Chapter-2

NATIONAL INCOME
 Meaning of National Income
• National income means the value of goods and services produced by a
country during a financial year. Thus, it is the net result of all economic
activities of any country during a period of one year and is valued in terms
of money. National income is an uncertain term and is often used
interchangeably with the national dividend, national output, and national 
expenditure. We can understand this concept by understanding the
national income definition.
 Definition of National Income
• The National Income is the total amount of income accruing to a country
from economic activities in a years time. It includes payments made to all
resources either in the form of wages, interest, rent, and profits.
• According to Simon Kuznets defines national income as “the net output
of commodities and services flowing during the year from the country’s
productive system in the hands of the ultimate consumers.”
 11 Importance of National Income
• Economic Policy
• Economic Planning
• Economy’s Structure
• Inflationary and Deflationary Gaps
• Budgetary Policies
• National Expenditure
• Distribution of Grants-in-aid
 11 Importance of National Income
• Distribution of Grants-in-aid
• Standard of Living Comparison
• International Sphere
• Defence and Development
• Public Sector
 11 Importance of National Income
• Economic Policy
• National income figures are an important tool of macroeconomic
analysis and policy.
• National income estimates are the most comprehensive measures
of aggregate economic activity in an economy.
 11 Importance of National Income
• Economic Planning
• National income statistics are the most important tools for long-
term and short-term economic planning. A country cannot possibly
frame a plan without having a prior knowledge of the trends in
national income. The Planning Commission in India also kept in
view the national income estimates before formulating the five-year
plans
 11 Importance of National Income
• Economy’s Structure
• National income statistics enable us to have clear idea about the
structure of the economy. It enables us to know the relative
importance of the various sectors of the economy and their
contribution towards national income. From these studies we learn
how income is produced, how it is distributed, how much is spent,
saved or taxed.
 11 Importance of National Income
• Inflationary and Deflationary Gaps
• National income and national product figures enable us to have an
idea of the inflationary and deflationary gaps. For accurate and
timely anti- inflationary and deflationary policies, we need regular
estimates of national income.
 11 Importance of National Income
• Budgetary Policies
• Modern governments try to prepare their budgets within the
framework of national income data and try to formulate anti-
cyclical policies according to the facts revealed by the national
income estimates. Even the taxation and borrowing policies are so
framed as to avoid fluctuations in national income.
 11 Importance of National Income
• National Expenditure
• National income studies show how national expenditure is divided
between consumption expenditure and investment expenditure. It
enables us to provide for reasonable depreciation to maintain the
capital stock of a community. Too liberal allowance of depreciation
may prove harmful as it may unnecessarily lead to a reduction in
consumption.
 11 Importance of National Income
• Distribution of Grants-in-aid
• National income estimates help a fair distribution of grants-in-aid
by the federal governments to the state governments and other
constituent units.
 11 Importance of National Income
• Standard of Living Comparison
• National income studies help us to compare the standards of living
of people in different countries and of people living in the same
country at different times.
 11 Importance of National Income
• International Sphere
• National income studies are important even in the international
sphere as these estimates not only help us to fix the burden of
international payments equitably amongst different nations but
also enable us to determine the subscriptions and quotas of
different countries to international organisations like the UNO,
IMF, IBRD. etc.
 11 Importance of National Income
• Defence and Development
• National income estimates help us to divide the national product
between defence and development purposes. From such figures we
can easily know how much can be spared for war by the civilian
population.
 11 Importance of National Income
• Public Sector
• National income figures enable us to know the relative roles of
public and private sectors in the economy. If most of the activities
are performed by the state, we can easily conclude that public sector
is playing a dominant role.
 CONCEPTS OF NATIONAL INCOME
• Before starting with the concepts lets try to first understand two important
things used in learning the concepts of National Income which is :
• Factor Cost
• Market Price
 CONCEPTS OF NATIONAL INCOME
• Factor Cost
• It Includes the cost of factors of production e.g. interest on capital, wages to
labor, rent for land profit to the stakeholders. Thus services provided by
service providers and goods sold by the producer is equal to revenue price.
• Market Price
• The Actual transacted price including indirect taxes such as GST, Customs
duty etc. Such taxes tend to raise the prices of goods and services in the
economy.
 CONCEPTS OF NATIONAL INCOME
• GDP (Gross Domestic product)
• The total value of goods produced and services rendered within a country
during a year is its Gross Domestic Product.
 CONCEPTS OF NATIONAL INCOME
• Gross Domestic product (GDP)
• Further, GDP is calculated at market price and is defined as GDP at market prices. Different constituents of GDP are:
1. Wages and salaries
2. Rent
3. Interest
4. Undistributed profits
5. Mixed-income
6. Direct taxes
7. Dividend
8. Depreciation
 CONCEPTS OF NATIONAL INCOME
• Gross National Product (GNP)
• For calculation of GNP, we need to collect and assess the data from all
productive activities, such as agricultural produce, wood, minerals,
commodities, the contributions to production by transport,
communications, insurance companies, professions such (as lawyers,
doctors, teachers, etc). at market prices.
 CONCEPTS OF NATIONAL INCOME
• It also includes net income arising in a country from abroad. Four main
constituents of GNP are:
1. Consumer goods and services
2. Gross private domestic income
3. Goods produced or services rendered
4. Income arising from abroad.
 CONCEPTS OF NATIONAL INCOME
• Net National product (NNP)
• Net national product (NNP) is the market value of a nation's goods and
services minus depreciation (often referred to as capital consumption).
 CONCEPTS OF NATIONAL INCOME
• How to Calculate Net National Product?
• The formula for NNP is:
• NNP = Market Value of Finished Goods + Market Value of Finished Services - Depreciation
• Alternatively, NNP can be calculated as:
• NNP = Gross National Product - Depreciation
• Let's assume Country XYZ's companies, citizens and entities produce $1 trillion worth of goods
and $3 trillion worth of services this year. The assets used to produce those goods and services
depreciated by $500 billion. Using the formula above, Country XYZ's NNP is:
• NNP = $1 trillion + $3 trillion - $0.5 trillion = $3.5 trillion
 CONCEPTS OF NATIONAL INCOME
• Per Capita Income (PCI)
• Per capita income is a measure of the amount of money earned per person
in a nation or geographic region. Per capita income can be used to
determine the average per-person income for an area and to evaluate the
standard of living and quality of life of the population. Per capita income
for a nation is calculated by dividing the country's national income by its
population.
 CONCEPTS OF NATIONAL INCOME

• Personal Income
• Personal income, aka "before-tax income," is the total annual gross earnings of an
individual from all income sources, such as: salaries and wages, investment interest and
dividends, employer contributions to pension plans, and rental properties.
 CONCEPTS OF NATIONAL INCOME
• How Personal Income Works
• Personal income is used in calculating adjusted gross income (AGI) --
which is important to individuals for income-tax purposes. 
• It is also an essential measure to investors because it serves as an indicator
of future demand for both goods and services in the market. If personal
income is high, there could be more money spent in the economy,
indicating a future business boom.
 CONCEPTS OF NATIONAL INCOME
• Why Personal Income Matters
• National personal income levels are very closely linked to the 
Gross Domestic Product (GDP), and they serve as a key indicator on
consumer spending, inflationary pressures, the overall economy and
markets. 
• Income statistics also provide an excellent indicator for socioeconomic
disparities and inequalities that could threaten the stability of the economy
down the road -- and consequently pose risks for the long-term prospects
of the markets. 
 DISPOSABLE INCOME
• Disposable income, also known as disposable personal income (DPI), is
the amount of money that households have available for spending and
saving after income taxes have been accounted for. Disposable personal
income is often monitored as one of the many key economic indicators
used to gauge the overall state of the economy.
• DPI=Personal Income−Personal Income Taxes​
 DISPOSABLE INCOME EXAMPLE
• Disposable income is an important measure of household financial
resources. For example, consider a family with a household income of
$100,000, and the family has an effective income tax rate of 25% (versus
marginal tax rate). This household's disposable income would then be
$75,000 ($100,000 – $25,000). Economists use DPI as a starting point to
gauge households' rates of savings and spending.
MEASUREMENT OF INCOME
 DIFFICULTIES IN MEASURING
NATIONAL INCOME
• The difficulties are:
• 1. Prevalence of Non-Monetized Transactions
• 2. Illiteracy
• 3. Occupational Specialization is Still Incomplete and Lacking
• 4. Lack of Availability of Adequate Statistical Data
• 5. Value of Inventory Changes
• 6. The Calculation of Depreciation
• 7. Difficulty of Avoiding the Double Counting System
• 8. Difficulty of Expenditure Method.
 DIFFICULTIES IN MEASURING
NATIONAL INCOME
• Prevalence of Non-Monetized Transactions:
• There are certain transactions in India in which a considerable part of
output does not come into the market at all.
• For example:
• Agriculture in which a major part of output is consumed at the farm level
itself. The national income statistician, therefore, has to face the problem
of finding a suitable measure for this part of output.
 DIFFICULTIES IN MEASURING
NATIONAL INCOME
• Illiteracy
• The majority of people in India are illiterate and they do not keep any
accounts about the production and sales of their products. Under the
circumstances the estimates of production and earned incomes are simply
guess work.
 DIFFICULTIES IN MEASURING
NATIONAL INCOME
• Occupational Specialization is Still Incomplete and Lacking
• There is the lack of occupational specialisation in our country which
makes the calculation of national income by product method difficult.
Besides the crop, farmers are also engaged is supplementary occupations
like—dairying, poultry, cloth-making etc. But income from such
productive activities is not included in the national income estimates.
 DIFFICULTIES IN MEASURING
NATIONAL INCOME
• Lack of Availability of Adequate Statistical Data
• Adequate and correct produc­tion and cost data are not available in our
country. For estimating national income data on unearned incomes and on
persons employed in the service are not available. Moreover data on
consumption and investment expenditures of the rural and urban
population are not available for the estimation of national income.
Moreover, there is no machinery for the collection of data in the country.
 DIFFICULTIES IN MEASURING
NATIONAL INCOME
• Value of Inventory Changes
• The value of all inventory changes (i.e., changes in stock etc.) which may
be either positive or negative are added or subtracted from the current
production of the firm. Remember, if in the change in inventories and not
total inventories for the year that are taken into account in national income
estimates.
 DIFFICULTIES IN MEASURING
NATIONAL INCOME
• The Calculation of Depreciation
• The calculation of depreciation on capital consumption presents another
formidable difficulty. There are no accepted standard rates of depreciation
applicable to the various categories of machine. Unless from the gross
national income correct deductions are made for depreciation the estimate
of net national income is bound to go wrong.
 DIFFICULTIES IN MEASURING
NATIONAL INCOME
• Difficulty of Avoiding the Double Counting System
• The very important difficulty which a calculator has to face in measurement is
the difficulty of avoiding double counting.
• For example:
• If the value of the output of sugar and sugar cane are counted separately, the
value of the sugarcane utilised in the manufacture of sugar will have been
counted twice, which is not proper. This must be avoided for a correct
measurement.
 DIFFICULTIES IN MEASURING
NATIONAL INCOME
• Difficulty of Expenditure Method
• The application of expenditure method in the calculation of national
income has become a difficult task and it is full of difficulties. Because in
this method it is difficult to estimate all personal as well as investment
expenditures.
Circular Flow of Income: Two sector model
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