National income

National Income - Concept & Measurement

1. National Income
Dr. A.K.Panigrahi

2. Meaning of National Income
•Nationalincomeisthemoney
valueofallthefinalgoodsand
servicesproducedbyacountry
duringaperiodofoneyear.
Nationalincomeconsistsofa
collectionofdifferenttypesof
goodsandservicesofdifferent
types.

3. Meaning of National Income
•Sincethesegoodsaremeasuredin
differentphysicalunitsitisnot
possibletoaddthemtogether.Thus
wecannotstatenationalincomeisso
manymillionsofmetersofcloth.
Therefore,thereisnowayexceptto
reducethemtoacommonmeasure.
Thiscommonmeasureismoney.

4. Example
•IfthevalueofameterofclothisRs.
20andthetotalclothproducedis
100meters,thenthemoneyvalueof
clothisRs.2000.Inthiswaywecan
findoutthevalueofothergoods
andservicesandthetotalvalueof
allthegoodsandservicesproduced
duringoneyear.

5. Basic Concepts in National income
•Grossdomesticproduct
•Grossdomesticproductatconstant
priceandatcurrentprice
•Grossdomesticproductatfactor
costandGrossdomesticproductat
marketprice

6. Basic Concepts in National income
•Netdomesticproduct
•Grossnationalproduct
•NetnationalProduct
•Netnationalproductatfactor
costornationalincome

7. Gross Domestic Product
•Grossdomesticproductis
themoneyvalueofallfinal
goods and services
producedinthedomestic
territoryofacountryduring
anaccountingyear.

8. Gross Domestic Product at Constant
price and Current price
•GDPcanbeestimatedatcurrent
pricesandatconstantprices.If
thedomestic product is
estimatedonthebasisofthe
prevailingpricesitiscalledgross
domesticproductatcurrent
prices.

9. Gross Domestic Product at Constant
price and Current price
•IfGDPismeasuredonthebasisof
somefixedprice,thatisprice
prevailingatapointoftimeorin
somebaseyearitisknownasGDP
atconstantpriceorrealgross
domesticproduct.

10. Market prices versus factor cost
•Acommoditywhengoestothemarket,
indirecttaxesareimposedonit.Thisisthe
marketprice.Whenwedeductthenet
indirecttaxeswegetfactorcost.

11. GDP at Factor cost and GDP at Market
price
•Conceptually,thevalueofGDP
whetherestimatedatmarketpriceor
factorcostmustbeidentical.Thisis
becausethefinalvalueofgoodsand
servicesmustbeequaltothecost
involvedintheirproduction.
•GDPF.C=GDPM.P–IT+S.

12. Gross Domestic Product
•Grossdomesticproduct(GDP)isa
measureoftheincomeandexpenditures
ofaneconomy.
•Itisthetotalmarketvalueofallfinalgoods
andservicesproducedwithinacountryin
agivenperiodoftime.

13. The Measurement of GDP
GDPisthemarketvalueofallfinal
goodsandservicesproducedwithina
countryinagivenperiodoftime.

14. The Measurement of GDP
•Output is valued at market prices.
•Itrecordsonlythevalueoffinalgoods,not
intermediategoods(thevalueiscounted
onlyonce).
•Itincludesbothtangiblegoods(food,
clothing,cars)andintangibleservices
(haircuts,housecleaning,doctorvisits).

15. What Is Counted and Not Counted in
GDP?
GDP includes all items produced in the economy and
sold legally in markets.
GDP excludes services that are produced and consumed
at home and that never enter the marketplace.
Caring labor, the work that is normally produced by
women.
Because GDP does not count it, it diminishes its
importance.
GDP also excludes black market items, such as illegal
drugs.

16. Net Domestic Product
•WhilecalculatingGDPnoprovision
ismadefordepreciationallowance
(alsocalledcapitalconsumption
allowance).Insuchasituationgross
domesticproductwillnotreveal
completeflowofgoodsandservices
throughvarioussectors.

17. Net Domestic Product
•Apartofistherefore,setasidein
theformofdepreciationallowance.
Whendepreciationallowanceis
subtractedfromgrossdomestic
productwegetnetdomestic
product.
•NDP=GDP–Depreciation.

18. Gross National Product
•Grossnationalproduct(GNP)isthetotal
incomeearnedbyanation’spermanent
residents(callednationals).
•ItdiffersfromGDPbyincludingincome
thatourcitizensearnabroadand
excludingincomethatforeignersearn
here.

19. Net National Product (NNP)
•NetNationalProduct(NNP)isthetotal
incomeofthenation’sresidents(GNP)
minuslossesfromdepreciation.
•Depreciationisthewearandtearonthe
economy’sstockofequipmentand
structures.

20. GNP and GDP tend to be used as synonyms,
although GDP is definitely the preferred measure
among economists
•GDP
•measures all
production within
India, by whoever
happens to be
working here;
•GNP
•measures the
production of all
Indians, wherever
they happen to be
working.

24. Personal Income and Disposable
income
•Personalincomeanddisposable
incomearetwoconceptsofnational
incomeverycommonlyusedin
advanced countries.Personal
incomemaybedefinedasthe
currentincomeofpersonsor
households fromallservices.
Personalincomeisnotameasureof
production.

25. Disposable Income
•Allpersonalincomeisnotatthe
disposaltobespentonconsumption.
Individualshavetopaypersonaldirect
taxestothegovernment.Theyarefree
tospendonlyafterthepaymentof
taxes.
•DPI=Personalincome–Personal
Directtaxes.

26. Disposable Personal Outlay
•Thedisposablepersonalincomemay
bespentfullyorindividualsmay
save.Whatremainsaftersavingis
calledthe personal outlay.
Disposableincomeisequalto
consumptionandsavings.
•Disposableoutlay=Disposable
income–Savings.

27. Measurement of National Income
Sincefactorincomearisefromtheproductionof
goodsandservices,andsinceincomesare
spentongoodsandservicesproduced,three
alternativemethodsofmeasuringnational
incomearepossible.
•Productionbased
•Spendingbased
•Incomebased

28. Methods
•Value Added Method or Production Method.
•Income Method.
•Expenditure Method.

29. Production or Value Added
Method
•Thismethodisalsocalledthevalue-addedmethod.This
methodapproachesnationalincomefromtheoutput
side.
•Underthismethod,theeconomyisdividedintodifferent
sectorssuchasagriculture,fishing,mining,construction,
manufacturing,tradeandcommerce,transport,
communicationandotherservices.
•Then,thegrossproductisfoundoutbyaddingupthe
netvaluesofalltheproductionthathastakenplacein
thesesectorsduringagivenyear.

30. Production or Value Added
Method
•Inordertoarriveatthenetvalueofproductionofagivenindustry,
intermediategoodspurchasebytheproducersofthisindustryare
deductedfromthegrossvalueofproductionofthatindustry.
•Theaggregateornetvaluesofproductionofalltheindustryand
sectorsoftheeconomyplusthenetfactorincomefromabroadwill
giveustheGNP.IfwedeductdepreciationfromtheGNPweget
NNPatmarketprice.NNPatmarketprice–indirecttaxes+
subsidieswillgiveusNNPatfactorcostorNationalIncome.
•Theoutputmethodcanbeusedwherethereexistsacensusof
productionfortheyear.Theadvantageofthismethodisthatit
revealsthecontributionsandrelativeimportanceandofthedifferent
sectorsoftheeconomy.

31. Precautions:
Thefollowingprecautionsshouldbetakenwhile
measuringNIofacountrythroughvalueadded
method.
1.Imputedrentvaluesofselfoccupiedhousesshouldbe
includedinthevalueofoutput.
2.Saleandpurchaseofsecond–handgoodsshouldnot
beincludedinmeasuringvalueofoutputofayear.
3.Valueofproductionforselfconsumptionaretobe
counted.
4.Valueofservicesofhousewivesarenotincluded.
5.Valueofintermediategoodsmustnotbecounted.

32. Income Approach
•Measures by summing the following components
–Employee Compensation
–Proprietor’s Income
–Corporate Profits
–Rent
–Interest Income
–Indirect Business Taxes
–Net Income from foreigners

33. Income Method
•ThismethodapproachesNIfromdistributionside.
•NationalIncomeisobtainedbysummingupthe
individualsofacountry.
•ThismethodofestimatingNIhasthegreatadvantageof
indicatingthedistributionofnationalincomeamong
differentincomegroupssuchaslandlords,owners,
workers,entrepreneurs.

34. Precautions:
1.Transfer payments are not included.
2.Imputed rent are included.
3.Illegal money is not included.
4.Windfall gains are not included.
5.Corporate Profit tax are not included.
6.Death duties, gift tax, wealth tax are not included.
7.Receipt from the sale of second hand goods are not
included.
8.Income equal to the value of production used for self
consumption used by farmers and others are included.

35. Expenditure Approach
•Considers total spending on all final goods &
services during the year
•It is a demand based concept
•Includes:
–Personal Consumption
–Durable Goods & Non-Durable Goods and Services
–Gross Private Investment
–Government Consumption and Gross Investment
–Net Exports of Goods and Services
•So, GDP = C + I + G + (X-M)

36. Measurement of National Income -
Expenditure Approach
•Expenditure Approach:
According to this methodthe moneyvalue of all
expenditure on final product will add up to GNP from
which capital consumption and net indirect tax (indirect
tax-subsidy) are deducted.
NI = GNP -Capital Consumption -Indirect Tax +
Subsidy
where,
GNP = C + I + G + NX

37. •(1) Consumption Expenditure (C):
It includes expenditure by household (a) durable goods
such as, automobile, refrigerators etc, (b) non-durable
goods such as: food, shirts etc and (c) services such as
doctors, education etc.
(2) GrossInvestment (I):
It includes
•(a) all final purchase of machinery, equipment, and tools
by business enterprise in given time period-change in
capital stock
•(b) all current construction
•(c) changes in inventories: changes instocksof finished
goods and goods in process as well as changes in the
raw material that businesses keep on hand. Inventories
can be negative,positiveor zero

38. (3) Government Expenditure (G):
This includes all governmental spending (central, state and
local) on the finished product of business and all direct
purchases of resources such as labour etc, it excludes all
govt. transfer payments, because it doesn't reflect any
current production.
(4) Net Exports (NX) = Export -Import :
This includes the difference between the imports and
exports, called net exports. it is the component of the total
demand for our goods. it can be negativepositiveor zero.

39. Thank You
Video:
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