National income

1. National Income

2. Developing
Nations
Poor /
Least
Developed
Nations
Rich /
Developed
nations
World

3. How do we measure the performance
of an economy?
A country’s economic performance is measured by
indicators of National Income ( GDP or GNP).
Performance of an economy is the level of production
(of goods and services) or total economic activity.

It estimate’s the total value of production in an economy.

4. Definition of National Income
“National income is a measure of the total market value of the
goods and services (output) produced by an economy over a
period of time (normally a year)”.
1) It is a Monetary Measure
2) Goods and Services to be counted only once
( Final goods and not intermediate goods)

5. Need for the Study of National Income
A national income measure serves various purposes regarding
economy, production, trade, consumption, policy formulation, etc.
1. To measure the size of the economy and level of country’s
economic performance.
2. To trace the trend or speed of the economic growth in relation
to previous year(s) as well as to other countries.
3. To know the structure and composition of the national income
in terms of various sectors and the periodical variations in them.
4. To make projection about the future development trend of the
economy.

6. 5. To help government formulate suitable development plans and
policies to increase growth rates.
6. To fix various development targets for different sectors of the
economy on the basis of the earlier performance.
7. To help business firms in forecasting future demand for their
products.
8. To make international comparison of people’s living standards.
However it has its own “Limitations”……….

7. 3 Interpretation of National Income
National Income = National Product = National Expenditure
The sum of values of all goods and services produced
( Production).
The sum of all incomes, in cash and kind, accruing to factors of
productions in a year (Distribution).
The sum of consumers, investment and government expenditure
(Expenditure).

8. Circular Flow of Income
Modern Economy is a monetary economy
Money act a medium of Exchange
A circular flow of money or income exist
Each money flow is in opposite direction to real flow
Flow of money income will not always remain constant

9. Economy
Household Sector
Firms or Business Sector
Government Sector
Foreign Sector

10. Two Sector Model of Income
Distribution
Business Firms Households
Factor Payments
Rent, Wages, Interest, profits
Economic Resources
Land, Labour, Capital, Enterprise
Consumption Expenditure
Goods and Services

11. Assumptions
No savings from household or business firms
Government has no role in the national economy
It’s a closed economy

12. Three Sector Model of Income
Distribution
What if household save?
The expenditure on goods and services decline
Savings reduces the flow of money expenditure to the business firms
Firms hire fewer workers / reduce factor payments
Causes a fall in Economy's Total Income.
Hence savings a “leakage” from the money expenditure flow
Savings = Investments
Investment is injection of money in circular flow of income

13. Three Sector Model of Income
Distribution
Business Firms Households
Factor Payments
Consumption Expenditure
Financial Market
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14. What if
Investment ≠ Savings?
Investment < Savings
Stocks of goods will Increase
Demand reduces
Production falls
Investment in capital goods will fall
Income , output and employment Falls
Flow of money contracts
Which leads to
Rate of interest falls
Leads to increase in investment
Hence
Savings = Investments

15. What if
Investment ≠ Savings?
Investment > Savings
Stocks of goods will falls
Demand rises
Production rises
Investment in capital goods will rise
Income , output and employment increases
Flow of money expand
Which leads to
Rate of interest rise
Leads to increase in savings
Hence
Savings = Investments

16. Why are poor countries poor?
Economic Wealth :
Man-made resources (road, factories, machines, communication
system)
Human Resources ( Hard and education)
Technological Resources ( High tech machinery)
Poor countries should grow rich by investing money in physical resources
and developing human and technological resources.
Poor countries should grow faster as new investments have the biggest
rewards.
Rich countries don’t gain much from further investments:
“ law of diminishing returns”

17. Why are poor countries poor?
So what should they do?
They should improve there education, technology and infrastructure.
Since the Returns for investors are high, there should be no
shortage of Investment.
Countries should take loan from banks for reconstruction and
development.
Countries can take foreign aids from rich countries.
This didn’t happen? WHY?
Except for countries like Taiwan, South Korea, China, India,
Singapore

18. Money Flows with Government
Sector
Government absorbs a good part of the incomes earned by
Households.
Government purchases goods and services from firms
Government spends on capital goods, infrastructure, defence,
education and health etc.
Household and firms pay taxes to Government.
Government also finance their expenditure by borrowing from the
financial market
Hence the Government
Intervenes and take preventive and corrective action to
stabilise an Economy

19. Three Sector Model of Income
Distribution
Business Firms Households
Financial Market
Government
Borrowing
Factor Payments
Consumption Expenditure

20. Total Expenditure (E) = C + I + G
Consumption Expenditure (C)
Investment Expenditure (I)
Government Expenditure (G)
Total Income (Y) = C + S + T
Consumption ( C)
Savings (S)
Taxes ( T )
E = Y
C + I + G = C + S + T
I + G = S + T
G – T= S – I
G> T (Budget deficit)
Government borrows from the financial market

21. Four Sector Model of Income Distribution
Business Firms Households
Financial Market
Government
Borrowing
Factor Payments
Consumption Expenditure
Foreign Sector

22. Four Sector Model of Income
Distribution
Balance of Trade
Export (X) = Import (M)
National Income = C + I+ G+ Xn ( X-M)
C + I + G + Xn = C + S+ T

23. India’ GDP growth rate
05-06: 9.2%
06-07: 9.4%
07-08: 9%

24. Economic Development
Phase 1 : Pre-1991
Policy tended towards
protectionism,
with a strong emphasis on import substitution,
industrialisation,
state intervention in labour and financial markets,
a large public sector,
business regulation, and
central planning.
Faced crises like
Wars – China (61) & Pakistan (65, 71)
Oil crisis (73, 79)
Severe Draughts (65-67)

25. Economic Development
Phase 2 : Post-1991
Late 80’s
Policy changes
Eased restrictions on capacity expansion for incumbents,
Removed price controls and
Reduced corporate taxes.
This increased the rate of growth,
But led to high fiscal deficits and a worsening current account.
Balance-of-payment crisis
The collapse of the Soviet Union, which was India's major
trading partner.
Gulf War, which caused a spike in oil prices.

26. Concepts of National
Income

27. The basic concepts…
GNP vs GDP
Market Price Vs Factor costs
Gross Vs Net
Nominal Vs Real
PI ( Personnel Income)
Disposable Income
Per capita

28. Gross Domestic Product (GDP)

GDP = C + I + G + (X-M)
“sum total of values of goods & services
produced in the country, in a given year”
GDP vs GNP

29. GDP vs GNP
Gross National Product (GNP)

GNP = GDP + net factor income from abroad
“sum total of values of goods & services produced
by the nationals of a country, in a given year”

30. Net factor income from abroad:
Is the difference between
income received from abroad by the normal residents
of India for rendering services in other countries and
the income paid to the foreign residents for the
services rendered by them in India.

31. GDP vs GNP
Gross National Product (GNP)

GNPMP = GDPMP + net factor income from abroad
GNP = C + I +G + (X-M) + (R-P)
R= Income receipts from abroad
P = Income paid abroad

32. Requirements for Calculating GNP
It measures the market value of annual output
It’s a Monetary measure
GNP accounts for goods that are traded through official market
i.e free of cost are not included
All good and services must be counted once
Income earned through illegal activities are not included

33. GDP Vs GNP
GDP
Used when the purpose is to measure the product generated in a
country.
i.e. whatever is produced in India, will go to constitute GDP, no
matter even if foreigners have contributed towards it
GNP
Used when the purpose is to measure the product that accrues
to the citizens of a country.
i.e. whatever is produced by Indian nationals whether inside or
outside the country will form GNP of India

34. Market Prices Vs Factor Costs
The GNP / GDP can be estimated at
Market Prices
Factor Cost
The Market Prices is a resultant of
Indirect Taxes; and
Subsidies
Factor Cost = Market Price – Indirect Taxes + Subsidies
Hence Factor Cost estimates are more ‘real’.

35. Gross Vs Net
In the process of creating national product – there is erosion
of total productive assets
Net estimates account for this erosion (called Depreciation)
Net = Gross - Depreciation

36. Nominal Vs Real
The price trend does not remain constant, it can rise or fall.
Hence the estimates in terms of money value will increase as
price of commodities have risen even if their physical output
hasn’t.
Economic Growth implies increase in real or physical output
than the rise in money value of output.
Adjustment of the National Income figures for the change in
prices needs to be done. – Deflating the NI
‘Real’ estimates account for this increase in prices

37. Nominal Vs Real
Increase in Price : Is denoted by Price Index
Price Index
Selection of Base year : (Current base year 1999-2000)
Price Index for Base year is taken to be 100
Price Index for the current year
Current Year Prices / Base Year Prices X 100
So if Price index is 145 – then prices as compared to Base year
have increased by 45%

38. Nominal Vs Real
Nominal Estimates
Real estimates = ---------------------------- X 100
Price Index
Hence
Nominal = Estimates at current prices
Real = Estimates at fixed prices

39. The Estimates
Estimate Definition
GDP C + I + G + (X-M)
GNP GDP + NFIA
GDPFC GDPMP – Indirect Taxes + Subsidies
NDP GDP - Depreciation
Real GDP Nominal GDP/ Price Index * 100
GNI GNP
NNP GNP - Depreciation
NI NNPFC

40. National income (NI) or National Income at
Factor Cost (NNPFC)
It refers to the sum of all incomes earned by factor owners for their
contribution of factor services namely land, labour, capital and
enterprises in the form of rent, wages, interest and profit.
NI = NNPFC = NNP MP - Indirect Taxes + Subsidies

41. Personal Income (PI)

It is the sum of all incomes received by all individual or households
during a given year.
PI = National Income + Transfer payments – (Social security +
Corporate Income tax + Undistributed Profits)
Transfer Payments = Incomes which are not earned but received
( Old- age pensions, unemployment compensation, relief payments)

42. Disposable Income (DI)

DI= Personal Income – Personal Taxes
Or
Disposable income can either be consumed or saved
DI= Consumption ( C) + Savings (S)
DI includes Transfer payments
It is the total income earned and unearned of individuals minus
direct taxes.

43. Per Capita Income (PCI)
Per capita income (or) output per person is an indicator to show
the living standards of people in a country.
If real PCI increases, it is considered to be an improvement in the
overall living standard of people.
National Income
PCI = ---------------------------
Population

44. The Estimates
Estimate Definition
GDP C + I + G + (X-M)
GNP GDP + FIFA
GDPFC GDPMP – Indirect Taxes + Subsidies
NDP GDP - Depreciation
Real GDP Nominal GDP/ Price Index * 100
GNI GNP
NNP GNP - Depreciation
NI NNPFC
PI NI + Transfer Payments – (Social Security +
Corporate Income Tax + Undistributed profits)
DI C + S or PI – Personal Taxes
PCI NI/ Population

45. Examples…
GNP 500 ( Rs Cr)
Capital Consumption Allowance - 50
Net National Product (NNP) 450
Indirect Taxes - 60
Subsidies 10
National Income ( NI ) 400
Corporate Profits - 70
Dividends 15
Government Transfer payments 25
Personal Income 370
Personal Indirect Taxes - 70
Disposable Personal Income (DPI) 300
Personal Consumption expenditure - 275
Personal Savings 25

46. Exercise
Q1. Find the Personal Disposable Income (PDI)
Rs. Trillion
National Income = 20
Undistributed Profits= 1.00
Corporate Taxes = 2.00
Personal Taxes = 1.50
Ans.

47. Exercise
Q2. Find the NIFA
Rs. crores
GDPFC = 7,00,000
NNPFC = 8,00,000
Depreciation= 7,000
Subsidies = 1,000
Indirect Taxes = 1,00,000
Ans.

48. Exercise
Q3. Find the GNPMP and NNPMP
Rs. crores
GDPFC = 10,000
NFIA = 500
Indirect Taxes = 1,000
Subsidies = 500
Depreciation = 1,000
Ans.

49. Exercise
Q4. Find the GNPMP , NNPFC and PDI
Rs. Lakh crore
GNPFC = 15.00
Indirect Taxes = 2.00
Subsidies = 1.00
Depreciation = 1.2
Undistributed Profits= 0.5
Corporate Taxes = 3.00
Personal Taxes = 1.50
Ans.

50. Exercise
Q5. Find the GNPMP , GDPMP, NNIMP, NDPMP and PDI
Rs. crore
GDPFC = 30,000
Indirect Taxes = 4,000
Subsidies = 2,000
Depreciation = 2,000
Undistributed Profits = 1,250
Corporate Taxes = 6,000
Personal Taxes = 4,000
Factor Income received from abroad = 7,500
Factor income paid abroad = 9,000
Ans.

51. Q6. A) Find the real national income or national income at
constant price.
B) Find the real annual growth in NI for various years
Year NI AT
Current Prices (Rs
000’ crores)
Wholesale Price
Index Number
(Base 1993-94=100)
1994-95854.1 112.6
1995-96941.8 121.6
1996-971093.9 127.2
1997-981376.8 132.8
1998-991583.1 140.7
1999-001740.2 145.3
2000-011878.4 155.7
2001-022060.6 161.3

52. Methods of Estimating
National Income

53. A quick recap…
NI =NNPFC
NNPFC =NDPFC + NFIFA
NDPFC=GDPMP – D + S – T
We will now estimate NDPFC by the 3 methods

54. 3 Interpretation of NI
National Income = National Product = National Expenditure
Y= O=E
The sum of values of all goods and services produced
( Production).
The sum of all incomes, in cash and kind, accruing to factors of
productions in a year (Distribution).
The sum of consumers, investment and government expenditure
(Expenditure).

55. Sectors used for Estimates

56. 3 Methods of estimating NI
1.Value Added Method
2.Income Method
3.Expenditure Method

57. 1. Value Added Method
 Called as Output or Production method
Value added is the difference between a firm’s sales and its
purchase of raw materials and services from other firms.
The economy is divided into different industrial sectors:
Agriculture, fishing, mining, manufacturing, construction,
trade, transport, communication ..............
Contribution of each enterprise to the generation of flow is
measured

58. 1. Value Added Method
Objective
Estimate
Total Output/
Production
Method of
Estimation
Value Add
Value Add
Output
Price
Input
Cost
Source of
Data
Enterprises

59. The Process
Classification into industrial sectors
Calculate Net Output
for each enterprise
Subtract – Input cost
Subtract – Depreciation & Indirect Tax
= Value Add of each enterprise
Collate for all enterprises in a sector
Collate for all sectors
Total units produced X MRP
O - I = P (production)
P – D + S – T
Sector contribution
NDPFC

60. Precautions
To be Included in NI
1. Rent of self- occupied
houses
2. Value of production for self
consumption
Not to be included in NI
1.Sale and purchase of second
hand goods
2.Value of intermediate goods
3.Value of services of Housewives

61. 2. Income Method
It approaches NI from distribution side
To produce goods and services we require the factors of production
The owners of these factors participate in the production for which
they receive INCOME – Wages, rent, interest and profit.
It identifies the productive enterprises and classify them into various
sectors
It’s the sum of incomes of all individuals of a country

62. 2. Income Method
Objective
Estimate
Total Income
Income
Wages,
Rents,
Interests,
Profits.
Difficulties in
differentiating
earnings
land vs capital
labour vs entrepreneurial
function
Source of
Data
Enterprises
Income
Classification
Labour
Capital
Mixed

63. The Process
Classification into industrial sectors
Classify factor payments
Measure Labour Payments
Measure Capital Payouts
Measure Mixed Income
(Salaries cum Profits)
Collate for all enterprises in a sector
Collate for all sectors
Labour, Capital, Fixed
Wages & Salaries
Dividends, Undistributed Profits
Interest, Royalties, Rent
Sector contribution
NDPFC
Self-employed
Why have we not accounted for
1. Depreciation & Indirect Taxes
2. Rent/ Interest income received by Individuals
3. Exports/ Imports

64. Precautions
To be Included in NI
1.Imputed rent of self- occupied
houses
2. Value of production for self
consumption
Not to be included in NI
1. Transfer Payments
2. Illegal Money
3.Windfall gains- prizes, lotteries
4.Corporate profit Tax
5.Sale of second- hand goods

65. 3. Expenditure Method
Objective
Estimate
Total
Expenditure
Nature of
Expenditure
Individuals or
Households
Government Enterprises
Expenditure by foreigners
on Exports – Expenditure
on buying Imports

66. The Process
Final private consumption expenditure
Government’s final consumption
expenditure
Gross domestic capital formation
(Fixed capital + Addition to stocks)
Net Exports
Summation = Total Expenditure
Subtract : Depreciation
C (individuals/ households)
G
I (enterprises)
C + G + I + (X-M) = GDPMP
GDPMP – D = NDPMP
X - M
Subtract : Indirect taxes NDPMP – (S-T) = NDPFC

67. Precautions
Not to be included in NI
1.Sale and purchase of second hand goods
2.Expenditure on intermediate goods
3.Expenditure on Transfer Payments
4.Purchase of shares and Bonds as they do not
add to NI.

68. In Sum
Value Added
NI = (P-D) + (S-T) + (X-M) + (R-P)
Income
NI = (w + r + i + n) + (X-M) + (R-P)
Expenditure
NI = (C + I + G) + (X-M) + (R-P)

69. Choice of Method
Choice of Method depends upon
i) The purpose of national income analysis
ii) Availability of necessary data
The task of estimating NI in India is with CSO ( Central statistical
organization)
CSO uses output and Income method
Output Method – Agriculture and Manufacturing
Income Method - Services

70. Difficulties in calculating NI
1.Non- Monetized Transactions
2.Black Money
3.Double Counting
4.Transfer Incomes
5.Growing Service Sector
6.Household Services
7.Social Services
8.Environmental Cost
9.Government Incomes
10.Capital Gains

71. Difficulties in India
1.Reliable data is not available
2.Large regional diversity
3.Illiteracy
4.Lack of differentiation of economic functions
5.Presence of unorganized sectors
6.Presence of large non- monetized transactions