This document provides an overview of key concepts related to measuring national income, including: 1) It defines different concepts of national income such as GDP, GNP, NNP, and discusses methods of measuring GDP including the product, income, and expenditure approaches. 2) It outlines what is included and excluded from national income accounting, such as the exclusion of non-market goods and services. 3) It discusses the merits and limitations of using national income statistics to measure and compare standards of living between countries.

1. 1
Economic Environment and Policy
Prof. Neelakantam Tatikonda
Prof . G . Ram Reddy Centre for Distance Education
Osmania University- Hyderabad
E-Mail: profneelakantam@gmail.com
MBA-I YEAR- II SEM
PAPER-III

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National Income
National Income Analysis

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Introduction
National income accounting provides us
with ex-post data about national income,
it cannot explain the level and determina
nts of national income. The following ide
ntities are true for any level of income. I
n order to explain and predict the level of
national income, models are constructed.

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5. Different Concepts of National Income
According to Marshall: “The labor and capital of a country ac
ting on its natural resources produce annually a certain net a
ggregate of commodities, material and immaterial including
services of all kinds. This is the true net annual income or re
venue of the country or national dividend.”
In this definition, the word ‘net’ refers to deductions from th
e gross national income in respect of depreciation and weari
ng out of machines. And to this, must be added income from
abroad.
5
There are a number of concepts pertaining to national inc
ome and methods of measurement relating to them.

6. (A) Gross Domestic Product (GDP):
GDP is the total value of goods and services produced wit
hin the country during a year. This is calculated at marke
t prices and is known as GDP at market prices. Dernberg
defines GDP at market price as “the market value of the
output of final goods and services produced in the domes
tic territory of a country during an accounting year.”
There are three different ways to measure GDP:
Product Method, Income Method and Expenditure Metho
d.
These three methods of calculating GDP yield the same r
esult because National Product = National Income = Nati
onal Expenditure.
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7. 1. The Product Method:
7
In this method, the value of all goods and services produc
ed in different industries during the year is added up. This
is also known as the value added method to GDP or GDP
at factor cost by industry of origin. The following items a
re included in India in this: agriculture and allied services;
mining; manufacturing, construction, electricity, gas and
water supply; transport, communication and trade; bankin
g and insurance, real estates and ownership of dwellings a
nd business services; and public administration and defen
se and other services (or government services). In other w
ords, it is the sum of gross value added.

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2. The Income Method:
The people of a country who produce GDP during a ye
ar receive incomes from their work. Thus GDP by inc
ome method is the sum of all factor incomes: Wages a
nd Salaries (compensation of employees) + Rent + Int
erest + Profit.

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This method focuses on goods and services produced within the country
during one year.
GDP by expenditure method includes:
(1) Consumer expenditure on services and durable and non-durable good
s (C),
(2) Investment in fixed capital such as residential and non-residential buil
ding, machinery, and inventories (I),
(3) Government expenditure on final goods and services (G),
(4) Export of goods and services produced by the people of country (X),
(5) Less imports (M). That part of consumption, investment and governm
ent expenditure which is spent on imports is subtracted from GDP. Simil
arly, any imported component, such as raw materials, which is used in th
e manufacture of export goods, is also excluded.
Thus GDP by expenditure method at market prices = C+ I + G + (X – M),
where (X-M) is net export which can be positive or negative.
3. Expenditure Method:

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GNP v.s. GDP
Gross National Product (GNP)
The total value at market prices of final goods
and services produced by the citizens in an
economy in a specified period.
Gross Domestic Product (GDP)
The total value at market prices of final goods
and services produced within the domestic
boundary of a territory in a specified perio
d

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Real GNP & Nominal GNP
& Per capita GNP
Real GNP=(Nominal GNP/GNP Deflator)*100
Per capita GNP = GNP / Population size

12. Net National Product (NNP)= GNP- Depreciatio
n
Net Domestic Product (NDP)= GDP- Depreciatio
n
National Income at Factor cost = NNP + Subsi
dies – Indirect taxes
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13. Personal Income =NIFC – Undistributed Profit
s + Transfer Payments
Disposable Income =Personal Income – Perso
nal Taxes
Per capita Income= National Income / Total p
opulation
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14. Relationship between Per capita income and population:
There is a close relationship among NI, Popul
ation and Per capita Income.
Gpc = g- gp where
Gpc= Rate of growth of per capita income.
g= Rate of the growth of National Income.
gp = Rate of growth of population
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15. National Income and Net Economic Welfare
GDP per capita (per person) is often used as a measure of a person's we
lfare. Countries with higher GDP may be more likely to also score high o
n other measures of welfare, such as life expectancy. However, there ar
e serious limitations to the usefulness of GDP as a measure of welfare:
Measures of GDP typically exclude unpaid economic activity, most impor
tantly domestic work such as childcare. This leads to distortions; for exa
mple, a paid nanny's income contributes to GDP, but an unpaid parent's
time spent caring for children will not, even though they are both carryi
ng out the same economic activity.
GDP takes no account of the inputs used to produce the output. For exa
mple, if everyone worked for twice the number of hours, then GDP migh
t roughly double, but this does not necessarily mean that workers are b
etter off as they would have less leisure time. Similarly, the impact of ec
onomic activity on the environment is not measured in calculating GDP.
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Comparison of GDP from one country to another may be distorted by m
ovements in exchange rates. Measuring national income at purchasing po
wer parity may overcome this problem at the risk of overvaluing basic go
ods and services, for example subsistence farming.
GDP does not measure factors that affect quality of life, such as the quali
ty of the environment (as distinct from the input value) and security fro
m crime. This leads to distortions - for example, spending on cleaning up
an oil spill is included in GDP, but the negative impact of the spill on well
-being (e.g. loss of clean beaches) is not measured.
GDP is the mean (average) wealth rather than median (middle-point) we
alth. Countries with a skewed income distribution may have a relatively
high per-capita GDP while the majority of its citizens have a relatively lo
w level of income, due to concentration of wealth in the hands of a small f
raction of the population. See Gini coefficient.

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Measurement of National Inco
me
Product Approach
Income Approach
Expenditure Approach

18. Product Approach
product method is also known as the output method or inven
tory method. In this method, the sum total of the gross value
of the final goods and services in different sectors of the eco
nomy like industry, service, agriculture, etc. is acquired for th
e current year by determining the total production that was
made during the specific time period. The value obtained is t
he gross domestic product. Thus, according to this method.
GDP= Total product of (industry + service + agriculture) sector
Symbolically, GDP= ∑ (P × Q)
Where,
P= Market price of goods and services
Q= Total volume of Output
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Income Approach
Income method is also termed as factor income method or fac
tor share method. Under this method, national income is meas
ured as the total sum of the factor payments received during a
certain time period.
The factors of production include land, labor, capital, and entr
epreneurship. Individuals who provide these factor services ge
t payment in the form of rent, wages/salaries, interest, and pr
ofit respectively. The total sum of income received by these in
dividuals comprise the national income for a given period of ti
me.
Besides these, there are professionals who employ their own l
abor and capital like advocates, doctors, barbers, CAs, etc. Th
e income of these individuals are called mixed incomes and ar
e also accounted for calculating the national income. However,
income received in the form of transfer payments are not inclu
ded.

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according to this method,
GDP= Rent (Rental incomes on agricultural and non-ag
ricultural properties)
+ Wages/Salaries (Wages and salaries earned by empl
oyees including supplements)
+ Interest (Net interest earned by individuals other than
governmental bodies)
+ Undistributed Profit (Profits earned by businesses bef
ore payment of corporate taxes and liabilities)
+ Dividends
+ Direct taxes
+ Depreciation

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Expenditure Approach
People spend their income. Thus, the total expenditure on fi
nal goods and services must be equal to the total value of fi
nal goods and services produced domestically.
Any output that is not sold to consumers is bought by produ
cers in the form of unintended inventory investment.
C+I+G+(X-M) = Aggregate / Total expenditure
NI= Eh+Eb+Eg
Where Eh, Eb, Eg are the annual flow of expenditure on final g
oods and services incurred by the house hold sector, the Bus
iness sector and the government sector respectively.

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Items excluded from National
Income Accounting
Second-hand goods
Intermediate goods
Non-marketed goods / services
Volunteer work / House work
Unreported / Illegal market transactions

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Merits & Uses of National Inco
me Statistics
Reflecting & comparing the standards of livin
g of different countries
Per capita real GNP  standard of living
Providing information to the government and
firms for economic planning
Reflecting the economic growth of a country
% change in real GNP over a period of time

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Limitations of National Income
Statistics
Factors that may understate the standar
d of living / the welfare
Exclusion of the value of leisure
Exclusion of non-marketed / unreported
transactions

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Limitations of National Income
Statistics
Factors that may overstate the standard
of living / the welfare
Undesirable Side-effects of Production
Air pollution / traffic congestion /…
Understate the real / social costs to soci
ety  externality /divergence between
social costs & private costs

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When comparing economic performances
using national income statistics,
Price Level
use real GNP  eliminate the effect of inflation
Size of Population
 use per capital GNP
Income Distribution
more even distribution  higher welfare
Composition of National income
more consumption, less national defence  higher welfare
Exchange Rates
expressed in the same currency
whether the exchange rates reflects the purchasing power
of the 2 currencies

27. Growth Rate of National Income in India
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Here we detail about the ten suggestions to raise growth rate of nat
ional income in India.
1. Development of Agricultural Sector:
2. Development of Industrial Sector:
3. Raising the Rate of Savings and Investment:
4. Development of Infrastructure:
5. Utilization of Natural Resources:
6. Removal of Inequality:
7. Containing the Growth of Population:
8. Balanced Growth:
9. Higher Growth of Foreign Trade:
10. Economic Liberalization:

28. Trends in National Income
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29. Sectoral Contribution to National Income
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Thank You!