This power point is all about highlighting the concept of National Income in the Indian context and various methods for its calculation. Further, various limitations of National Income are also underlined.

1. Presentation
On
“NATIONAL INCOME IN INDIA”
By
Dr. Mohmed Amin Mir
Assistant Professor
Department of Commerce & Management
Studies
Islamia College of Science & Commerce,
Srinagar
Jammu & Kashmir
Contact No: +91-9797178402
Email ID: aamin.icsc@gmail.com

2. Topics to be Discussed
 Macroeconomics?
 Circular Flow of Income:
 Two Sector Economy (Household +Business Firms)
 Three Sector Economy (H+B+Govt)
 Four Sector Economy (H+B+G+Foreign Sector)
 Meaning of National Income?
 Concept of N.I
 National Product
 National Income in Two Sector Economy
 National Income in Real Economy
 Different Concepts of National Income
 Items Excluded from N.I Accounting
 Personal Income
 Disposable Income
 GDP & Economic Well Being
 Limitations of N.I/ GDP/GNP

3. Macroeconomics
• Study of how individual households and firms make
decisions
• How they interact with one another in markets
• Study of the economy as a whole
• Goal is to explain the economic changes that affect
many households, firms, and markets at once
• Macroeconomics answers questions like the
following:
– Why is average income high in some countries and low in others?
– Why do prices rise rapidly in some time periods while they are more
stable in others?
– Why do production and employment expand in some years and
contract in others?

4. CIRCULAR FLOW OF INCOME/MONEY
• Modern economy – monetary economy:
money used as medium of exchange
• How economy Functions
• The equality of income and expenditure can
be illustrated with the circular-flow diagram
• Summarizes the transactions between the
different economic agents
– Agents: households, firms (business),
government, and foreigners (rest of the world)

5. CIRCULAR INCOME FLOW IN TWO-SECTOR
ECONOMY
1. Household Sector & 2. Business Firms
ASSUMPTIONS:
o Neither Household nor Firms Save
o Govt. doesn’t play any part in the economy
o No role of foreign trade (Closed Economy)
• Households: Own factors of production, Consume goods and service
• Firms: Hire factors of production to Produce goods and services

6. The Circular-Flow Diagram
Firms
Households
Market for
Factors
of Production
Market for
Goods
and Services
SpendingRevenue
Wages, rent,
and profit
Income
Goods &
Services sold
Goods &
Services
bought
Labor, land,
and capital
Inputs for
production

7. CIRCULAR INCOME FLOW WITH FINANCIAL
MARKETS
1. Household Sector
2. Business Firms & Financial markets
ASUMPTIONS:
o All Savings of household come in Financial Markets
o No Inter-Households Borrowings
Inclusion of Financial Markets will Result in:
 Saving
 Borrowing (Investment Expenditure)

8. FIRMS HOUSEHOLDS
Good and
services
bought
Good and
services sold
Revenue
(=GDP)
Spending
(=GDP)
Inputs for Production
Land, labor
and capital
Wages, rent,
interest and profit
(=GDP)
Flow of goods & services
Flow of money
Income (=GDP)
THE CIRCULAR FLOW DIAGRAM

9. CIRCULAR INCOME FLOW IN A THREE SECTOR ECONOMY
1. Household Sector
2. Business Firms
3. Government
Government affects the economy in a number of ways:
Spending (capital goods, public infrastructure,
education, defense etc.)
Taxing (from households +Business Firms)
Borrowing (from Financial Markets)
 Govt. Borrowing Increases demand for credit which
causes Rate of Interest to Rise i.e. it crowds out Private
Investment.

10. GOVT
FIRMS HOUSEHOLDS
Good and
services bought
Good and
services sold
Revenue
Spending
Inputs for
Production
Land, labor
and capital
Wages, rent,
interest and
profit (=GDP)
Income (=GDP)
THE CIRCULAR FLOW DIAGRAM
Net Tax PaymentsGovt Purchases Goods
Net Tax Payments
Wages &
Slaries

11. CIRCULAR INCOME FLOW IN THE FOUR
SECTOR: OPEN ECONOMY
1. Household Sector
2. Business Firms
3. Government &
4. Foreign Sector.
ASSUMPTIONS:
o It is only the business firms of the domestic countries that
interact with foreign countries and therefore Export & Import.
Foreign Sector affects Domestic economy by way of Exports &
Imports:
 If EXPORTS – IMPORTs = Trade Surplus Net Capital
Outflow
 If IMPORTS – EXPORTS = Trade Deficit Net Capital Inflow

12. GOVT
FIRMS HOUSEHOLDS
Good and
services bought
Good and
services sold
Revenue Spending
Inputs for
Production
Land, labor and
capital
Wages, rent, interest and
profit (=GDP)
Income (=GDP)
THE CIRCULAR FLOW DIAGRAM
Net Tax PaymentsGovt Purchases Goods
Net Tax Payments
Wages &
Slaries
Foreign Countries
Foreign
Remittances
Export of
Manpower
Receipt from Exports
Payment for Imports

13. NATIONAL INCOME
National Income is the sum of all INCOMES of the people
of a country
or
The INCOME which different people of the society get are
obtained by them for their contribution of Land, Labour,
Capital & Entrepreneurial Services (in the form of interest,
wages, Rents and profits ) to national production.
Therefore, N.I= Rent+Wages+Interest+Profit

14. CONCEPT OF NATIONAL INCOME: 3 Interpretations
Represents a TOTAL VALUE OF PRODUCTION,
Represents a RECEIPTS (INCOME)TOTAL,
Represents an EXPENDITURE TOTAL
i.e. NATIONAL INCOME = NATIONAL PRODUCT = NATIONAL EXPENDITURE
Thus, 3 measures of N.I:
Sum of all incomes accruing to F.O.P =Sum values of all
final Goods & Services=Sum of all Expenditures
(Consumer’s+Investments+Govt )

15. NATIONAL PRODUCT
Total value of all final Goods & Services
PRODUCED by various productive
firms/businesses in a year.
N.P= Total Output × Market Prices
Thus, out of N.P (in value terms),
Rent+Wages+Interest+Profit will be paid to
different F.O.P

16. N.I in Two Sector Economy
•No role of Govt (Indirect Taxes & Subsidies)
•No Depreciation
Thus,
N.P = Value of Final Goods & services Produced =
Rent+Wages+Interest+Profit = N.I

17. N.I in Real (Open)Economy
•Firms keep a part of some value
created as Depreciation Allowance
•Govt. takes away Indirect Taxes
Thus, incomes of factor owners
are reduced to that extent.

18. DIFFERENT CONCEPTS OF N.I
GROSS NATIONAL PRODCUT AT MARKET PRICES (G.N.P)
GROSS DOMESTIC PRODUCT AT MARKET PRICES (G.D.P)
NET NATIONAL PRODUCT AT MARKET PRICES (N.N.P)
NET NATIONAL PRODUCT AT FACTOR PRICES (N.N.P)

19. GROSS NATIONAL PRODCUT AT MARKET
PRICES (G.N.P)
Total Market Value of All Final Goods & Services produced in a
country.
Includes only currently produced Goods & services in a year
Includes Net Factor Income From Abroad
NET FACTOR INCOME FROM ABORAD (NFIA)
NFIA = Is the difference between Factor Incomes received
from abroad by normal residents of India for rendering factor
services in other countries MINUS (-) the factor incomes paid to
the foreign residents for factor services rendered by them in the
domestic territory of India.

20. COMPONENTS OF N.N.P
1. Household Consumption (C): Value of final Goods & Serices
produced in a year and consumed by households
2. Gross Private Investment (I): Value of New Capital Goods
Produced
3. Government Purchases of Goods & Services (G): Value of
output of general govt
4. Net Exports (NX): Value of goods Exported minus the value of
goods Imported
5. NFIA: Difference between relevant income of normal residents
earned from abroad and same type of incomes paid to the non-
residents working in domestic territory of a country.
Therefore,
G.N.P at M.P = C+I+G+NX+NFIA

21. GDP
GDP is the money value of all final goods & services
produced by normal residents as well as non-
residents in the domestic territory of a country but
does not include NFIA.
Thus, G.D.P at M.P = C+I+G+NX
or
G.D.P at M.P=G.N.P at M.P – NFIA
GDP is a measure of the income and expenditures
of an economy.
The market value of good (Vi) is equal to Pi × Qi

22. Measurement of Economy’s Output:
GDP
PRECAUTIONS TO BE TAEKEN:
1. Output is valued at market prices.
2. GDP is usually expressed in the currency of a particular country, e.g.,
Indian Rupees….indicates the market value of the goods and services
3. GDP measures only the value of final goods, not intermediate goods (the
value is counted only once).
4. It includes both tangible goods (food, clothing, cars) and intangible
services (haircuts, housecleaning, doctor visits).
5. GDP only measure current production.
Transfer payments & transactions involving goods produced in other periods (past)
are not included in the calculation of GDP
1. It measures the value of production within the geographic confines of a
country.
2. It measures the value of production that takes place within a specific
interval of time, usually a year or a quarter (three months).

23. NET NATIONAL PRODUCT (N.N.P) or N.I
at M.P
“The market value of final goods and services
after deducting the depreciation charges”.
Therefore,
N.N.P/ N.I at M.P = G.N.P – Depreciation

24. NATIONAL INCOME / N.I at Factor Cost /
N.N.P at Factor Cost
• Simply means sum of all incomes earned by resource
suppliers for contribution of land, labour, capital &
entrepreneurial ability which go into the years Net
Production.
N.N.P at Factor Cost Vs. N.N.P at Market Prices:
• N.N.P at Factor Cost = N.N.P at Market Prices – Indirect Taxes + Subsidies
or
• N.N.P at Factor Cost = N.N.P at Market Prices – Net Indirect Taxes
Where Net Indirect Taxes= Indirect Taxes-Subsidies

25. Items excluded from National Income
Accounting
Second-hand goods
Intermediate goods
Non-marketed goods / services
Volunteer work / Housework
Unreported / Illegal market transactions
items produced and sold illicitly, such as illegal
drugs.

26. PERSONAL INCOME (P.I)
• Sum of all incomes ACTUALLY RECIEVED by all individuals or
household during a given a year.
• P.I= N.I - incomes currently earned but not
received+incomes received but not currently earned
(Transfer Payments)
• i.e.
P.I =N.I – (Social Security Contributions+Corporate Income
Taxes+Undistributed Corporate Profits)+Old-age
pension+unemployment compensation + relief
payments+interest payment on public debt.

27. DISPOSABLE INCOME (D.I)
• After a part of P.I is paid to govt. in the form of
personal taxes like Income Tax & personal property
taxes, what remains of P.I is called D.I.
Therefore, D.I = P.I – Personal Taxes (I.T +P.T)
Thus, D.I can either be Saved or Consumed.
Hence, D.I = Consumption + Saving

28. GDP and Economic Well-Being
 GDP is the best single measure of the economic well-being of
a society.
 GDP per person tells us the income and expenditure of the
average person in the economy.
 Higher GDP per person indicates a higher standard of living
 Reflecting & comparing the standards of living 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
 Shows % change in real GNP over a period of time

29. Some Limitations of NI Statistics/ GDP or GNP as
Measures of Growth
 Factors that may understate the standard of living / the welfare
 Exclusion of the value of leisure
 Exclusion of non-marketed / unreported transactions
 Ignores income distribution
 Ignores environmental degradation
 Does not include activities that do not go through the formal markets
sector
 Does not include “illegal” activities like drug trafficking, prostitution
 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 society ⇒ externality /divergence
between social costs & private costs

30. Thank you
Any Query???