National income refers to the total value of all final goods and services produced in a country in a year. It includes goods and services produced domestically and income earned abroad by a country's citizens, minus income earned domestically by foreigners. There are various concepts used to measure national income, including gross domestic product (GDP), gross national product (GNP), net national product (NNP), personal income, and disposable personal income. National income is calculated using the expenditure, income, and production approaches.

1. National Income
The sum total of the values of all goods and services
produced in a year
It is the money value of the flow of goods and services
available in an economy in a year

2. National Income
National Income refers to-
The income of a country
to a specified period of time, say a year
includes all types of goods and services
which have an exchange value
counting each one of them only once

3. There are various concepts of national income. These are
explained below one by one:
(1) Gross National Product (GNP).
(2) Net National Product (NNP)/National Income.
(3) Gross Domestic Product (GDP).
(4) National Income at Factor Cost.
(5) Personal Income.
(6) Disposable Personal Income.

4. National Income concepts
Gross National Product
Gross National Product. GNP is the total value of all
final goods and services produced within a nation in a
particular year, plus income earned by
its citizens (including income of those
located abroad), minus income of non-
residents located in that country. Basically, GNP
measures the value of goods and services that the
country's citizens produced regardless of
their location.

5. National Income concepts
Net National Product - NNP
The monetary value of finished goods and services
produced by a country's citizens, whether overseas or
resident, in the time period being measured (i.e., the
gross national product, or GNP) minus the amount of
GNP required to purchase new goods to maintain
existing stock (i.e., depreciation).
NNP=GNP-Depreciation

6. Depreciation Allowance and Maintaining Capital Intact. Here a
question can be asked as to what we actually mean by depreciation
allowance and maintaining capital intact; (the words which we have
used in explaining NNP).
It is known to every one of us that when production is going on, the
value of capital equipments does not remain the same. A decrease in
value because of wear and tear through, use, rusting, accident or
through actions of elements, gradually take place in the building and
other equipments of business. A certain sum of money based on the
value of the capital equipment and its longevity is set aside every year
from the gross annual income so that when machinery is worn out, a
new capital equipment can be set up from the sum thus accumulated.
This fund which is set aside for covering the wear and tear, deterioration
and obsolescence of the machinery is named as Depreciation
Allowance. We can make this concept more clear by taking a simple
example.

7. Example of NNP:
Suppose, a person buys a machinery for manufacturing cloth for $10000 only.
He expects that this machinery will last ten years and after that period, it will
be partially or completely worn out. He sets aside $1000 every year from the
gross national income as a depreciation reserve of the capital equipment.
After the expiry of ten years, he accumulates $10000 and with that money he
replaces the old capital equipment which has lived its useful life and maintains
capital intact. The sum of money, i.e., $1000 which he annually deducts from
the gross annual income, is known asdepreciation allowance.
It is often pointed out by economists that the calculation of depreciation
allowance every year is a difficult task.
For example, a person expects the longevity of the capital equipment, say for
ten years. There is a possibility that machinery may last longer or it may go out
of use earlier. So they say what needed is an approximate decision regarding
the' depreciation allowance. This decision should be based on high degree of
judgment and guessing about the future.

8. (3) Gross Domestic Product (GDP):
Definition and Explanation of GDP:
It is a key concept in the national income. "Gross domestic
product (GDP) is the total market value at current prices of all
final goods and services produced within a year by the factors of
production located within a country".
The labor and capital of a country working on its natural resources
produce a certain aggregate of commodities, material and non-
material every year. In addition to this, there may be foreign firms
producing goods in the various sectors of the economy like mining,
electricity, manufacturing etc.

9. Distinction Between GDP and GNP:
Here it seems necessary to make a distinction between gross
domestic product (GDP) and gross national product (GNP).
Gross domestic product is the total market value of all final
goods and services produced by factors of production within a
nation's border during a periodof one years. In other words GDP
is a flow of production produced within the country by
domestically located resources in a year.
Gross national product (GNP) on the other hand, is the measure
of all final goods and services produced by the citizens within
their own country as well as outside the country during a period
of one year. In other words, GNP expresses the money value of
flow of goods and services produced within the country and the
net income received from abroad during a period of one year.
Thus when we move from GDP to GNP, we add factor income
receipts from foreigners and subtract factor income payments to
foreigners. Formula For GDP:
GDP = GNP - Net Foreign Income From Abroad

10. NATIONAL INCOME AGGREGATES
There are many aggregates in national income accounting.
The basic among these is
Gross Domestic Product at Market Price (GDPmp). By making
adjustments in GDPmp, we can
derive other aggregates like Net Doemstic product at Market
Price (NDPmp) and NDP at factor
cost (NDPfc).
Net Domestic Product
Why is GDPmp called gross? GDPmp is final products valued
at market price. This is what
buyers pay. But this is not what production units actually
receive. Out of what buyers pay the
production units have to make provision for depreciation and
payment of indirect tax like excise,
sales tax, etc. This explains why GDPmp is called ‘gross’. It is
called gross because no provision
has been made for depreciation. However, if depreciation is
deducted from the GDP, it becomes
Net Domestic Product (NDP). Therefore,
GDPmp - depreciation = NDPmp

11. Domestic product at Factor Cost
Why is GDPmp called ‘at market price’ ?
Out of what buyers pay, the production units have to
make payments of indirect taxes,if any. Sometimes
production units receive subsidy on production. This
is in addition to the market
price which production units receive from the
buyers. Therefore what production units actually
receive is not the ‘market-price’ but “market price -
indirect tax + subsidies” This is what is actually
available to production units for distribution of
income among the owners of factors of production.
Therefore,
Market price - indirect tax (I.T.) + subsidies = Factor
payments (or factor costs)
By making adjustment of indirect tax and subsidies
we derive GDP at factor cost (GDPfc)
from GDPmp..
GDPmp - I.T. + subsidies = GDPfc
or GDP - net I.T. = GDPfc

12. Net Domestic Product at Factor Cost
If we make adjustment of both the net I.T and depreciation
(also called consumption of
fixed capital) we get one more aggregate called Net Domestic
Product at Factor Cost (NDPfc)
GDPmp - I.T. + Sub-depreciation = NDPfc.
or NDPfc+ I.T. - Sub+depreciation = GDPmp
Net National Product at Factor Cost (NNPfc) or National
Income
Net factor income from abroad (NFIA) provides the link
between NDP and NNP. Therefore,
NDPfc + NFIA = NNPfc
or NNPfc - NFIA = NDPfc
Similarly,
NDPmp + NFIA = NNPmp
GDPmp + NFIA = GNPmp

13. (5) Personal Income:
Definition and Explanation:
National income is the sum of factor income. In
other words, it is the income which individuals
receive for doing productive work in the form of
wages, rent, interest and profits. Personal income,
on the other hand, includes all income which is
actually received by all individuals in a year. It
includes income which is not directly earned but is
received by individuals.
For example, Pensions, welfare payments are
received by households but these are not elements
of national income because they are transfer

14. In the same way, in national income
accounting, individuals are attributed income
which they do not actually receive. For
example, undistributed profits, employees
contribution for social security corporate
income taxes etc. are elements of national
income but are not received by individuals.
Hence they are to be deducted from national
income to estimate the personal income.
P.I. = N.I. – corporate taxes – undistributed
corporate profits – social security
contributions + transfer payments

15. (6) Disposable Personal Income:
Definition and Explanation:
Disposable personal income is the amount which is
actually at the disposal of households to spend as they
like. It is the amount which is left with the
households after paying personal taxes such as
income tax, property tax, national insurance
contributions etc.
Formula For Disposable Personal Income:
Disposable personal income = Personal Income -
Personal Taxes
DPI = PI - Personal Taxes
The concept of disposable personal income is very
important for studying the consumption and saving
behavior of the individuals. It is the amount which
households can spend and save.
Disposable Income = Consumption + Saving
DI = C + S

16. Methods of calculating National Income
There are three approaches to the measurement of
national income:
Spending or Expenditure Method
Income Method
Production or Output Method
Income = Expenditure = Output
Y = E = O
Why output = expenditure
Unsold output goes into inventory, and is counted as “inventory
investment”… ….whether the inventory buildup was intentional or not.
In effect, we are assuming that firms purchase their unsold output.

17. Spending or Expenditure
Approach
The spending approach divides GDP into four
areas:
 Households (Consumption expenditures) (C)
 Businesses (Domestic Investment) (I)
 Government (Govt. expenditures) (G) and
 Foreigners (Export (X) and Imports (IM)of
Goods and Services) (X-IM).
GDP = E = C + I + G + (X–IM)
where E is aggregate expenditure

18. •The Income Approach
•The measure of GDP are calculated by adding all
the income earned by various factors of
production which are engaged in the production
of output.
•Households supply business with the factors of
production in return for payment in the form of wages,
rent, and interest
•Proprietors income /Income of self employed (the
profits of partnerships and solely owned
businesses, like a family restaurant)

19. The Production Approach
The measures of GDP are Calculated by adding the
total value of the output (of goods and Service)
produced by all activities during any time period,
such as a year.
The production approach looks at GDP from the
standpoint of value added by each input in the
production process.
major challenge – problem of double counting
Out put of many business = input of some other
Eg : Out put of tyre industry is the input of bike industry…
counting the out put of both industries will result in
double….

20. Problems in calculating National
Income
Black Money : It has created a parallel economy -
unreported economy which is equivalent to the size of
officially estimated size of the economy
Non-Monetization : In most of the rural economy,
considerable portion of transactions occurs informally
Growing Service Sector : growing faster than
Agricultural and Industrial sectors… value addition in
legal consultancy, health service ,financial and business
services is not based on accurate reporting.

21. House Hold Services : It ignores
domestic work and house keeping
services
Social Services : It ignores volunteer
and unpaid social services. (Mother
Teresa’s social service)
Environment Cost : It does not
distinguish between environmental-
friendly and environmental-hazardous
industries … cost of polluting
industries is not included in the
estimate.

22. Importance of national income
It indicates the prosperity of a nation. Growth in
national income indicates economic prosperity
It indicates the standard of living of people of a
country
It indicates the per capita income with which we can
compare the levels of development of all the countries
Countries can be classified as ‘developed’ and
‘developing’ and ‘under developed’ based on their per
capita income only

23. Importance of national income
NI estimates are very helpful to the Finance Minister.
It guides him to make proper and right decisions in
regard to taxation and budgets
It is useful to compare the prosperity of a country at
different times
It provides an instrument of economic planning
It indicates the trends of inflation and deflation.
Proper corrective action can be taken against them

24. Importance of national income
It helps to know the progress of various sectors in the
economy. Imbalanced growth, if any, can be solved
It helps in forecasting the economic future and
preplanning is possible
It indicates the economic status of a country among
the nations of the world

25. Trends of national income of India
During the plan periods, national income and per
capita income are increasing steadily
But the rise in the per capita income is rather slow
due to population growth
Agricultural sector is the most important sector as it
is the single largest contributor to the national
income
In the recent years, the share of the government
sector in national income is steadily increasing
indicating the increased efficiency of the public sector