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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