NI is the final outcome of all economic activities of a nation valued in terms of money.

NI is the money value of all final goods and services produced in a country during a period of one year. It is the money value of the flow of goods and services available in an economy in a year. It refers to the money value of the entire volume of final goods & services resulting from all economic activities of the country.

It refers to the money value of the flow of goods and services available annually in an economy. Marshalls Definition: The labour and capital resources of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial including services of all kinds. This is the true net annual income or revenue of the country or the national dividend.

National Income refers toThe 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

Gross National Product (GNP):

It is defined as the value of all final goods & services

produced during a specific period, usually one year, plus incomes earned abroad by the nationals minus incomes earned locally by the foreigners. GNP = GNI, but the only difference is procedural nature, GNP is estimated on the basis of product-flows, GNI is estimated on the basis of money income flows, (i.e. Wages, interest, profit, rent, etc)

Gross Domestic Product (GDP):

It is defined as the market value of all final goods and

services produced in the domestic economy during a period of one year, plus income earned locally by the foreigners minus incomes earned abroad by the nationals.

Net National Product:

NNP is defined as GNP less depreciation, i.e.

NNP = GNP Depreciation Depreciation is that part of total productive assets which is used to replace the capital worn out in the process of creating GNP. NNP less indirect taxes is National income

NNP at Market Prices:

It is the net value of final goods and services evaluated

NNP at Factor Cost:

at market prices in the course of one year in a country. NNP at Market Price = GNP at Market Prices Depreciation

It is the net output evaluated at factor prices.

NNP at Factor Cost = NNP at Market Prices Indirect Taxes + Subsidies = GNP at Market Prices Depreciation Indirect Taxes + Subsidies = National Income

GDP at Factor Cost:

It is the sum of net value added by all producers

within the country. GDP at Factor Cost = Net Value Added + Depreciation GDP at Factor cost includes
Compensation of employees Operating surplus (Gross value added at factor cost compensation of employees depreciation) Mixed income of self employed

Net Domestic Product (NDP):

It is the value of net output of the economy during

the year. NDP = GDP at Factor Cost - Depreciation

Nominal & Real GDP:

When GDP is measured on the basis of current

prices, it is called GDP at current prices or nominal GDP. When GDP is calculated on the basis of fixed prices in some year, it is called GDP at constant prices or real GDP

GDP Deflator:
It is an index of price changes of goods and services

GNP at Market Prices:

included in GDP. It is calculated by dividing the nominal GDP in a given year by the real GDP for the same year and multiplying it by 100. GDP Deflator = (Nominal GDP/Real GDP) x 100
When we multiply the total output produced in one

year by their market prices prevalent during that year in a country, we get GNP at market price. GNP at Market Price = GDP at Market Price + Net Income from Abroad

GNP at Factor Cost:

It is the sum of the money value of the income

produced by and accruing to the various factors of production in one year in a country. GNP at Factor Cost = GNP at Market Price + Indirect Taxes + Subsidies Per Capita Income: (Rs 54,000 in 2010-11 ) (Rs 44,345 in 2009-10) (Rs 18,450 in 2001-02) The average income of the people of a country in a particular year is called Per Capita Income for that year. Per Capita Income for 2010 = National Income for 2010 / Population in 2010

For measuring national income, an economy is viewed from three different angles
The national income is considered as an aggregate of

productive units of different sectors such as agriculture, mining, manufacturing, trade and commerce, services, etc. The whole national income is viewed as a combination of individuals and households owning different kinds of factors of production which they use themselves or sell factor-services to make their livelihood. The national economy may also be viewed as a collection of consuming, saving and investing units (individuals, households, firms and govt.)

National Income may be measured by different corresponding methods.

1. Product Method: when the entire national economy is

considered as an aggregate of producing units. 2. Income Method: when national economy is considered as combination of factor-owners and users. 3. Expenditure Method: when national economy is viewed as a collection of spending units. 4. Value Added Method: The difference between the value of material outputs and inputs at each stage of production is the value added. If all such differences are added up for all industries in the economy, we arrive at the GDP.

In this method The total products produced in the economy are calculated at market price for the year and the value is added without double counting. The data of all productive activities, such as agricultural products, commodities produced from industries, fisheries, wood received from forests, lawyers, doctors, teachers, communications, etc are collected and assessed at market price.
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According to this method Net incomes of individuals and business houses during a year are added to know the national income The net income payments received by all citizens of a country in a particular year are added up. The net incomes that accrue to all factors of production by way of net rents, net wages, net interest and net profits are all added together. But incomes received in the form of transfer payments are not included in it. Transfer payments such as old age pensions , widow pensions and unemployment benefits etc should not be counted as these are the incomes received without contributing to the production.
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One mans income is another mans expenditure. Therefore national income can be arrived at by adding the total expenditure of individual and business firms and govt. during a year. Total expenditure incurred by the society in a particular year is added together and includes personal consumption expenditure, net domestic investment, govt. expenditure on goods and services and net foreign investment.
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Problems in Income Method

Owner-occupied Houses: if the house owner occupies

the house himself, will the service of the house be included in national income? Self-employed Persons: the self employed person gets a mixed income consisting of interest, rent, wage and profit for his factor employed. Goods meant for Self-consumption: if the farmer keeps some produce for his self-consumption, it has money value which must be included in NI. Wages and salaries paid in Kind: when it is paid in terms of free food, lodging, dress and other amenities are included in National Income.

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Problems in Product Method

Services of Housewives: it is not included in national

income, when a teacher teaches his children also not included in national income Intermediate & Final Goods: difficult to distinguish properly between intermediate and final goods. So it will lead to double counting and overestimation of national income. Second-hand Goods and Assets: these are not included in the national income, because they are already included in the NI in the year of manufacturing. Commission or brokerage charged by the broker for sale purchase of old stock, bond etc are included in the NI as these are the payments they receive for their productive services during the year.
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Problems in Product Method

Illegal Activities: income earned through illegal

activities like gambling, smuggling, illegal illicit of extraction of wine, etc is not included in NI, as they are not considered productive from the societys point of view. Consumers Services: doctors, actors, lawyers, singers, teachers, etc are not producing anything tangible but render services to customers. Their services included as final goods in estimating NI. Capital Gains: it is not included in the NI because these do not arise from current economic activities.
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Problems in Product Method

Inventory Changes: whether positive or negative

changes in the inventories are included in NI. Depreciation: it lowers the NI as it is deducted from GNP in order to arrive at NNP. Price Changes: prices do not remain stable. When prices rises, the national income also rises though national production might have fallen. Though the national production might have increase, the fall in the price level the national income also falls.
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Problems in Expenditure Method

Govt. Services: if these services are final goods, then

only they would be included but if they are used as intermediate goods are not included in NI. Transfer Payments: pensions, unemployment allowances, subsidies, interest, etc are govt. expenditure but are not included in the NI because they are paid without adding anything to the production process during the current year. Durable-use Consumers Goods: these are bought in one year and are used for number of years. Public Expenditure:
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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

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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

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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

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