National income21 by urvin
Give more definations and Concepts of National Income it includes: Gross Domestic Product (GDP). Gross National Product (GNP). Net Domestic Product (NDP). Net National Product (NNP). and many more...
Published on: Mar 3, 2016
Transcripts - National income21 by urvin
According to Samuelson ,
“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.”
• The 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. National Income is the flow of
goods and services of a nation during a year National
income is the aggregate money value of all final goods
and services in a country during a year.
Concepts of National Income includes:
Gross Domestic Product (GDP).
Gross National Product (GNP).
Net Domestic Product (NDP).
Net National Product (NNP).
1. Gross Domestic Product
• Gross Domestic Product (GDP): 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.
• GDP at market price: includes the final value of
goods and services also includes indirect taxes and
excludes the subsidies given by the government.
• GDP at factor cost is the money value of final
goods and services based on the cost involved in
the process of production.
Gross Domestic Product at factor cost
= GDP at Market Prices –Indirect Taxes+ Subsidies
• Gross National Product (GNP): GNP is the aggregate
final output of citizens and businesses of an economy in
• GNP may be defined as the sum of Gross Domestic
Product and Net Factor Income from Abroad (NFIA).
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.
3. Net National Product (NNP) AND Net Domestic
• Net Domestic Product (NDP)
• Net National Product (NNP)
= GDP–Depreciation +NFIA
• 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
= C+I+G+(X–M)–Depreciation + NFIA
• 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
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
• 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 national income at constant prices, or
Real National Income or national income at constant
•GDP deflator is the ratio of nominal GDP in a year to real GDP of
•GDP deflator measures the change in prices between the base year
and the current year.
Per Capital Income and Personal Income
• Per capita income is the average income of the people of a
country in a particular year.
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
Methods of measuring national income
• In equilibrium
• Hence there are three approaches to the measurement of GDP:
• Product (or Output) Method: National Income by Industry of
– Final Product Method
– Value Added Method
• Income Method or National Income by Distributive Shares
• Expenditure Method
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.
– 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).
Limitations of Product Method
• Problem of Double Counting:
– unclear distinction between a final and an
• 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
• Self Consumption of Output
– Producer may consume a part of his
• 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).
• Economy is divided on basis of income groups, such as
wage/salary earners, rent earners, profit earners etc.
• Income of all the groups 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-
Limitations of Income
• 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
Expenditure Method of Measuring National
• The total expenditure incurred by the society in a
particular year is added together to get that year’s
• Components of Expenditure:
– personal consumption expenditure
– net domestic investment
– government expenditure on goods and services, and
– net foreign investment
• Ignores Barter System
• Ignores Own Consumption
• Affected by Inflation
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
• A measure of economic welfare.
higher aggregate production implies more and
more goods and services being available to
• 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.
Difficulties in Measurement of
• 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
• Inadequate data: Lack of adequate and reliable
data is a major hurdle to the measurement of
national income of underdeveloped countries.