NATIONALINCOME

Anil Kumar Mishra

National income
Methods of estimating of NI
Value added method
Income method
Expenditure method
Value added method
At production level, NI is the value of final goods and services produced in a country within the limits of
domestic territory plus net factor income earned from abroad.
Classifying all producing enterprises into various industrial sectors according to their activities.
Primary sector
Secondary sector
Tertiary sector
Finding out net value added
Net value added = Gross value of output-(value of intermediate consumption + depreciation + net
indirect taxes)
Finding out net factor income earned from abroad and adding the same to net domestic product for
obtaining national income
Point should be kept in mind
The values of following items are also included in the estimation of national product according to this
method
Imputed rental value of the self occupied houses
Production for self consumption
Own account production of fixed assets by govt. enterprises and households.
The sale of second hand items is not included in national product. Because these are
not the outcome of current flows of goods and services.
However, commission of the brokers related to the sale of these second hand items is
included in the national income.

NATIONALINCOME

Anil Kumar Mishra
Precautions
Value of production for self consumption is included in the national income
Imputed rental value of the self occupied house is included in the national income.
Sale price of second hand assets in not included.
Value of on account production by the households and govt. is included in the national income.
Services of house wives are not included.
Value of intermediary goods is not included in the national income.
Commission related to the sale of second hand items is included in the national income.
Income method
At distribution level, National income includes all factor payments that accrue to factors of production in
an accounting year.
Identifying producing enterprises employing factors : primary, secondary, and service sectors
Classifying factor payments: compensation of employees, rent and interest, profit, mixed income.
Estimating factor payments: by adding up all the factor payments of enterprises of all the sectors,
domestic factor income is obtained.
Finding out net factor income earned from abroad
Compensation of
Employees
Operating Surplus Mixed Income of the Self
Employed
1.Wages & Salaries
in Cash
2. Compensation
3. Private Pension
1. Income from
property
(Rent , Interest,
Royalty)
2. Income from
Entrepreneur---ship
(Profits)
1.Profession
of Doctors,
Lawyers


Identification of product units
NATIONALINCOME

Anil Kumar Mishra
1. Primary Sector Agricultural, Forestry, Fishing, Mining
2. Secondary Sector Manufacturing Sector
3. Tertiary Sector This sector is also called service sector Banking, Insurance etc.,
GDPMP = 1+2+3+Net Indirect Taxes+ Depreciation
NDPMP = GDPMP Depreciation(Consumption of Fixed Capital)
NDPFC = NDPMP Net Indirect Taxes
NNPFC = NDPFC + NFIA


Precautions
Transfer payments are not to be included in the national income.
The imputed rent of the self occupied house is included in the national income.
Wind fall gains like income from lottery are not included in the national income.
Death duty, wealth tax, capital gain tax etc. are not included in the national income.
Income from second hand goods is not included.
Income of gamblers, smugglers, thieves is not included.
Expenditure method
It estimates national income by measuring final expenditure on gross domestic product.
Steps involved in the estimation of NI
Private final consumption expenditure.
Govt. final consumption expenditure.
Gross domestic capital formation.
Change in stocks
Gross fixed capital formation
Net export value of goods and services.
To identify economic units incurring final expenditure.
NATIONALINCOME

Anil Kumar Mishra
Classification of final expenditure.
Private final consumption expenditure
Govt. final consumption expenditure
Gross fixed capital formation
Change in stocks
Net Exports
GDPMP = PFCE + GFFCE + GFCF + Change in Stocks + Net Exports
GDPFC = GDPMP NIT
NDPFC = GDPFC Depreciation/Consumption of Fixed Capital
NNPFC = NDPFC + NFIA
Consumption Expenditure: It is incurred by the households.
Expenditure by the households is divided into three categories:
Expenditures on durables
Expenditure on non durables
Expenditure on services like transport, medical, etc.
Investment Expenditure
Investment is an addition to the existing stock of capital goods such as machinery, factories, residential
houses and firms inventories..
Investment expenditure is made on the capital goods
Expenditure on the purchase of new plants, machines, equipment, factories, etc.
Inventory expenditure includes the change in inventories
Expenditure on the purchase of new houses by households is included.
Estimation of Government Expenditure:
Defense expenditure
Expenditure on the maintenance of law and order
Expenditure on the social welfare activities
NATIONALINCOME

Anil Kumar Mishra
Expenditure on health and education
Estimation of net exports:
Exports represents spending of foreigners on our goods
Imports represents our expenditure on the purchase of foreign goods.
The difference between the two give us net exports
Precautions
National income should obtained at market prices.
Depreciation value should be added.
It includes only final expenditure.
All expenditures on second hand goods is excluded from national income.
All govt. expenditure on transfer payments is not included.
Expenditure on intermediate goods and services is not to be included.


Difficulties in the measurement of NI
Conceptual difficulties.
Difficulty to separate intermediary and final goods
Valuation of goods and services produced.
Valuation of self consumption.
Difference between transfer payment and income payments
Statistical difficulties.
Statistical information relating to raw materials used depreciation, etc.
NATIONALINCOME

Anil Kumar Mishra



NATIONALINCOME

Anil Kumar Mishra



GROSS & NET : DEPRECIATION
Gross Product =Net Product + Depreciation
NATI0NAL PRODUCT & NET PRODUCT -:NFIA
National Product=Domestic Product+ NFIA
PRODUCT at MARKET PRICE & FACTOR PRICE-:NIT
Product at Market Factor =Product at Factor Cost+ Net Indirect Tax
Net Indirect Tax=Indirect Taxes - Subsidies
GDP : Value of all final goods and services produced within the domestic territory of a country during an
accounting year.
GNP = GDP + Net factor income from abroad
NATIONALINCOME

Anil Kumar Mishra


NATIONALINCOME

Anil Kumar Mishra

Personal Income : It is the income which an individual earns from all the sources.
Personal Disposable Income : Personal Income Direct Taxes
Per Capita Income = National Income
Total Population
Problem:
Calculate NI by income and expenditure method :( Rs. in Cores)
(i) Subsidies : 5
(ii) Private final consumption expenditure : 100
(iii) NFIA : (-) 10
(iv) Indirect Tax : 25
(v) Rent : 5
(vi) Government final consumption expenditure : 20
(vii) Net domestic fixed capital formation : 30
(viii) Operating surplus : 20
(ix) Wages : 50
NATIONALINCOME

Anil Kumar Mishra
(x) Net export : (-) 5
(xi) Addition to stock : (-) 5
(xii) Social security contribution by employers : 10
(xiii) Mixed income : 40
Solution:
Incomemethod
NI=(ix)+(xii)+(viii)+(xiii)+(iii)
=50+10+20+4010
=Rs110Cr.
Expendituremethod
NI=(ii)+(vi)+(vii)+(xi)+(x)(iv)+(i)+(iii)
=100+20+30+()5+()525+510
=Rs110Cr.