National Income-Cocepts

and Measurement

Meaning
National income is the money

value of final goods and services

produced in a country during a
given period of time normally one
year
National Income-Cocepts
and Measurement
 In short,natioal income is the Net
Domestic Product(NDP) of a country plus
net factor income from abroad

Y=NDP+ net income from abroad

Definition
“ National income is the sum of
total value of final goods and
services produced by labour and
wealth of a nation during aperiod
of one year”
Brooman
National Income
Accounting-Definition
 National Income Accounting
refers to the measurement of
aggregate economic activity,
particularly national income and its
components.

 Aggregate = Total or Gross

Different Cocepts of
National Income
1.Gross Domestic Product
 At market prices

 At Factor cost or factor prices

Gross Domestic Product is the total

monetary value of final output produced
within a nations borders in a given time
period at current market prices
Different Cocepts of
National Income
 GDP at market prices=P x Q

 GDP at Factor Cost= GDP at

market prices –Indirect Taxes
+subsidy
 Example -- Company X
 Production in Production in 2004
2002  200 washers at $600
 100 dryers at $450
 200 washers at $500
 100 dryers at $400

Nominal Production = 200 x $500 + 100

x $400

= $140,000
Nominal Production = 200 x $600 + 100
x $450

= $165,000
Problem: dollar value of output higher, but real output
 Nominal GDP vs. Real GDP
Important Distinction

 Nominal GDP: measure output at current prices

= py
 Real GDP (y): accounts for price change
---measure output at constant
prices
---use prices from a base year
---is an index
 Difference between Nominal GDP and Real GDP is the
change in prices
 Nominal GDP/Real GDP = GDP Deflator => tells change in
prices => price index
 (py)/p = y
 By how much has production increased
between 2002 and 2005? (using 2005 as
base year for prices)

 Production in Production in 2005

2002  300 washers at $600
 100 dryers at $450
 200 washers at $500
 100 dryers at $400

Real Production (2005) = 300 x $600 + 100 x $450 = $225,000

Real Production (2002) = 200 x $600 + 100 x $450 = $165,000
Growth Rate = ($225,000-$165,000)/$165,000 = 36.36%
 A Closer Look at GDP
 GDP = (1) total market value of (2) final goods and services
produced in a (3) country during a (4) given period
 (1) Total market value
 Prices reflect value placed on good/service by society
 Ignores non-market economic activity
 (2) Final goods & services
 No intermediate goods…avoid double counting
 (3) In a country/region…domestically produced
 (4) Given period
 No used sales counted
 Services rendered on used sales is counted
Different Cocepts of
National Income
2.Gross National Product
 Also called GNI (Gross National Income)
 Output produced by citizens of a geographic region
 Value must be remitted back to country

Calculated –
 At market prices

GNPmp= GDPmp+ Net Factor income

from abroad
Different Cocepts of
National Income
Net factor income from Abroad
=Factor payments received by the
residents of a country abroad- Factor
payments made to the foreigners by
the country
Example: Net U.S. income receipts
from rest of the world= U.S. income
receipts- U.S. income receipts
Different Cocepts of
National Income
 Example: In 2008
Net U.S. income receipts from
rest of the world
= U.S. income receipts- U.S. income
receipts
55.2=329.1-273.9
Different Cocepts of
National Income

U.S. income receipts 329.1

 U.S. income payments 273.9
Net U.S. income receipts from 55.2
rest of the world
Different Cocepts of
National Income
 At Factor cost or factor prices
GNPfc=NNPfc +Depreciation
or
GNPfc(GNI) = GDPfc + Net factor Income from Abroad

Payments: (1) net dividends, interest, rent flows abroad

(2) net wage flows abroad
 Example
 Joe Canadien, citizen of Canada,
works in US and sends wages back
to Canada

US GDP includes Joe’s wages Canadian GNI includes Joe’s wages

Different Cocepts of
National Income
3.Net Domestic Product(NDP)
 At market prices

NDP=GDP-Depreciation
or
NDP=NNP-Net factor income abroad
Different Cocepts of
National Income
 At Factor cost or factor prices
NNP=NDPmp-indirect
taxes+subsidies
or
NNP=NDPmp-Net indirect taxes
Different Cocepts of
National Income
National Domestic factor Income
includes
1.Compensation of employees
 Wages in cash and in kind

 Contribution of employers to social

security on behalf of the employers

 Pension to retired employees
Different Cocepts of
National Income
2.Operating surplus
 Rent

 Interest

 Profit(dividend+corporation

tax+saving of corporations )
3.Mixed income of the self employed
 Mixed income of all sources
Different Cocepts of
National Income
4.Net National Product
 At Market prices

NNP=GNP-depreciation
 At factor prices

NNP=NDP+Net factor income from abroad

Different Cocepts of
National Income
5.Factor Income from NDP accruing
to Pvt. Sector
=NDPfc-income from property and
enterpreneurship accruing to the
govt. Departmental enterprises-
saving of non-departmental
enterprises
Different Cocepts of
National Income
6.Private income
 total of factor incomes from all
sources and current tranfer-
payments from the govt. And rest
of the world accruing to the pvt.
sector
Different Cocepts of
National Income
7.Personal Income
 Income actually received by the

persons from all sources in the

form of current transferpayments
and factor income.
PI=Pvt. Income - corporate saving
Different Cocepts of
National Income
8.Disposable Income
the income remaining with
individuals after deductions of all
taxes levied against their income and
their property by the govt.
DI=PI-direct taxes(IT,PT)-Miscellaneous
receipts of the govt administrative
deptt.(Fines n Fees)
Different Cocepts of
National Income
9.Per Capita Income
=National Income
Population
Example:Population 200
cr.,NI=Rs2000cr.

PI= 2000/200 =20 cr

 Per Capita GDP

 Per Capita GDP calculations attempt to give us

additional information about how we are doing
as an economy.

 Per Capita GDP calculations may be a better

measure of the standard of living.
• For citizens living in the same country over time
• For comparing standards of living between citizens of
different countries
Different Cocepts of
National Income
10.Real Income or Real GDP
=Nominal GDP at current prices
X100
Current price index