 Example:
• GDP of country
• Aggregate demand & Aggregate supply
• Sales, Profits
• etc.

Types of goods
Intermediate Goods : Final Goods

Types of goods
Intermediate
Goods :
 Intermediate goods refers to those goods which are to be used as an
input for the production of some other goods i.e. for the production of
finished goods
Tyres
furniture
Shirts
Bread
woods
Rubber
fabric
Wheat

Intermediate Goods  goods which are purchased with the purpose to resell it to the consumers so as
to earn money are also treated as intermediate goods.
Automobile dealer
Electronic Dealer
General Store Inventories
CAR
Electrical Appliances

 It refers to those goods which are purchased for personal and self consumption
purpose. These are not meant to be sold in the market rather used in households.
Final Goods
Air Conditioner Refrigerator Fruit & Vegetables Clothes
Consumer Goods

 these goods also include goods which are used in business for investment
purpose and facilitate in proper functioning of the operation.
Final Goods
Computer Machines Printer Furniture
Capital goods

Final Goods
Consumer Goods Capital Goods
 Goods which are used
in households for self
consumption or self use
are called consumer
goods
 Goods which are used in
business for investment
purpose or for the use in
business are known as
capital goods

•Goods which are either used as an input
for the production of finished good or
which are to be sold in the market so as
to earn profit.
Final Goods
Intermediate Goods
Basis
•Goods which are either used for self
consumption or as an investment in the
business.
1. Meaning
2. Inclusion
•These are neither included in domestic
product nor on the valuation of
national income.
•These are included in domestic product
as well as in the national income.
3. Production Boundary •These are within the production boundary • These are within the production boundary
4. Life •These are generally used within a period of one
year
•These goods generally have a life span of
more than a year.
5. Example •Car purchased by Automobile dealer is an
intermediate good.
•Car purchased by consumer for personal
use.

1. Value of wood purchased for
manufacturing table
Classify the following items as intermediate or final goods, also state reason.
Question:
Classification of good Reason
Intermediate good Because it will be used as an input for the production
of table
2. Furniture purchased by school Final Good (capital good) Because furniture are investments by the school
3. Computer installed in office Final Good (capital good) Because it will not be sold rather used in office for
work.
4. Chalk & duster purchased by
school
Intermediate good Because these are generally consumed within a period
of one year.
5. Mobile set purchased by mobile
dealer
Intermediate good Because these are purchased for resale in the market.
6. Fabric purchased by tailor Intermediate good Because tailor will used it for stitching clothes and
sell it to customer.
7. Unused coal of factory at the end
of the year
Final Good (Capital good) Because it’s life is more than a year.
8. Milk purchase by household Final Good (consumer goods) Because it will be used by household for consumption
purpose.
Items

Total value of all the goods & services
produced during the period of one
year within the domestic boundary of
the country is called GDP

Calculation of GDP
GDP of an economy is calculated by
multiplying the quantity of output with the
prices of the output.
Gross Domestic Product(GDP)
= QUANTITY x PRICE

Real GDP Nominal GDP
Types of GDP

Nominal GDP:
When GDP of an economy for a given
year is calculated by multiplying the
current year’s output with the current
year’s price it is called Nominal GDP
Nominal GDP is also known as GDP at
Current Price

GDP for the Year 2020-21:
Quantity in the
current year
(Q1) 2020-21
Prices in the
current year
(P1) 2020-21
Output GDP for the year
2020-21
(Q1) x (p1)
1. Refrigerators
2. Television
3. Automobiles
4. Stationary
5. Mobile phones
2,000 units
1,000 units
5,00 units
1000 units
4,000 units
Rs. 100
Rs. 80
Rs. 500
Rs. 20
Rs. 50
Rs. 200,000
Rs. 80,000
Rs. 250,000
Rs. 20,00
Rs. 200,000
Total = 750,000
Nominal GDP = Current year’s Output (Q1) X Current year’s Price (P1)

Real GDP:
When GDP of an economy for a given
year is calculated by multiplying the
current year’s output with the Base year’s
price it is called
Real GDP
.
Real GDP is also known as GDP at Constant
Price

GDP for the year 2020-21:
Quantity in the
current year
(Q1) 2020-21
Prices in the base
year
(P0) 2011-12
Output GDP for the year
2020-21
1. Refrigerators
2. Television
3. Automobiles
4. Stationary
5. Mobile phones
2,000 units
1,000 units
5,00 units
1000 units
4,000 units
Rs. 70
Rs. 50
Rs. 300
Rs. 15
Rs. 40
Rs. 140,000
Rs. 50,000
Rs. 150,000
Rs. 15,000
Rs. 160,000
Total = 5,15000
Real GDP = Current year’s Output (Q1) X Base year’s Price (P0)

Which is the better indicator of economic Growth ?
Real GDP is considered a better indicator
for growth of an economy because it is
not effected by the change in price
output.

Which is the better indicator of economic Growth ?
Example:
GDP for the year 2020-21
1. Nominal GDP
= output (2020-21) X Current year’s price (2020-21)
= 20,000 units X Rs. 100 per unit
= 20 Lakhs
2. Real GDP
= output (2020-21) X Base year’s price (2011-12)
= 13 Lakhs
GDP for the year 2021-22
1. Nominal GDP
= output (2021-22)
= 24Lakhs
X current year’s price (2021-22)
2. Real GDP
= output (2020-21) X Base year’s price (2011-12)
= 13 Lakhs

Who are
Residents
GDP of an economy is calculated by
multiplying the quantity of output with the
prices of the output.

GDP Deflator
GDP deflator is the ratio of nominal GDP
to Real GDP multiplied by 100.
It gives us an idea about the change in
the price of goods that have been
included in the calculation of GDP
.

GDP as an index of economic welfare
Although GDP is considerd a good
indicator of economic growth but it
cannot be considerd an adequate
parameter for economic welfare.
following are the reasons for the same:

1. Distribution of GDP
2. Non Monetary Exchanges
3. Inflation
4. Externalities

Who Are Residents?
A resident whether a person or an
institution is one who’s center of economic
interest lies in the economic territory of
the country in which he lives or is located.

Center of Economic interest
center of economic interest means:
(a) Resident lives or is located within the
economic territory.
(b) the resident carries out basic
economic activities from that location.

Following are not treated as
residents
(a)foriegn medical patients.
(b) foriegn students
(c) official diplomats and member of the
armed forces of foriegn country.
(d) international org. such as WHO, IMF, UN etc.
(e) people who crosses border and goes to work in
another coutry.

Types of income
FACTOR INCOME TRANSFER INCOME

FACTOR INCOME
Factor income refers to income received by
factors for rendering their factor services.
Factor income include
incomes such as:
•Rent
•Wages
•Interest
•Profits etc
Factor incomes are included in the valuation of national
income.

TRANSFER INCOME
Incomes which are received without rendering
any factor services are known as transfer
income . Factor income include
incomes such as:
• Scholarships
• Gifts
• Donation
• Charity etc
Transfer incomes are not included in the valuation of
national income as it is connected with any productive
activities and doesn’t leads to any addition in the value of

•Income received on account of
productive activity or services are called
factor income.
Transfer Income
Factor Income
Basis
•Income received without any
productive service are called transfer
income.
1. Meaning
2. Inclusion
•These are included in domestic product as
well as in the valuation of national income.
•These are neither included in domestic
product nor in the national income.
3. Concept •It is an earning concept • it is a receipt concept
4. Example •Rent, wages, interest, salary, pension, provident
fund, profits etc.
•Gift, donation charity, scholarship, old
age pension etc.

DOUBLE COUNTING
• It refers to counting the value of a commodity more
than once while calculating the value of production in
the economy.
• This leads to over estimation of the value of goods and services
produced, which eventually leads to inflated value of national income.

Production Units
•FIRM
A
•FIRM
B
•FIRM
C
•FIRM
D
Raw Cotton: Rs 200 Cotton Yarn Rs 350 Fabric Rs 600 Shirt Rs 1,000
National Income = Value of output by each firm
Includes Value of . Raw cotton Rs 200 Includes Value of . Cotton Yarn Rs 350 Includes Value of . Cotton fabric Rs 600
1. National Income = Value added by each firm
2. National Income = value of final good
= 200 + 350 + 600 + 1000
= 2150
AVOIDING DOUBLE COUNTING
= 200 + 150 + 250 + 400
= 1,000
= 1,000

Production Units
•Farmer •Flour
Mill
•Bake
r
•Shopkeep
er
Wheat: Rs 20 Flour: Rs 35 Bread: Rs 55
National Income = Value of output by each firm
= 20 + 35 + 75 + 100
= 230
Includes Value of . Wheat 20 Includes Value of . Flour Rs 35
Includes Value of . Bread Rs. 55
1. National Income = Value added by each firm
= 20 + 15 + 20 + 05
= 60
2. National Income = value of final good
= 60
•Custome
r
Final Price: Rs 60
AVOIDING DOUBLE COUNTING

NATIONAL INCOME Class 12th

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