Taruna Dureja Banga

Def- National Income

The total market value of all final goods and services

produced in the economy in a given year.

Sum of all incomes accruing to factors of production in

the economy in a year.

Concepts of national income

The important concepts of national income are:
1. Gross Domestic Product (GDP) 2. Gross National Product (GNP) 3. Net National Product (NNP) at Market Prices 4. Net National Product (NNP) at Factor Cost or

National Income 5. Personal Income 6. Disposable Income

Gross Domestic Product

1. Gross Domestic Product (GDP): Gross Domestic

Product (GDP) is the total market value of all final goods and services currently produced within the domestic territory of a country in a year. GDP= P*Q

Gross National Product

Gross National Product is the total market value of all

final goods and services produced in a year. GNP includes net factor income from abroad whereas GDP does not. Therefore, GNP = GDP + Net factor income from abroad.
NFYA = factor income received by Indian nationals

from abroad factor income paid to foreign nationals working in India.

Distinction b/w GDP and GNP

GNP
It is the total money value of

GDP
It is the total money value of

goods and services produced by the countrys factors during a given year. The income earned by the nationals whether inside or outside the country is included in GNP.

goods and services produced in the domestic territory of a country during a given year. It doesn't include the income earned by the nationals outside the country.

Net National Product at Market price

NNP is the market value of all final goods and services

after providing for depreciation. That is, when charges for depreciation are deducted from the GNP we get NNP at market price. Therefore
NNP = GNP Depreciation

Depreciation is the consumption of fixed capital or fall

in the value of fixed capital due to wear and tear.

Difference b/w GNP&NNP

GNP
It is the sum of money value

NNP
It is the net money value of

of goods and services produced by the countrys factors during a given year. GNP = GDP + NFYA It doesnot gives the correct picture of wealth of nations

goods and services produced by the countrys factors during a given year. NNP=GNP-DEP It gives the correct picture of wealth of nation.

Distince b/w FC & MP

FACTOR COST(NNP)
Only those payments are

MARKET PRICE(NNP)
Market value of final goods and services produced during a year is taken into account.

included which are made to factors of production as rewards for their factor services e.g.: Wages, Rent , Interest, Profits. Indirect taxes are deducted from National product at market price. Factor cost of its goods is equal to the market price plus the subsidy paid on it NNPat fc= NNP atMP- IT+sub

Prices of goods sold into the market include Indirect taxes such as excise duty, sales tax, custom duty.

Subsidy reduces the market price. And hence it is subtracting from the market price.
NNPat MP= NNP at FC+IT- Sub

Net National Product at Factor Cost

NNP at factor cost or National Income is the sum of

wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year. It may be noted that:
NNP at Factor Cost = NNP at Market Price Indirect

Taxes + Subsidies.

 Net Domestic Product at Factor Cost (NDP at FC)=

NNP at FC NFYA
Gross Domestic Product at Factor Cost= NDP at fc +

Dep
Net Domestic Product at factor cost= GDP - Dep

Personal Income
Personal income is the sum of all incomes actually received by all individuals or households during a given year. In National Income there are some income, which is earned but not actually received by households such as Social Security contributions, corporate income taxes and undistributed profits. On the other hand there are income (transfer payment), which is received but not currently earned such as old age pensions etc. Thus, in moving from national income to personal income we must subtract the incomes earned but not received and add incomes received but not currently earned. Therefore,

Personal Income
Personal Income = National Income Social Security

contributions corporate income taxes undistributed corporate profits + transfer payments.

Disposable Income
Disposable Income: It is the income which is actually

available to individual to spend on consumption and to save. The whole of personal income is not available to individuals to meet their expenditures, what remains is called disposable income. Thus, Disposable Income = Personal income personal taxes. Disposable Income can either be consumed or saved. Therefore, Disposable Income = consumption + saving.

Per Capita Income

It is obtained by dividing national income by the

population. Per Capita Income = National Income Population It shows average income of the people in the country.

MEASUREMENT OF NATIONAL INCOME

Production generate incomes which are again spent on goods and services produced. Therefore, national income can be measured by three methods:
1. Output or Production method(Value Added

method) 2. Income method, and 3. Expenditure method.

Output or Production method(Value Added method)

Under this method, the economy is divided into

different sectors such as agriculture, fishing, mining, construction, manufacturing, trade and commerce, transport, communication and other services.
Then, the gross product is found out by adding up the

net values of all the production that has taken place in these sectors during a given year.

Output or Production method(Value Added method)

In order to avoid the problem of Double Counting and

hence overestimation of the countrys total output, the intermediate production of goods and services should not be included in the final total. The problem of Double counting can be avoided by summing up only the value added by each firm at different stages of production of goods and services, rather than the final output.

 The output method can be used where there exists a

census of production for the year. The advantage of this method is that it reveals the contributions and relative importance and of the different sectors of the economy.

No Problem!
To correct for this problem economist

have created the Value Added approach.

Value Added Approach Eliminates Double Counting

Participants Farmer Cone factory and ice cream-maker Middleperson Vendor Totals Cost of Materials $ 0 100 Value of Sales $ 100 250 Value Added $ 100 150

250 400 $ 750

400 500 $1,250

150 100 $500

The Value-added Approach to Measuring GDP

Production Farmer harvest wheat Generated $100 Added $100

Miller

makes into flour

200

100

GDP counts only the $ value of the final good

Baker

makes into breadThis is the same as the value-added. 300 100

$600 $300

Calculating GDP
GDP can be calculated three ways:
add up the value added of all producers; add up all spending on domestically produced final

goods and services, leading to the equation:

GDP = C+I+G+X-IM;
add up the all income paid to factors of production

Income Method
Here National income is found by adding up the value

of all final goods and services produced. To Produce goods and services we require FACTORS OF PRODUCTION( Land, Labor, Capital & Entrepreneur). They receive income in the form of Wages, salaries, Rent, Interest, Profits and Dividends for their services National Income is equal to sum of all the Factor Incomes.

Income Method
Only income earned for productive services are

included in National Income. Transfer payments such as Pensions, unemployment benefits are not included because they represent redistribution of the income. Inclusion of it will lead to Double Counting and hence increased National Income.

Expenditure Method
NY is the sum total of expenditure incurred on final

goods and services purchased during one year. NY= C+I+G(X-M) C=Consumption expenditure I= Investment expenditure G=Government Expenditure Net receipts = Exports- Imports
To avoid Double Counting only expenditure of Final goods and service must be included.

Problems in Measurement of National Income

1. Problem of Definition
One of the greatest difficulties while calculating

national income is that what should be included and what excluded with respect to the goods and services produced.

 2. Calculation of Depreciation

In production process some capital, equipments, machines are worn

out, which is called depreciation or capital consumption. In calculation of national income some allowance should be made to replace the equipment worn out. If it is not made then we have over estimated NY.
3.Income from Foreign Firms(NFYA) The income arising from the activities of the foreign firms operating in

a country should be included in the countries national income or not .

However the I.M.F has given the viewpoint that the production and

income of these foreign forms should go to the owning country while there profit must be credited to the parent concern.

NFYA= R-P R= Income received by domestic factors for their contribution to production abroad.

P= Income paid to the foreign factors for the contribution to production in domestic economy.

 5. Danger of Double Counting

Proper care is required for calculating national income so that double counting may not take place. This problem usually arises in those countries where proper documentation or statistics are not available.
6. Value of Inventories

Since it is not easy to calculate the value of raw materials, semi finished and finished goods in the custody of producers therefore it creates problems. 7. Market Price and Factor Cost