NATIONAL INCOME

What is National income?

Ans: National income is the some of incomes earned by all the
individuals of a country within a specific time period. The
sum of individual incomes from all the final goods and
services produced in a country in an year is called national
income.

Different concepts of national income

 Gross Domestic Product (GDP):
Gross means total, domestic means home and product
means output. So, GDP is the total market value of all
currently produced goods in the geographical
boundaries of a country within a specific period
generally one year.

The goods and services maybe durable or not durable,

produced by private sector or public sector but it does
not include intermediate goods and services.

 Net Domestic Product (NDP):

When depreciation on fixed capital used in production of
goods and services is deducted from the GDP, we get Net
Domestic Product.

NDP = GDP – Depreciation

GDP = NDP + Depreciation
 Gross National Product (GNP):
When Net factor income is added to the GDP, we get
Gross National Income. Net Factor Income (NFIA) is the
difference between what domestic people earn from
abroad and what foreign people earn from the domestic
economy.

GNP = GDP + NFIA

 Net National Product (NNP):

It refers to the total value of goods and services produced
in an economy within a period of time after deduction of
depreciation.

NNP = GNP – Depreciation

 Per Capita Income (PCI):

The average income of individuals in any year of a
country is called Per Capita Income.

PCI = Total National Income of a country in a year/Total

Population of a country

National Income Aggregates:

 National Income (NNPfc) = NNPmp – Indirect Tax +
Subsidies
OR NNPfc = NNPmp - Net Indirect Tax
 GDPmp = GNPmp – NFIA
GNPmp = GDPmp + NFIA

 GDPfc = GDPmp – NIT

GDPmp = GDPfc + NIT
 NDPmp = GDPmp – Depreciation
GDPmp = NDPmp + Depreciation

Methods of calculating national income:

A. Value Added Method
NNPfc = GDPmp – Depreciation + NFIA – NIT

B. Income Method:
NNPfc = NDPfc + NFIA

NDPfc = Compensation of Employees + Operating

Surplus + Mixed Income of Self Employed

Compensation of Employees = Wages & Salaries +

Pention on Retirement + Employees contribution to
S.S.S

Operating Surplus = Rent & Royalty + Interest +

Profit

C. Expenditure Method:
NNPfc = GDPmp – Depreciation + NFIA – NIT
OR NDPmp + NFIA – NIT

NDPmp/GDPmp = Private Final Consumption

Expenditure + Government Final Consumption
Expenditure + Net Export (Export – Import) +
Net/Gross Domestic Capital Formation
(NDCF/GDCF)

NDCF/GDCF = Net/Gross Domestic Capital

Formation + Change in Stock
 MULTIPLE CHOICE QUESTIONS: CHOOSE
THE CORRECT ANSWER

1. Household inventory is:

(a) Not included in national income
(b) A stock concept
(c) Both (a) and (b)
(d) None of these

2. Remittances from a relative working abroad are:

(a) Included in national income
(b) Not included in national income
(c) Transfer payments
(d) Both (b) and (c)

3. Value added refers to:

(a) Production of durable goods
(b) Output – I/C
(c) Production of non-durable goods
(d) Expenditure on intermediate goods

4. Which of the following items is not included while

calculating national income by income method:
(a) Rent
(b) Mixed Income
(c) Fixed Investment
(d) Undistributed Profits
5. As a result of double counting, national income is:
(a) Over-estimated
(b) Under-estimated
(c) Correctly estimated
(d) Not estimated for the entire year of accounting

6. Which of the following is not a transfer payment:

(a) Interest on national debt
(b) Retirement pensions
(c) Old-age pensions
(d) Donations

7. Difference between closing stock and opening stock

during an accounting year is known as:
(a) Increase in stock
(b) Change in stock
(c) Decrease in stock
(d) None of these