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 Page 1


National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: National Income Accounting 
Lesson Developer: Neha Goel 
College/ Department: Shyam Lal College, University of Delhi 
  
Page 2


National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: National Income Accounting 
Lesson Developer: Neha Goel 
College/ Department: Shyam Lal College, University of Delhi 
  
National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
 
1. Learning Outcomes 
2.  Introduction to National Income 
2.1: Meaning 
2.2: Market value 
2.3: Final Goods and Services 
2.4: Period of time 
3.  Various Concepts of National Income 
3.1: GDP 
3.2: GNP 
3.3: NDP mp 
3.4: NDP fc 
3.5: NNP mp 
3.6: NNP fc 
3.7: Private Income 
3.8: Personal Income 
3.9: Personal Disposable Income 
4.  Real Income and Nominal Income 
4.1: GDP Deflator 
5.  Methods of estimating National Income 
5.1: The Income Method 
5.2: The Expenditure Method 
5.3: The Value Added/Output Method 
6.  Circular Flow of Income 
6.1: CIRCULAR FLOW IN 2 SECTORS ECONOMY 
6.2: CIRCULAR FLOW IN 3 SECTORS ECONOMY 
6.3: CIRCULAR FLOW IN 4 SECTORS ECONOMY 
7.  Gross Domestic Product 
7.1: Limitations of GDP as an index of economic welfare 
 7.2: Importance of GDP as an indicator of economic welfare 
8. Summary 
9. Exercise 
10. Glossary 
11. References 
12. Multiple Choice Questions 
 
1. Learning Outcomes 
After you have read this chapter, you should be able to: 
? Explain the meaning of national income. 
? Explain the various concepts of national income. 
? Define a Transfer Payment and also Gross Domestic Product. 
? Understand the concept of measurement of National Income and precautions to 
be taken. 
? Identify the limitations of the measurement of GDP. 
? Define the circular flow of income. 
? Appreciate the use of GDP as an indicator of standard of living. 
? Apply the knowledge of value added and error of double counting. 
 
2. Introduction to National Income: 
National Income is just one aggregate. There are many other aggregates woven 
around it. To arrive at National Income we have to pass through these aggregates. 
Page 3


National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: National Income Accounting 
Lesson Developer: Neha Goel 
College/ Department: Shyam Lal College, University of Delhi 
  
National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
 
1. Learning Outcomes 
2.  Introduction to National Income 
2.1: Meaning 
2.2: Market value 
2.3: Final Goods and Services 
2.4: Period of time 
3.  Various Concepts of National Income 
3.1: GDP 
3.2: GNP 
3.3: NDP mp 
3.4: NDP fc 
3.5: NNP mp 
3.6: NNP fc 
3.7: Private Income 
3.8: Personal Income 
3.9: Personal Disposable Income 
4.  Real Income and Nominal Income 
4.1: GDP Deflator 
5.  Methods of estimating National Income 
5.1: The Income Method 
5.2: The Expenditure Method 
5.3: The Value Added/Output Method 
6.  Circular Flow of Income 
6.1: CIRCULAR FLOW IN 2 SECTORS ECONOMY 
6.2: CIRCULAR FLOW IN 3 SECTORS ECONOMY 
6.3: CIRCULAR FLOW IN 4 SECTORS ECONOMY 
7.  Gross Domestic Product 
7.1: Limitations of GDP as an index of economic welfare 
 7.2: Importance of GDP as an indicator of economic welfare 
8. Summary 
9. Exercise 
10. Glossary 
11. References 
12. Multiple Choice Questions 
 
1. Learning Outcomes 
After you have read this chapter, you should be able to: 
? Explain the meaning of national income. 
? Explain the various concepts of national income. 
? Define a Transfer Payment and also Gross Domestic Product. 
? Understand the concept of measurement of National Income and precautions to 
be taken. 
? Identify the limitations of the measurement of GDP. 
? Define the circular flow of income. 
? Appreciate the use of GDP as an indicator of standard of living. 
? Apply the knowledge of value added and error of double counting. 
 
2. Introduction to National Income: 
National Income is just one aggregate. There are many other aggregates woven 
around it. To arrive at National Income we have to pass through these aggregates. 
National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
These are domestic and national aggregates. There are also disposable income 
aggregates derived from National Income, but are different in some respects. An 
understanding of the concept of transfer income is necessary to study the disposable 
income aggregates. There are few methods of measuring National Income and 
various precautions have to be taken for it. Finally, we need to understand the 
concept of GDP and various limitations towards it. 
2.1. Meaning: 
1. The flow of goods and service in an economy during a year is called national 
product. National income (Y) is defined as the total net value (market value) of all 
final goods and services produced within a nation by the residents of an economy, 
whether operating in the domestic territories or outside, over a period of time. 
2. The aggregates of the net amount of goods and services produced by the labour 
and capital in an economy, utilising its natural resources, is known as national 
income or national product. 
3. Measure of nation’s economic activity in a given period of time. It is the total 
value of all income in a nation during a specified time. This income is the 
summation of all factor payments i.e. wages, profits, rents, interest and pension 
payments (to the residents of the country). 
 
a. Market Value: We convert the value of all the goods & services produced in 
India in rupee terms (market value in India). For example, making of jewellery, 
service of a doctor, making of a table etc. have different values. This is because 
making diamond jewellery is different from making furniture, but by converting 
everything to its rupee value we have a uniform unit of measurement. 
 
b. Final goods and Services: We do NOT count the products used to make other 
products, but only the products used for final consumption. So a bike will be 
counted in the GDP but the plastic used to make the bike is not counted 
separately. This is because the value of the bike already reflects the value of the 
plastic, rubber, steel, etc. that goes into it. 
 
c. Period of time: National Income is generally calculated for one year (one 
accounting year). 
 
d. Domestic Territory: National Income takes into account the earnings of 
residents of India working in India or abroad. The economic activity of a nation 
may include the geographical territory of another country. For example, if an 
Indian professor goes to America and works there for 2 years and comes back to 
India earning Rs. 2,00,000, this earning is calculated in national income along 
with his earnings in India. 
**Estimate of National Income in India is usually prepared by Central Statistical 
Organisation. 
** Test Yourself: 
Explain National Income. 
Importance of Measuring the level and rate of growth of national income (Y): 
? To check the rate economic growth by calculating GDP.  
? To see the changes in the standard of living of the residents. 
? To see the changes in the distribution of income between different groups in 
the economy. 
Page 4


National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: National Income Accounting 
Lesson Developer: Neha Goel 
College/ Department: Shyam Lal College, University of Delhi 
  
National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
 
1. Learning Outcomes 
2.  Introduction to National Income 
2.1: Meaning 
2.2: Market value 
2.3: Final Goods and Services 
2.4: Period of time 
3.  Various Concepts of National Income 
3.1: GDP 
3.2: GNP 
3.3: NDP mp 
3.4: NDP fc 
3.5: NNP mp 
3.6: NNP fc 
3.7: Private Income 
3.8: Personal Income 
3.9: Personal Disposable Income 
4.  Real Income and Nominal Income 
4.1: GDP Deflator 
5.  Methods of estimating National Income 
5.1: The Income Method 
5.2: The Expenditure Method 
5.3: The Value Added/Output Method 
6.  Circular Flow of Income 
6.1: CIRCULAR FLOW IN 2 SECTORS ECONOMY 
6.2: CIRCULAR FLOW IN 3 SECTORS ECONOMY 
6.3: CIRCULAR FLOW IN 4 SECTORS ECONOMY 
7.  Gross Domestic Product 
7.1: Limitations of GDP as an index of economic welfare 
 7.2: Importance of GDP as an indicator of economic welfare 
8. Summary 
9. Exercise 
10. Glossary 
11. References 
12. Multiple Choice Questions 
 
1. Learning Outcomes 
After you have read this chapter, you should be able to: 
? Explain the meaning of national income. 
? Explain the various concepts of national income. 
? Define a Transfer Payment and also Gross Domestic Product. 
? Understand the concept of measurement of National Income and precautions to 
be taken. 
? Identify the limitations of the measurement of GDP. 
? Define the circular flow of income. 
? Appreciate the use of GDP as an indicator of standard of living. 
? Apply the knowledge of value added and error of double counting. 
 
2. Introduction to National Income: 
National Income is just one aggregate. There are many other aggregates woven 
around it. To arrive at National Income we have to pass through these aggregates. 
National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
These are domestic and national aggregates. There are also disposable income 
aggregates derived from National Income, but are different in some respects. An 
understanding of the concept of transfer income is necessary to study the disposable 
income aggregates. There are few methods of measuring National Income and 
various precautions have to be taken for it. Finally, we need to understand the 
concept of GDP and various limitations towards it. 
2.1. Meaning: 
1. The flow of goods and service in an economy during a year is called national 
product. National income (Y) is defined as the total net value (market value) of all 
final goods and services produced within a nation by the residents of an economy, 
whether operating in the domestic territories or outside, over a period of time. 
2. The aggregates of the net amount of goods and services produced by the labour 
and capital in an economy, utilising its natural resources, is known as national 
income or national product. 
3. Measure of nation’s economic activity in a given period of time. It is the total 
value of all income in a nation during a specified time. This income is the 
summation of all factor payments i.e. wages, profits, rents, interest and pension 
payments (to the residents of the country). 
 
a. Market Value: We convert the value of all the goods & services produced in 
India in rupee terms (market value in India). For example, making of jewellery, 
service of a doctor, making of a table etc. have different values. This is because 
making diamond jewellery is different from making furniture, but by converting 
everything to its rupee value we have a uniform unit of measurement. 
 
b. Final goods and Services: We do NOT count the products used to make other 
products, but only the products used for final consumption. So a bike will be 
counted in the GDP but the plastic used to make the bike is not counted 
separately. This is because the value of the bike already reflects the value of the 
plastic, rubber, steel, etc. that goes into it. 
 
c. Period of time: National Income is generally calculated for one year (one 
accounting year). 
 
d. Domestic Territory: National Income takes into account the earnings of 
residents of India working in India or abroad. The economic activity of a nation 
may include the geographical territory of another country. For example, if an 
Indian professor goes to America and works there for 2 years and comes back to 
India earning Rs. 2,00,000, this earning is calculated in national income along 
with his earnings in India. 
**Estimate of National Income in India is usually prepared by Central Statistical 
Organisation. 
** Test Yourself: 
Explain National Income. 
Importance of Measuring the level and rate of growth of national income (Y): 
? To check the rate economic growth by calculating GDP.  
? To see the changes in the standard of living of the residents. 
? To see the changes in the distribution of income between different groups in 
the economy. 
National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
3. Various concepts of National income: 
(3.1) Gross Domestic Product at market price (GDP mp): The monetary value of 
all final goods & services produced during an accounting year by all production units 
located within the economic territory of a country (undiminished by consumption of fixed 
capital/depreciation and net indirect taxes). For example, India’s GDP comprises the 
value of goods produced such as car, television etc. in India and value of services such 
as taxi rides, doctor’s medication etc. provided in India. 
(GDP = Price * Quantity) 
 There are 3 important observations related to this- 
 (a) Domestic/economic Territory- GDP is a Domestic Product which means value of 
production is carried out in the economic territory. Domestic territory is defined as the 
government administered geographic territory within which there is free circulation of 
human-beings, capital and goods. India's domestic territory includes all the Indian Ships, 
Embassies and government offices located in foreign countries. 
(b) Value of final goods & services- i.e. only the market value of final goods & 
services used for final consumption is taken into account. 
(c) Residents- A person or an institution becomes resident of a country if he/she carries 
out the basic economic activity in the domestic territory of the country in which he lives 
or is located. 
(d) Indirect Taxes-These are taxes imposed on goods and services during their 
production process. They are called indirect as the burden indirectly falls on the buyers 
of goods and services. Example: sales tax, service tax, excise duty, custom duty, service 
tax etc. 
 
**It is important to note that market price of many goods includes the indirect taxes like 
sales tax and excise duties, which makes the market price of goods different from the 
price that the seller receives for those goods. So it would be wrong to calculate GDP at 
market price. Thus the concept of factor cost is taken into account which is the amount 
received by the factors of production that manufactured the good. The market price – 
Indirect taxes = Factor Cost. 
GDP at Factor Cost: 
GDP fc = GDP mp – Net Indirect Taxes (NIT) 
 GDP fc = GNP mp – NFIA – NIT 
(NFIA=factor income received by residents from abroad – factor income paid to non-
residents) 
(Net Indirect Taxes = Indirect Taxes – Subsidies) 
 
 (3.2) Gross National Product (GNP mp) at market price: It is a Gross Product 
which means it is undiminished by deduction of, consumption of fixed capital i.e. it 
includes depreciation in it. The term National implies ‘belonging to residents’ and market 
price implies that net indirect taxes have not been deducted. Thus, GNP mp is the value 
of economic production contributed by the residents of an economy (whether 
producing/working in the domestic country or foreign country). 
GNP mp = GDP mp + NFIA 
The difference between GDP mp & GNP mp is Net Factor Income from Abroad (NFIA). It 
arises because of the fact that some output that may be produced within a country is 
made by the factors of production owned by the foreign country. For example, part of 
India’s GDP includes the profits earned by Suzuki co. from its Indian manufacturing 
operations. These profits are part of Japanese GNP as they are the income of Japanese-
owned capital (though it is not a part of Japanese GNP). 
NFIA can be both positive and negative. 
Net factor income from abroad (NFIA) is the difference between factor incomes 
incurred from rest of the world and the factor income earned by rest of the world. They 
are in the form of compensation of employees and income from property and 
entrepreneurship. NFIA is the income received from abroad for rendering factor services 
Page 5


National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: National Income Accounting 
Lesson Developer: Neha Goel 
College/ Department: Shyam Lal College, University of Delhi 
  
National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
 
1. Learning Outcomes 
2.  Introduction to National Income 
2.1: Meaning 
2.2: Market value 
2.3: Final Goods and Services 
2.4: Period of time 
3.  Various Concepts of National Income 
3.1: GDP 
3.2: GNP 
3.3: NDP mp 
3.4: NDP fc 
3.5: NNP mp 
3.6: NNP fc 
3.7: Private Income 
3.8: Personal Income 
3.9: Personal Disposable Income 
4.  Real Income and Nominal Income 
4.1: GDP Deflator 
5.  Methods of estimating National Income 
5.1: The Income Method 
5.2: The Expenditure Method 
5.3: The Value Added/Output Method 
6.  Circular Flow of Income 
6.1: CIRCULAR FLOW IN 2 SECTORS ECONOMY 
6.2: CIRCULAR FLOW IN 3 SECTORS ECONOMY 
6.3: CIRCULAR FLOW IN 4 SECTORS ECONOMY 
7.  Gross Domestic Product 
7.1: Limitations of GDP as an index of economic welfare 
 7.2: Importance of GDP as an indicator of economic welfare 
8. Summary 
9. Exercise 
10. Glossary 
11. References 
12. Multiple Choice Questions 
 
1. Learning Outcomes 
After you have read this chapter, you should be able to: 
? Explain the meaning of national income. 
? Explain the various concepts of national income. 
? Define a Transfer Payment and also Gross Domestic Product. 
? Understand the concept of measurement of National Income and precautions to 
be taken. 
? Identify the limitations of the measurement of GDP. 
? Define the circular flow of income. 
? Appreciate the use of GDP as an indicator of standard of living. 
? Apply the knowledge of value added and error of double counting. 
 
2. Introduction to National Income: 
National Income is just one aggregate. There are many other aggregates woven 
around it. To arrive at National Income we have to pass through these aggregates. 
National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
These are domestic and national aggregates. There are also disposable income 
aggregates derived from National Income, but are different in some respects. An 
understanding of the concept of transfer income is necessary to study the disposable 
income aggregates. There are few methods of measuring National Income and 
various precautions have to be taken for it. Finally, we need to understand the 
concept of GDP and various limitations towards it. 
2.1. Meaning: 
1. The flow of goods and service in an economy during a year is called national 
product. National income (Y) is defined as the total net value (market value) of all 
final goods and services produced within a nation by the residents of an economy, 
whether operating in the domestic territories or outside, over a period of time. 
2. The aggregates of the net amount of goods and services produced by the labour 
and capital in an economy, utilising its natural resources, is known as national 
income or national product. 
3. Measure of nation’s economic activity in a given period of time. It is the total 
value of all income in a nation during a specified time. This income is the 
summation of all factor payments i.e. wages, profits, rents, interest and pension 
payments (to the residents of the country). 
 
a. Market Value: We convert the value of all the goods & services produced in 
India in rupee terms (market value in India). For example, making of jewellery, 
service of a doctor, making of a table etc. have different values. This is because 
making diamond jewellery is different from making furniture, but by converting 
everything to its rupee value we have a uniform unit of measurement. 
 
b. Final goods and Services: We do NOT count the products used to make other 
products, but only the products used for final consumption. So a bike will be 
counted in the GDP but the plastic used to make the bike is not counted 
separately. This is because the value of the bike already reflects the value of the 
plastic, rubber, steel, etc. that goes into it. 
 
c. Period of time: National Income is generally calculated for one year (one 
accounting year). 
 
d. Domestic Territory: National Income takes into account the earnings of 
residents of India working in India or abroad. The economic activity of a nation 
may include the geographical territory of another country. For example, if an 
Indian professor goes to America and works there for 2 years and comes back to 
India earning Rs. 2,00,000, this earning is calculated in national income along 
with his earnings in India. 
**Estimate of National Income in India is usually prepared by Central Statistical 
Organisation. 
** Test Yourself: 
Explain National Income. 
Importance of Measuring the level and rate of growth of national income (Y): 
? To check the rate economic growth by calculating GDP.  
? To see the changes in the standard of living of the residents. 
? To see the changes in the distribution of income between different groups in 
the economy. 
National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
3. Various concepts of National income: 
(3.1) Gross Domestic Product at market price (GDP mp): The monetary value of 
all final goods & services produced during an accounting year by all production units 
located within the economic territory of a country (undiminished by consumption of fixed 
capital/depreciation and net indirect taxes). For example, India’s GDP comprises the 
value of goods produced such as car, television etc. in India and value of services such 
as taxi rides, doctor’s medication etc. provided in India. 
(GDP = Price * Quantity) 
 There are 3 important observations related to this- 
 (a) Domestic/economic Territory- GDP is a Domestic Product which means value of 
production is carried out in the economic territory. Domestic territory is defined as the 
government administered geographic territory within which there is free circulation of 
human-beings, capital and goods. India's domestic territory includes all the Indian Ships, 
Embassies and government offices located in foreign countries. 
(b) Value of final goods & services- i.e. only the market value of final goods & 
services used for final consumption is taken into account. 
(c) Residents- A person or an institution becomes resident of a country if he/she carries 
out the basic economic activity in the domestic territory of the country in which he lives 
or is located. 
(d) Indirect Taxes-These are taxes imposed on goods and services during their 
production process. They are called indirect as the burden indirectly falls on the buyers 
of goods and services. Example: sales tax, service tax, excise duty, custom duty, service 
tax etc. 
 
**It is important to note that market price of many goods includes the indirect taxes like 
sales tax and excise duties, which makes the market price of goods different from the 
price that the seller receives for those goods. So it would be wrong to calculate GDP at 
market price. Thus the concept of factor cost is taken into account which is the amount 
received by the factors of production that manufactured the good. The market price – 
Indirect taxes = Factor Cost. 
GDP at Factor Cost: 
GDP fc = GDP mp – Net Indirect Taxes (NIT) 
 GDP fc = GNP mp – NFIA – NIT 
(NFIA=factor income received by residents from abroad – factor income paid to non-
residents) 
(Net Indirect Taxes = Indirect Taxes – Subsidies) 
 
 (3.2) Gross National Product (GNP mp) at market price: It is a Gross Product 
which means it is undiminished by deduction of, consumption of fixed capital i.e. it 
includes depreciation in it. The term National implies ‘belonging to residents’ and market 
price implies that net indirect taxes have not been deducted. Thus, GNP mp is the value 
of economic production contributed by the residents of an economy (whether 
producing/working in the domestic country or foreign country). 
GNP mp = GDP mp + NFIA 
The difference between GDP mp & GNP mp is Net Factor Income from Abroad (NFIA). It 
arises because of the fact that some output that may be produced within a country is 
made by the factors of production owned by the foreign country. For example, part of 
India’s GDP includes the profits earned by Suzuki co. from its Indian manufacturing 
operations. These profits are part of Japanese GNP as they are the income of Japanese-
owned capital (though it is not a part of Japanese GNP). 
NFIA can be both positive and negative. 
Net factor income from abroad (NFIA) is the difference between factor incomes 
incurred from rest of the world and the factor income earned by rest of the world. They 
are in the form of compensation of employees and income from property and 
entrepreneurship. NFIA is the income received from abroad for rendering factor services 
National Income Accounting 
 Institute of Lifelong Learning, University of Delhi 
by the normal residents of the country to rest of the world & the income paid for factor 
service rendered by non residents in the domestic territory of the country. The 3 
components of NFIA –  
(1) Net compensation of employees from abroad i.e. wages, in cash & kind both. 
(2) Net property & entrepreneurial income from abroad i.e. rent, interest profit, dividend 
etc. 
(3) Net retained earnings of resident companies working in foreign countries. 
GNP at Factor Cost: 
       GNP fc = GDP fc + NFIA 
  Or GNP fc = GNP mp – NIT 
  Or GNP fc = NNP mp – NIT+ Depreciation 
  Or GNP fc = NNP fc + depreciation 
** One of the short-coming of GDP/GNP is that it doesn’t take depreciation into account 
and ignores the fact that some capital may depreciate/diminish over time due to wear 
and tear of the capital. 
(Gross investment – depreciation = net investment). 
(3.3) Net Domestic Product at market price (NDP mp): It is the  monetary value of 
all final goods & services produced by all production units located within the economic 
territory of a country during an accounting year, excluding depreciation (diminished by 
consumption of fixed capital but undiminished by net indirect taxes). 
      NDP mp = GDP mp – Depreciation 
Or, NDP mp = GNP mp – NFIA – depreciation 
Depreciation- it is the consumption or fall in the value of fixed capital due to its normal 
wear and tear (use in production) or due to change in technology, market demand, 
government’s policy etc. For example, Mr. James bought machinery costing Rs. 10,000 
in Dec. 2010 and it depreciates @ 10% p.a. Thus, value of the machinery in Dec. 2011 is 
Rs. 9,000 (i.e. 10,000 – (10,000*10%)).  
(3.4) Net Domestic Product (NDP fc): It is the sum total of factor incomes generated 
by all production units located within the domestic territory of the country after 
deducting depreciation (diminished by consumption of fixed capital and net indirect tax). 
Thus, 
      NDP fc= GDP fc – depreciation 
                   = GNP fc – depreciation – NFIA 
                   = NNP fc – NFIA 
 Or NDP fc = NDP mp – Indirect Tax + Subsidies 
                   = NDP mp – NIT 
 
(3.5) Net National Product at market price (NNP mp): It is the monetary value of 
all final goods & services produced by all production units located within a country during 
an accounting year by making allowances for depreciation. 
  NNP mp =NDP mp + NFIA, or 
                 = GNP mp – depreciation, or 
                 = GDP mp – depreciation + NFIA 
 
(3.6)Net National Product at factor cost (NNP fc) or National Income: National 
income (NI) or NNP fc is the summation of earnings of all the factors of production (i.e., 
land, labour, capital, & organisation), of the residents of a country, both from economic 
territory and from abroad (diminished by consumption of fixed capital and net indirect 
taxes). 
  NNP fc = GNP fc – depreciation 
  NNP fc = NNP mp – Indirect Taxes + Subsidies 
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FAQs on Lecture 2 - National Income Accounting - Macroeconomics- Learning and Analysis

1. What is national income accounting?
National income accounting is a method used to measure and track the economic performance of a country. It calculates the total value of goods and services produced within a nation's borders over a specific period, typically a year. It provides valuable information about the size and growth of the economy, income distribution, and overall economic well-being.
2. How is national income calculated?
National income is calculated through various approaches, such as the income approach, expenditure approach, and production approach. The income approach sums up all the incomes earned by individuals and businesses in the country, including wages, salaries, profits, and rents. The expenditure approach calculates the total spending on goods and services by households, businesses, and the government. The production approach measures the value-added at each stage of production in the economy.
3. What is Gross Domestic Product (GDP)?
Gross Domestic Product (GDP) is a key indicator of national income and measures the total value of all final goods and services produced within a country during a specific period, usually a year. It includes the value of goods and services consumed domestically, as well as exports minus imports. GDP provides a comprehensive measure of economic activity and helps economists and policymakers assess the overall health and performance of an economy.
4. How does national income accounting help in economic analysis?
National income accounting plays a crucial role in economic analysis by providing essential data to assess the economic performance of a country. It helps in measuring and comparing the size of different economies, analyzing income distribution, identifying economic growth rates, and tracking changes in consumption and investment patterns. This data is instrumental in formulating economic policies, evaluating the effectiveness of government interventions, and making informed decisions to promote economic stability and growth.
5. What are the limitations of national income accounting?
While national income accounting is a valuable tool for economic analysis, it has certain limitations. One limitation is that it does not capture non-market activities, such as unpaid household work and the underground economy. It also does not consider the distribution of income and wealth, which can be crucial for understanding societal well-being. Additionally, national income accounting does not account for environmental degradation and resource depletion, which are increasingly important factors in assessing sustainable economic development.
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