CONCEPT OF NATIONAL

INCOME ACCOUNTING

1. Gross Domestic Product at Market Prices

Total Production X Prices MP = Money Value of all
Goods & Services
2. Net Domestic Product (N.D.P.)
= G.D.P. Depreciation = Net Domestic Product
Depreciation is the wear and tear of fixed capital
3. G.D.P. at FC = G.D.P. MP N.I.T.
N.I.T. = Indirect Taxes Subsidies
4. NET Factor Income from Abroad (N.F.I.F.A.)
The Net factor income is measured as factor
incomes flowing in from abroad minus factor
incomes flowing out from the same country.
MP

5. Gross National Product (G.N.P.)=

GDP+N.F.I.F.A. = G.N.P.
6. Net National Product (N.N.P.)=
G.N.P. - Depreciation = N.N.P.
Market prices and constant prices
To find out the real income of a country, a
particular year is taken as base year. The
price level for that year is assumed to be Rs.
100
Real NNP = NNP X Base Year Price Index = (100)
for the current Year

Current Year Price Index

Examples,
Base Year Index 2000
National Income is Rs. 20000
Index numbers for this year = 250
So, 20000 X 100 = Rs. 8000 Crores
250
This is known as National income at constant prices

7. Income adjusted with purchasing power

parity
The PPP Gross Domestic Product
The PPP exchange rate is the rate of exchange that
makes the prices of different countries equal

Why is National Income Important?

Measuring the level and rate of growth of national income
is important to economists when they are considering:
Economic growth and whether a country is in the
business cycle.
Change to average living standards of the population
Looking at the distribution of national income

Computation of G.D.P.
There are three ways of calculating GDP all of which
sum to the same amount sine by identity:=

==

National Output

National
Expenditure

National Income

Income Method
The total of the following items, in a given
year gives us the value of G.D.P.
1.Rents
2.Wages + Salaries [compensation of workers]

3.Interest Income
4.Profits
5.Mixed income

Expenditure Method
The sum total of the following information gives us
the value of G.D.P. in a particular year

1.Personal consumption expenditure

2.Net domestic investment
3.Government expenditure on goods and
services
4.Net exports
.

Value Added Method

The difference between the value of
material output and input at each stage of
production is the value added.

G.D.P. is calculated by adding up the

above net values.

Difficulties in the Measurement of

National Income.
It is very difficult to calculate the correct G.D.P. why
due to the following.
1. There are a numbers of goods and services which are
difficult to be assessed in terms of money.
2. The problems of double counting
3. Income earned through certain activities is not included
4. Transfer payments create problem
5. Capital gains or losses do not result from current
economic activities
6. Lack of data, limited capacity of organisations collecting
data lack of co operation

It is calculated by subtracting intermediate

goods from the value of its sales.

Participants

Cost of
Materials

Value of
Sales

Value Added

Farmer
Cone factory
and ice creammaker

100
200

200
250

100
50

Middleperson

250

400

150

Vendor

400

500

100

Totals

950

1,350

400

 The

GDP deflator is essentially an

adjustment factor which is used to
convert Nominal GDP into Real GDP.

GDP Deflator = PIN of the select year

100

To convert Nominal GDP into Real

GDP:
Real GDP = Nominal GDP
GDP Deflator
GDP Deflator = Nominal GDP of a Year
Real GDP of a Year

Example: Estimate Real GDP for the year 19992000. If- Nominal GDP 1999-2000:
Rs.17,40,207 billion.
Price Index Number (WPI) 1999-2000 : 145
Price Index Number (WPI) Base year (199394) : 100

GDP Deflator (1999-2000) = PIN in 1999-2000

100
= 145 = 1.45
100
Real GDP (1999-2000) = Rs.1740207
1.45
= Rs.1200143 billion

.
1]salaries received by indians working in British embassey in
India ----no
2. Profits earned by a company in India which is owned by a
non resident --yes
3 profitsearned by a resident of India from his company in
Dubai no
4scholarships , Bonus part time job of a student .
t Yes
3.

Rent on owner occupied houses is included

in GNP because it is a part of the both
income and expenditure.

Expenditure on public administration like

national defence, police, fire brigade,
members of parliament. [ Honda cars
,wealth tax , building rented to foreigner in
India .earthquake ,awards ,second hand
goods ,

 National

Income (NI) : National Income is

the sum of the earning of all the factors
of production from current production of
goods and services.

Per

Capita income : National Income /

Total population.

PPP is a technique through which a

condition can be created between
countries where an amount of money
has the same purchasing power for
same basket of goods in different
countries.
The

prices of the goods between the

countries would only reflect the

exchange rates.

 If

the identical basket of

goods price in 20,000 in
Japan and
$ 200 in United States.
PPP-based Exchange Rate of
Japanese Yen to US$ would be:
E$/ =
US $ 1= 100

As per Nominal Exchange rate:

US

$1 = 87.5
To purchase identical basket of
20000 in Japan one has to spend
US $ 230
As

per Nominal Exchange rate:

1 = 0.01 US$
To purchase identical basket of US
$ 200 in USA and one has to spend
20000

 However,

PPP based exchange rate will

change if relative price change :
Example: If there is no price inflation in
the US while prices in Japan are
increasing by 10% a year.
At

the end of Year, a basket of goods price

$200 in US & in Japan 22000.
PPP Exchange Rate = E$/
$200/ 22000 =
Or
1US$ = 110

 It

works under the law of one price;

non-existence of tariff and other
trade barriers.
All

identical goods must have only

same price in different markets
when
the
prices
are
expressed
in
the
same
currency.

 The

National income data of different

countries is converted into a foreign
currency at the official exchange
rate.

This

data is not normally represent the

true relative purchasing power, hence
country-wise data is not comparable.

 As

per the World Bank, to overcome

the difficulty, all individual countrys
Income data can be converted into the
PPP income data.

By computing the PPP of each

countrys currency in terms of the US $

Growth Rate G.N.P. in India

Years

At Current Price

At constant
Price

2000-01

7.4

4.0

2001-02
2002-03
2003-04
2004-05

9.2
8.0
12.3
13.4

6.0
4.0
8.6
7.5

2005-06
2006-07
2007-08

14.3
15.2
14.8

9.6
9.8
9.3

Estimates of G.N.P. in India

Years.

In Corers at Current
Prices

At Constant Prices

1950-51

9078

223899

1955-56
1960-61
1970-71
2000-01

10508
16440
42697
1902384

268105
328373
470254
1841755

2004-05
2007-08

2855331
4297047

2366886
3114864

Product Method.
The total value of final goods and services produced in a
country during a year is calculated at market prices.
This includes the following:1. Money value of agriculture production including allied
activities
2. Money value of Industrial goods + construction sector
3. Value of services sector .
4. Self - consumption
5. nit
Note: only final goods and services are included in the study.

Per Capita Income in India

Years

At Current Prices

At Constant
Prices (1900-00)

2000-01
2001-02
2002-03

5.1
6.6
6.2

1.8
3.7
3.0

2003-04
2004-05
2005-06
2006-07

10.6
11.1
12.1
13.5

7.1
5.6
7.9
8.2

2007-08

12.5

7.6

GDP at Market Prices

Year

GDP at MP

2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03

100206.20
88749.47
77953.13
64778.27
56300.03
49870.90
42947.06
36933.69
39422.09
28415.03

Source RBI

Per Capital GNP at F.C

78,009
68,857
60,583
61,888
45,675
40,064
34,838
30,419
27,081
24,301

Growth
Year

Table 1.1: Annual

Growth Rates of
The GDP

Rate

Growth
Year

Rate

Growth
Year

Rate

At 1993-94 Prices

Growth
Year

Rate

At 1999-2000 Prices

1951-52

2.3

1969-70

6.5

1987-88

3.8

2000-01

4.4

1952-53

2.8

1970-71

5.0

1988-89

10.5

2001-02

5.8

1953-54

6.1

1971-72

1.0

1989-90

6.7

2002-03

3.8

1954-55

4.2

1972-73

-0.3

1990-91

5.6

2003-04P 8.5

1955-56

2.6

1973-74

4.6

1991-92

1.3

2004-05QE 7.5

1956-57

5.7

1974-75

1.2

1992-93

5.1

2005-06QE 9.0

1957-58

-1.2

1975-76

9.0

1993-94

5.9

2006-07AE 9.2

1958-59

7.6

1976-77

1.2

1994-95

7.3

1959-60

2.2

1977-78

7.5

1995-96

7.3

1960-61

7.1

1978-79

5.5

1996-97

7.8

1961-62

3.1

1979-80

-5.2

1997-98

4.8

1962-63

2.1

1980-81

7.2

1998-99

6.5

1963-64

5.1

1981-82

6.0

1999-2000 6.1

1964-65

7.6

1982-83

3.1

2000-01

4.4

1965-66

-3.7

1983-84

7.7

2001-02

5.8

1966-67

1.0

1984-85

4.3

2002-03P 4.0

1967-68

8.1

1985-86

4.5

2003-04QE 8.5

1968-69

2.6

1986-87

4.3

2004-05QE 6.9

Figure 1.1: Average Growth Rate

7
6.3
6
4.8

5
4.1
4
3.2
3

0
1951-65

1965-81

1981-88

1988-06

Figure 1.2: GDP Growth: Business cycle effect or a shift in the growth rate?
10.0
8.6

9.0
8.0

7.1

7.0
6.0
5.0
4.0

5.2
4.0

3.0
2.0
1.0
0.0
1990-93

1993-97

1997-03

2003-07

Dollar GDP has grown 16.3 annually during

2003-06
Figure 1.3: GDP in current dollars ($billion)
900
806

800
700

696
601

600
500
452

461

478

506

400
300
200
100
0
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

s
6.

Table 1.2: Growth Rates of Sectoral GDP (at

factor cost)
Period

Agriculture & Allied Industry Manufacturing Services

1

GDP

1951-65

2.9

6.7

6.6

4.7

4.1

1965-81

2.1

4.0

3.9

4.3

3.2

1981-88

2.1

6.3

7.1

6.5

4.8

1988-06

3.4

6.5

6.8

7.8

6.3

Table 1.3: The Composition of the GDP

Year

Agriculture and Allied Industry Manufacturing Services

1950-51

57

15

28

1964-65

49

21

12

31

1980-81

40

24

14

36

1987-88

33

26

16

41

2004-05

21

27

17

52

:Table GDP Rankings.

Rank On the basis of exchange rate in

Dollars
1

U.S.A.

11,667

2.

Japan

4623

3.

Germany 2714

4.

U.K.

2140

5.

France

2002

6.

Italy

1572

7.

China

1649

8.

Spain

991

9.

Canada

980

10.

India

692