National Income & National Income & Related ConceptsRelated Concepts

National IncomeNational Income

National income is the money value National income is the money value of all the final goods and services of all the final goods and services produced by a country during one produced by a country during one year.year.

National Income at current National Income at current pricesprices

Goods and services are valued at the Goods and services are valued at the prices prevailing in the markets in prices prevailing in the markets in that particular year.that particular year.

E.g. National Income of 2009-10: E.g. National Income of 2009-10: goods and services are valued at goods and services are valued at prices prevailing in the year 2009-10.prices prevailing in the year 2009-10.

Estimates of GDP, NDP, NNP and Per Capita Income

1999-2000 to 2004-2005

(at current prices)

(Rs. crore)

Year GDP at factor cost (Rs. Crore)

NDP at factor cost (Rs. Crore)

NNP at factor cost (Rs. Crore)

Per capita income (Rs.)

1993-94 Series

New Series

1993-94 Series

New Series

1993-94 Series

New Series

1993-94 Series

New Series

1999-00 1761838 1792292 1579479 1605643 1564048 1590212 15625 15886

2000-01 1902999 1930184 1705104 1727452 1686995 1704719 16555 16729

2001-02 2081474 2097446 1863795 1876285 1848229 1856217 17823 17883

2002-03 2254888 2255574 2021936 2019972 2008770 2003282 19040 18988

2003-04 2519785 2543396 2266148 2286826 2252070 2268576 20989 21142

2004-05 2830465 2843897 2553334 2549139 2535627 2531223 23241 23222

Growth rates (%)

                     

2000-01 8 7.7 8 7.6 7.9 7.2 6 5.3

2001-02 9.4 8.7 9.3 8.6 9.6 8.9 7.7 6.9

National Income at constant National Income at constant pricesprices

Goods and services are valued at the Goods and services are valued at the price prevailing in the base yearprice prevailing in the base year. .

E.g. National Income of year 2009-10 E.g. National Income of year 2009-10 at 1999-2000 prices (prices of goods at 1999-2000 prices (prices of goods and services prevailing in year 1999-and services prevailing in year 1999-2000).2000).

Estimates of GDP, NDP, NNP and Per Capita Income

1999-2000 to 2004-2005

(at constant prices)

(old series at 1993-94 prices and new series at 1999-2000 prices)

(Rs. crore)

Year GDP at factor cost (Rs. Crore)

NDP at factor cost (Rs. Crore)

NNP at factor cost (Rs. Crore)

Per Capita Income (Rs.)

1993-94 Serie

s

New Seri

es

1993-94 Serie

s

New Seri

es

1993-94

Series

New Serie

s

1993-94 Seri

es

New Series

1999-00 1148367 1792292 1019296 1605643 1008114 1590212 10071 15886

2000-01 1198592 1870388 1062492 1675633 1050338 1653088 10308 16223

2001-021267945 1978056 1125480 1775952 1115171 1755281 10754 16910

2003-041430548 2226041 1274074 2004703 1266005 1986858 11799 18517

Per Capita IncomePer Capita Income

National Income per head of National Income per head of population.population.

NYNY

PCY = -----------------PCY = -----------------

PopulationPopulation

Some Basic ConceptsSome Basic Concepts

Domestic Territory of a Domestic Territory of a CountryCountryIncludes:Includes:• Territory lying within the political frontiers, Territory lying within the political frontiers,

including territorial waters of the countryincluding territorial waters of the country• Ships & aircrafts operated by residents of te Ships & aircrafts operated by residents of te

country between 2 countriescountry between 2 countries• Fishing vessels, oils & natural gas rig, Fishing vessels, oils & natural gas rig,

floating platforms operated by residents of floating platforms operated by residents of the country in international waters or the country in international waters or engaged in extraction in area in which the engaged in extraction in area in which the country has exclusive rights of exploitation.country has exclusive rights of exploitation.

• Embassies, consulates & military Embassies, consulates & military establishments of the country located establishments of the country located abroad.abroad.

Normal Residents of a Normal Residents of a CountryCountry• Resident => a person who Resident => a person who

“ordinarily” resides in a country and “ordinarily” resides in a country and whose centre of interest lies in that whose centre of interest lies in that country.country.

• Normal residents => covers both Normal residents => covers both individuals and institutions. It individuals and institutions. It includes nationals and non-nationals includes nationals and non-nationals residing in a country.residing in a country.

Exceptions Exceptions • International organisations like World Health International organisations like World Health

Organisation, World Bank, IMF, ILOOrganisation, World Bank, IMF, ILO• Resident HHs & individuals cover all individuals living Resident HHs & individuals cover all individuals living

within the domestic territory except the following:within the domestic territory except the following:• Foreign visitors for recreation, holidays, medical Foreign visitors for recreation, holidays, medical

treatment, study tours, conferences, etc.treatment, study tours, conferences, etc.• Crew member of foreign vessels, commercial travelers & Crew member of foreign vessels, commercial travelers &

seasonal workers.seasonal workers.• Officials, diplomats & members of armed forces of a Officials, diplomats & members of armed forces of a

foreign countryforeign country• Employees of international organisations who are not Employees of international organisations who are not

citizen of the country in which the office is locatedcitizen of the country in which the office is located• Foreigners who are the employees of non-resident Foreigners who are the employees of non-resident

enterprises and who have come to the country for enterprises and who have come to the country for installing machines or equipment purchased from their installing machines or equipment purchased from their employers.employers.

Stock variablesStock variables

Measures of economic Measures of economic activity at a point in timeactivity at a point in time..

Examples of Stock Var.Examples of Stock Var.

• Wealth (an accumulation of savings over Wealth (an accumulation of savings over time)   time)  

• Debt (an accumulation of borrowing over Debt (an accumulation of borrowing over time) time)

• Capital Stock (Factories, Machinery, Capital Stock (Factories, Machinery, Inventory, Infrastructure) Inventory, Infrastructure)

• The Money Supply The Money Supply

• Any Balance Sheet measures (Assets, Any Balance Sheet measures (Assets, Liabilities, Owner's Equity)Liabilities, Owner's Equity)

Flow VariablesFlow Variables

Economic activity measured Economic activity measured per unit of timeper unit of time . .

Examples of Flow Var.Examples of Flow Var.

• Income (Household, Per-Capita, National) Income (Household, Per-Capita, National)

• Budget Deficits Budget Deficits

• Investment Expenditure Investment Expenditure

• Consumption Expenditure Consumption Expenditure

• Any Income Statement measures (Sales Any Income Statement measures (Sales Revenue, Gross Profit, Expenses)Revenue, Gross Profit, Expenses)

Closed EconomyClosed Economy

• A country which has no economic A country which has no economic relations with other countries.relations with other countries.

• All other countries (except the one All other countries (except the one under consideration) are grouped under consideration) are grouped into one category “rest of the world”.into one category “rest of the world”.

Open EconomyOpen Economy

A country having economic relations with the A country having economic relations with the rest of the world.rest of the world.

•Selling goods and services to foreigners Selling goods and services to foreigners (exports)(exports)

•Purchasing goods and services from the rest of Purchasing goods and services from the rest of the world (imports)the world (imports)

•Selling shares, bonds, debentures to foreigners Selling shares, bonds, debentures to foreigners •Lending and borrowingLending and borrowing•Sending gifts to foreigners and receiving gifts Sending gifts to foreigners and receiving gifts

from themfrom them•Normal resident going to foreign countries to Normal resident going to foreign countries to

work there, and foreign residents coming and work there, and foreign residents coming and working in the domestic territory of the country.working in the domestic territory of the country.

Net Factor Income from Net Factor Income from AbroadAbroad

Income attributable to factor services Income attributable to factor services rendered by the normal residents of a country rendered by the normal residents of a country to the rest of the world to the rest of the world lessless factor services factor services rendered to them by the rest of the world.rendered to them by the rest of the world.

Includes:Includes:

• NetNet compensation of employees compensation of employees

• NetNet income from property and income from property and entrepreneurship (interest, rent, profits and entrepreneurship (interest, rent, profits and dividends); anddividends); and

• NetNet retained earnings of resident companies retained earnings of resident companies abroad.abroad.

Basic Economic ActivitiesBasic Economic Activities

•ProductionProduction

•ConsumptionConsumption

•Capital AccumulationCapital Accumulation

ProductionProduction

Any activity which produces a Any activity which produces a commodity or increases the value of commodity or increases the value of a commodity already produced.a commodity already produced.

ConsumptionConsumption

• Using up of goods and services to Using up of goods and services to satisfy human wants.satisfy human wants.

• Destruction of utility.Destruction of utility.

Capital FormationCapital Formation

• Surplus of production over Surplus of production over consumption in an accounting consumption in an accounting year.year.

• That which adds to further That which adds to further production.production.

•Construction of New Assets Construction of New Assets (buildings, roads, bridges, transport (buildings, roads, bridges, transport equipment).equipment).

•Production of machine and Production of machine and equipmentequipment

• Increase in the stock of raw Increase in the stock of raw materials, semi-finished goods and materials, semi-finished goods and finished goods during an finished goods during an accounting year.accounting year.

Income ConceptsIncome Concepts

Net Domestic Product at Net Domestic Product at Factor CostFactor Cost

• Also called Domestic Factor Income Also called Domestic Factor Income (DFY)(DFY)

• NDP (FC) is defined as the net value NDP (FC) is defined as the net value added by all the producers within the added by all the producers within the domestic territory of the country.domestic territory of the country.

NDP (FC) = Wages + Rent NDP (FC) = Wages + Rent + Interest + Profit + Mixed + Interest + Profit + Mixed

Income of the self-Income of the self-employedemployed

NDP (FC) = compensation of NDP (FC) = compensation of employees + operating employees + operating

surplus + mixed income of surplus + mixed income of self-employedself-employed

Gross Domestic Product Gross Domestic Product

GDP (FC) = NDP (FC) + DGDP (FC) = NDP (FC) + D

Where D = depreciationWhere D = depreciation

GDP (MP) = GDP (FC) + N.I.TGDP (MP) = GDP (FC) + N.I.T

Where N.I.T = net indirect taxesWhere N.I.T = net indirect taxes

= I.T. – S = I.T. – S

I.T = Indirect TaxesI.T = Indirect Taxes

S = SubsidiesS = Subsidies

Gross National ProductGross National Product

GNP (MP) = GDP (MP) + NFAGNP (MP) = GDP (MP) + NFA

Where NFA = Net Factor Income Where NFA = Net Factor Income from abroadfrom abroad

Important features of GNPImportant features of GNP

• Expressed in terms of money.Expressed in terms of money.• Includes only those items which are Includes only those items which are

produced during the time for which GNP produced during the time for which GNP stands (flow concept).stands (flow concept).

• Accounts for only those goods traded Accounts for only those goods traded through the official market.through the official market.

• Intermediate goods not included.Intermediate goods not included.• Excludes non-productive transactions and Excludes non-productive transactions and

second-hand sales.second-hand sales.

National IncomeNational Income

Factor income accruing to the normal Factor income accruing to the normal resident of the country.resident of the country.

NNP (MP) = GNP (MP) – DNNP (MP) = GNP (MP) – DNNP (FC) = NNP (MP) – NITNNP (FC) = NNP (MP) – NIT

= W + R + I + P + Mix Y + = W + R + I + P + Mix Y + NFANFA

= National Income (NY)= National Income (NY)

  NFA (6)  

 NIT (5) 5 6  

  D (4) 4 4 5 6

Wages(1) 1 1 1 1 1

R+I+P (2) 2 2 2 2 2

Mixed Income (3) 3 3 3 3 3

NDP (FC) GDP (FC) GDP (MP)

GNP (MP)

NNP (MP)

NNP (FC)

 NY

Important relationsImportant relations

• Gross – Net = DepreciationGross – Net = Depreciation

• M.P. – FC = N.I.TM.P. – FC = N.I.T

• National – Domestic = NFANational – Domestic = NFA

Quick ReviewQuick ReviewNDP (FC)NDP (FC)

W + I + R + P + Mix YW + I + R + P + Mix YGDP (MP)GDP (MP)

NDP(FC) + D + NIT (=IT - S)NDP(FC) + D + NIT (=IT - S)Widest concept of NY?Widest concept of NY?GNP (MP) GNP (MP)

= NDP(FC) + D + NIT (=IT - S) + NFA= NDP(FC) + D + NIT (=IT - S) + NFA= GDP (MP) + NFA= GDP (MP) + NFA

National Income (NY)National Income (NY)NNP (FC) = NDP (FC) + NFANNP (FC) = NDP (FC) + NFA

= GNP (MP) – D – NIT = GNP (MP) – D – NIT

Other Income ConceptsOther Income Concepts

Sectors of the EconomySectors of the Economy

• Economy = Government + PrivateEconomy = Government + Private

• Government = central, state & localGovernment = central, state & local

• Private = households (HH).Private = households (HH).

• Firms = government + HHFirms = government + HH

Private IncomePrivate Income

Private Income = NDP (FC) Private Income = NDP (FC) – – Income from property & Income from property & entrepreneurship accruing to government entrepreneurship accruing to government – – savings of non-departmental savings of non-departmental enterprises enterprises + National Debt Interest + National Debt Interest + NFA + NFA + current transfers from government + current transfers from government + other transactions from rest of the + other transactions from rest of the world.world.

Personal IncomePersonal Income

Current Income of persons or HHs from Current Income of persons or HHs from all sources.all sources.

Personal Income = Private Income Personal Income = Private Income

– – savings of private corporate sector savings of private corporate sector netnet of retained earnings of foreign of retained earnings of foreign sector sector

– – Corporation TaxCorporation Tax

Personal Disposable IncomePersonal Disposable Income

Income at the disposal of the HHs Income at the disposal of the HHs from all sources.from all sources.

PDY = Personal IncomePDY = Personal Income

– – Direct Taxes paid by HHs Direct Taxes paid by HHs

– – miscellaneous receipts of miscellaneous receipts of government.government.

Methods to Measure Methods to Measure National IncomeNational Income

Circular Flow of National Circular Flow of National IncomeIncome

ProductionProduction

Income Expenditure

Three phases of the circular Three phases of the circular flowflow• ProductionProduction::

sum of net value added by all the sum of net value added by all the producing enterprises (including the producing enterprises (including the government) government)

• DistributionDistribution::total income generated in the production total income generated in the production of goods and servicesof goods and services

• DispositionDisposition: : sum of expenditures of the three spending sum of expenditures of the three spending units (general government, consumer units (general government, consumer households and producing enterprises).households and producing enterprises).

Product (Value Added) Product (Value Added) MethodMethod

Measures the contribution of each Measures the contribution of each producing enterprise in the domestic producing enterprise in the domestic territory of the country.territory of the country.

An ExampleAn Example

ProducerStage of

Production

Value of Intermediate Consumption

Value of Output

Gross Value Added

Farmers Wheat Nil 500 500Miller Flour 500 700 200Baker Bread 700 900 200Shop keaper Sale 900 1000 100

Total 2100 3100 1000

Value of Output = Volume of physical Value of Output = Volume of physical output x Market Priceoutput x Market Price

Value of intermediate consumption = Value of intermediate consumption = price paid by the enterprise.price paid by the enterprise.

Include:Include:• Own account production of fixed assets by Own account production of fixed assets by

government, enterprises & householdsgovernment, enterprises & households• Production for self consumptionProduction for self consumption• Imputed rent of owner-occupied housesImputed rent of owner-occupied houses

Not includedNot included: : Sale of second-hand goodsSale of second-hand goods• Brokerage and commission earned by Brokerage and commission earned by

dealers of second hand goods are a part of dealers of second hand goods are a part of current production.current production.

GDP (MP) = GDP (MP) =

NVA by Primary sector NVA by Primary sector

+ NVA by Secondary sector + NVA by Secondary sector

+ NVA by Tertiary sector+ NVA by Tertiary sector

NDP (FC) = Value of Output NDP (FC) = Value of Output

– – Value of intermediate Value of intermediate consumption consumption

– – D - NITD - NIT

Income MethodIncome Method

• For every rupee’s worth of goods & For every rupee’s worth of goods & services produced, a rupee’s worth of services produced, a rupee’s worth of income is generated.income is generated.

• Income Method should give the same Income Method should give the same value of National Income as Value value of National Income as Value Added Method.Added Method.

NDP (FC) = Wages + Rent + NDP (FC) = Wages + Rent + Interest + Profits + Mixed Interest + Profits + Mixed Income of self-employedIncome of self-employed

National Income = NDP (FC) + National Income = NDP (FC) + NFANFA

Include:Include:

• Value of production for self consumption.Value of production for self consumption.

• Imputed rent of owner occupied houses.Imputed rent of owner occupied houses.

Exclude:Exclude:

• All transfer paymentsAll transfer payments

• Illegal incomesIllegal incomes

• Windfall gains (lotteries)Windfall gains (lotteries)

• Death duties, gift tax, wealth taxDeath duties, gift tax, wealth tax

• Corporation taxCorporation tax

• Income taxIncome tax

Expenditure MethodExpenditure Method

National Income is the sum of all final National Income is the sum of all final expenditures, expenditures, includingincluding::

•Expenditure on private consumption (C)Expenditure on private consumption (C)

•Gross investment (both private & public) (I)Gross investment (both private & public) (I)

•Expenditure on government (federal, state & Expenditure on government (federal, state & local) (G)local) (G)

•Foreigner’s expenditure on our exports (X) Foreigner’s expenditure on our exports (X) net of our expenditure on imports from net of our expenditure on imports from abroad (M).abroad (M).

• GDP (MP) = C + G + I + X – MGDP (MP) = C + G + I + X – M

• GDP (MP) = PFCE + GFCE + Gross GDP (MP) = PFCE + GFCE + Gross Fixed Capital Formation + Change in Fixed Capital Formation + Change in stocks + Net Exports of goods & stocks + Net Exports of goods & services.services.

Find out the Gross Value Find out the Gross Value Added at Market Price:Added at Market Price:

A sells intermediate goods worth A sells intermediate goods worth Rs.400 to B. B sells the Rs.400 to B. B sells the manufactured goods worth Rs.400 to manufactured goods worth Rs.400 to C and worth Rs.200 to D. C sells his C and worth Rs.200 to D. C sells his goods to D for Rs.500. D sells the goods to D for Rs.500. D sells the final goods to the consumer final goods to the consumer household for Rs.850.household for Rs.850.

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