Meaning of National Income

National income is the money value of all the final

goods and services produced by a country during
a period of one year. National income consists of a
collection of different types of goods and services
of different types.

Since these goods are measured in different

physical units it is not possible to add them
together. Thus we cannot state national income is
so many millions of meters of cloth. Therefore,
there is no way except to reduce them to a
common measure. This common measure is
money.
 Basic Concepts in National income
• Gross domestic product

• Gross domestic product at constant price and at current price

• Gross domestic product at factor cost and Gross domestic product at market
price

• Net domestic product

• Gross national product

• Net national Product

• Net national product at factor cost or NATIONAL INCOME

 The Importance of National Income
• The measurement of the size of the economy and level of country’s
economic performance;
• To trace the trend or the speed of the economic growth in relation to
previous year(s) also in other countries;
• To know the composition and structure of the national income in terms of
various sectors and the periodical variations in them.
• To make projections about the future development trend of the economy.
• To help government formulate suitable development plans and policies to
increase growth rates.
• To fix various development targets for different sectors of the economy on
the basis of the earlier performance.
• To help businesses to forecast future demand for their products.
• To make international comparison of people’s living standards.

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 Organizational structure of Indian Economy
Even though service sector of India is contributing highest percentage of
GDP, still its sad to say that Agriculture is still the main source of
employment for around 65% of our population. Only 4-5% the total work
force are working in organized sector.
Agri-culture & Allied
Financial Year Services
Industry Mining and Quarrying Manufacturing Services

1951-52 51.45 16.69 2.02 9.05 29.63

1961-62 46.25 20.80 2.21 11.58 30.85

1971-72 40.47 23.97 2.23 13.02 34.14

1981-82 35.35 26.23 2.82 14.28 37.49

1991-92 28.54 27.33 3.55 14.51 43.91

2001-02 22.42 26.57 2.86 15.02 51.02

2011-12 14.10 27.51 2.06 15.70 58.39

2012-13 13.68 27.03 1.98 15.24 59.29

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 National Income Accounts
• GDP: The final value of goods & services
produced in the economy in a financial year.
• GNP: The final value of goods & services
produced by the economy in a financial year.
 GDP
• GROSS DOMESTIC PRODUCT (GDP) is the primary
measure of the economy’s performance. In detail… It is the
total market value of a country’s output.
• It is the market value of all final goods and services produced
within a given period of time by factors of production located
within a country (whether the factors of production used
belongs to an Indian national or a foreigner does not make any
difference).

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 GDP Cont….
• GDP is the monetary value of the total output of goods and
services produced by an economy within a given period of
time (quarterly or annual)without Double or Multiple
Counting.
• GDP includes only the market value of FINAL GOODS (goods
and services that are purchased for final use by consumer, not
for resale, or further processing) and ignores
INTERMEDIATE GOODS (goods and services that are
purchased for resale or for further processing) altogether.

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 What GDP Excludes???
• Exclusion of Used Goods and Paper Transactions or Non Production
Transactions.
• GDP is concerned only with new, or current, production. Old output is not
counted in current GDP as it was already counted back at the time it was
produced.
• GDP ignores all transactions which money or goods change hands but in
which no new goods and services are produced.
• Non production transactions including financial transactions (such as public
and private transfer payments, and stock market transactions), and second
hand sales do not form part of GDP computation.
• It also excludes output produced abroad by domestically owned factors of
production.
GDP is the value of output produced by factors of production located within a
country.

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 GNP
GNP is the total market value of all final goods and services
produced within a given period by factors of production owned
by a country’s citizens, regardless of where the output is
produced. It takes into account the market price of a final good or
service that has been produced by a country’s factors of
production within the country and the returns to investments and
other income from abroad derived by its nationals.
Thus: GNP = GDP + Net Factor Income from Abroad (NFIA),
where NFIA is the difference between the factor income received
from the rest of the world and the payments to factors of
production abroad for their investments in India.

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 Measurement of GDP
There are three ways to measure GDP. Each
definition is conceptually identical.
I. GDP is equal to the total expenditures for all final goods and
services produced within the country in a stipulated period of
time (usually a 365-day year).
II. GDP is equal to the sum of the value added at every stage of
production (the intermediate stages) by all the industries
within a country, plus taxes less subsidies on products, in the
period.
III. GDP is equal to the sum of the income generated by
production in the country in the period—that is,
compensation of employees, taxes on production and imports
less subsidies, and gross operating surplus (or profits)
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 Calculating GDP
TOTAL PRODUCTION = TOTAL INCOME = TOTAL EXPENDITURE 

Commonly the Expenditure / Outlay Method is used for

measuring and quantifying GDP
The GDP under the expenditures approach is
calculated by adding up all the expenditures
made on final goods and services produced
within the geographical boundaries of a
regionGDP = consumption + gross investment
+ government spending
+ (exports − imports)
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 GDP (Production Or Value-added
Approach)
• It is a method of computing GDP/GNP that measures the economy based on the
contribution of industries and sectors to the value of the final goods. The money value
of the goods and services is calculated at market price. The sum-total is called the
GDP at market price
• GDP=∑GVAi
• GVA: Gross Value added at each production unit “i”.
• Example: 1kg wheat is sold at Rs 20, intial value addition by the farmer is 20, then the
same is used in a bakeshop & bread is sold of Rs. 50, so value added by the bread
maker is 50-20= Rs.30. Total value added = 30+20=50

This approch considers all sectors of an economy like

1. Agriculture & allied services, of which:
(i)       Agriculture
(ii)      Forestry & logging
(iii)     Fishing etc.

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 GDP (Product approach) cont.
2. Industries of which:
(i)       Mining & Quarrying
(ii)      Manufacturing
(iii)Electricity, Gas and Water Supply etc.

3. Services, of which:
 
(i)  Construction
(ii)   Trade
(iii)   Hotels & Restaurants
(iv)    Railways
(v)     Other means of Transport
(vi)    Storage
(vii)   Communication
(viii)  Banking and Insurance
(ix)     Real Estates and Dwelling Business
(x)      Public Administration and Defense
(xi)     Other Services etc. 13
 GDP (Income approach)
• INCOME APPROACH looks at GDP in terms of who receives the
income, not who purchases it. It corresponds to the sum of the
rewards to the owners of the factors of production in national income.
• National Income is the total income earned by factors of production
owned by a country’s citizen (compensation of employees,
proprietors’ income, corporate profits, net interest, and rental income).
• GDP=∑INTEREST + ∑RENT+ ∑WAGE + ∑PROFIT (adds ∑
Depreciation which is already deducted from profit)

• Depreciation is part of GDP in the income approach. It is added in

the computation of GDP because it has been subtracted from the
amount that corporations actually receive as profit

• This is called GDP at Factor cost

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 GDP at market price(GDPmp)
& factor cost (GDPfc)
• Let say in an economy, 1 mobile & 1 quintal of rice is
produced. Then the economy’s GDP will look like
the following.
Mobile Paddy Total
Factor Cost(Sum
of Factor Incomes) 5000 200 5200
Tax(10%) 500 0 500
Subsidy 3 3
Market Price 5500 197 5697
• That means
• GDPfc = GDPmp – tax + subsidy
• GNPfc= GDPfc+NFIA
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 GNP
• (GDP at factor cost + Net factor income from abroad) is known as
GNP at factor cost.
• If we will deduct the depreciation from GNP at factor cost, then
will be known as Net national product (NNP) which is also
known as national income.
• (GDP at market prices+ Net factor income from abroad) is known
as GNP at market prices.
• GNP at factor cost = GNP at market Prices – taxes+ Subsidies

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 Disposable income & Personal Income
• Personal Income= NNPfc – (Undistributed Profits + net
interest payment by households + corporation taxes – transfers
received by households)
• Personal Disposable Income = Personal income – personal
tax & non tax payments
Personal disposable income is what is left with the people of the
economy to spent on their needs.
When these national income concepts are divided by the
population, we get per-capita figures.

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 Difficulties in Measurement of National Income
Conceptual Difficulties
Inclusion of Services: There has been some debate about whether to include
services in the counting of national income, and if it counts as output.
Identifying Intermediate Goods: The basic concept of national income is to only
include final goods, intermediate goods are never included, but in reality it is
very hard to draw a clear cut line as to what intermediate goods are. Many goods
can be justified as intermediate as well as final goods depending on their use.
Identifying Factor Incomes: Separating factor incomes and non factor incomes is
also a huge problem. Factor incomes are those paid in exchange for factor
services like wages, rent, interest etc. Non factor are sale of shares selling old
cars property etc., but these are made to look like factor incomes and hence are
mistakenly included in national income.
Services of Housewives and other similar services: National income includes
those goods and services for which payment has been made, but there are scores
of jobs, for which money as such is not paid, also there are jobs which people do
themselves like maintain the gardens etc., so if they hired someone else to do
this for them, then national income would increase, the argument then is why are
these acts not accounted for now, but the bigger issue would be how to keep a
track of these activities and include them in national income.
Practical Difficulties
Unreported Illegal Income: Sometimes, people don't provide
all the right information about their incomes to evade taxes so
this obviously causes disparities in the counting of national
income.
Non Monetized Sector: In many developing nations, there is
this issue that goods and services are traded through barter,
i.e. without any money. Such goods and services should be
included in accounting of national income, but the absence of
data makes this inclusion difficult.
Pollution & externality: Positive or negative externality, both
are not valued in the system.
Goods produced but self consumed: Even if this value is
created, its not taken in to account as it does not enter in to
market.
 BASE YEAR
A base year is the year used for comparison for the level of a
particular economic index. For GDP, WPI, and IIP base year is
2011-12, but for CPI its 2012.

The base year is taken on many factors like state of food

production in that year whether it is normal or below normal,
whether the monsoon in that particular year is good or below the
expectations or much above average. Seeing the overall   prices
and economic performance in that year, If a particular year is
ideal then it is considered as base year.

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 There are two ways that GDP can
increase:
1. An increase in the PRICES of goods and services.
2. An increase in the QUANTITY of goods and services.

We need a method to calculate GDP that addresses rising

prices

Suppose an economy produces three goods or services, Car

washing, Baseballs, and Paddy. Data for the past three years
can be found below.
 Prices and Quantities for our
Simple Economy

  2006 2007 2008

Product Quantity Price Quantity Price Quantity Price

Car Service 90 50 100 60 100 65

Baseballs 75 2 100 2 120 2.25

Paddy(tons) 50 30 50 25 65 25
 Nominal GDP
Nominal GDP (The value of final goods and services evaluated
at current-year prices) for each year:
NGDP2006 = Q2006 x P2006
= (90 x 50.00) Car Washing
+ (75 x 2.00) Baseballs
+ (50 x 30.00) Paddy
= Rs.6,150
Nominal GDP 2007
NGDP2007 = Q2007 x P2007
= (100 x 60.00) Car Washing
+ (100 x 2.00) Baseballs
+ (50 x 25.00) Paddy
= Rs.7,450
Nominal GDP 2008
NGDP2008 = Q2008 x P2008
= (100 x 65.00) Car Washing
+ (120 x 2.25) Baseballs
+ (65 x 25.00) Paddy
= Rs.8,395
 Real GDP
• Real GDP (The value of final goods and services evaluated at
base-year prices) for each year as if the prices have not
changed so that actual product value could be estimated.

• By using the prices from the base-year, (or holding prices

constant over time), we control for the impact, that rising
prices have, on GDP, to get a measure of “Real” economic
activity.
 Real GDP in 2006
RGDP2006 = Q2006 x P2006
= (90 x 50.00) Window Washing
+ (75 x 2.00) Baseballs
+ (50 x 30.00) Hammers
= Rs.6,150
Note: For the Base-Year Nominal GDP always equals Real GDP
 Real GDP in 2007
RGDP2007 = Q2007 x P2006
= (100 x 50.00) Car Washing
+ (100 x 2.00) Baseballs
+ (50 x 30.00) Paddy
= Rs.6,700

Note: We use “Current Quantities” and “Constant

Prices”.
 Real GDP in 2008
RGDP2008 = Q2008 x P2006
= (100 x 50.00)Car Washing
+ (120 x 2.00) Baseballs
+ (65 x 30.00) Paddy
= Rs.7,190

Note: We still use “Current Quantities” and “Constant

Prices”.
 The General Formula for
Calculating a Growth Rate

New _ Value  Old _ Value

Percent _ Change  %   100
Old _ Value

X t  X t 1
Percent _ Change  %   100
X t 1
Calculate the Growth Rate in Real
GDP between 2006 and 2007
%Change = [(RGDP2007 – RGDP2006)/RGDP2006] x 100

%Change = [(6,700 – 6,150)/6,150] x 100

%Change = 8.94%

That is real GDP grew by 8.94% between 2006 and 2007.

Calculate the Growth Rate in Real
GDP between 2007 and 2008
%Change = [(RGDP2008 – RGDP2007)/RGDP2007] x 100

%Change = [(7,190 – 6,700)/6,700] x 100

%Change = 7.31%

That is real GDP grew by 7.31% between 2007 and 2008.

 The Price Level
We can use our calculations of Nominal GDP and Real GDP to
calculate the Price Level (A measure of the average prices of
goods and services in the economy.)
 The GDP Deflator
One example of a measure of the average price level is the GDP
deflator.

NGDPt
GDP _ Deflatort   100
RGDPt
Calculate the GDP Deflator for 2006
GDP Deflator2006 = (NGDP2006/RGDP2006) x 100

GDP Deflator2006 = (6,150/6,150) x 100 = 100

Note: The GDP Deflator is always equal to 100 in the

base-year.

The Price Index is “unitless”

Calculate the GDP Deflator for 2007
and 2008
GDP Deflator2007 = (NGDP2007/RGDP2007) x 100

GDP Deflator2007 = (7,450/6,700) x 100 = 111.19

GDP Deflator2008 = (NGDP2008/RGDP2008) x 100

GDP Deflator2008 = (8,395/7,190) x 100 = 116.76

 The Inflation Rate
We can use the growth rate formula from previous to calculate
the Inflation Rate (the Inflation Rate is The percentage
increase / hike in the price level from one year to the next.)
 Calculate the Inflation Rate from
2006 to 2007
Inflation Rate Between 2006 and 2007 =
[(GDP Def.2007 – GDP Def.2006)/GDP Def.2006] x 100

Inflation Rate Between 2006 and 2007 = [(111.19 – 100)/100]

x 100 = 11.19

That is the inflation rate between 2006 and 2007 was

11.19%.
Calculate the Inflation Rate from
2007 to 2008
Inflation Rate Between 2007 and 2008 =
[(GDP Def.2008 – GDP Def.2007)/GDP Def.2007] x 100

Inflation Rate Between 2007 and 2008 = [(116.76 –

111.19)/111.19] x 100 = 5.01

That is the inflation rate between 2007 and 2008 was

5.01%.
 Is real GDP always higher than
Nominal GDP
YEAR PRICE QUANTITY NGDP   RGDP
1951 30 40 1200 < 2120
1961 34 44 1496 < 2332
1971 40 48 1920 < 2544
1981 44 54 2376 < 2862
1991 53 58 3074 = 3074
2001 60 67 4020 > 3551
2011 65 74 4810 > 3922
2016 65 79 5135 > 4187
Note: Base year is 1991      
What if base year changes to 2011-12? OR
2001 quantity is less than 1991 that is <58?    
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 Real Income & Inflation
• Real Income is income in terms of goods and services. Its
different from nominal income in the sense that it actually
measures the current purchasing power.
• When there is inflation or a hike in price level, it leads to less
of real income as the purchasing power of currency declines.
Example:
• Before inflation, 1 kg potato price was Rs. 10. with Rs. 100
you were able to buy 10 kgs.
• But the price goes up to Rs.20/kg, so with the same Rs. 100,
you can buy only 5 kgs.
• What happens to your real income?

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 HOME WORK
• Study the economic history of India.
• How much India does contribute to world GDP NOW and
what was it contributing BEFORE ?

• Give your own reasoning.

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