Explained: National Income | Indian Economy for UPSC CSE PDF Download

Gross Domestic Product (GDP)

GDP Calculation:

• The market value of all final goods and services produced in the domestic economy in a year.
• GDP at market price = Gross Value Added (GVA) at basic price + Indirect tax – Subsidies

National Income Accounting Equation:

• Y = National income
• C = Personal consumption expenditure
• I = Private investment
• G = Government spending
• X = Net exports
• M = Imports

Final Goods vs. Intermediate Goods:

• Final Goods: Meant for final consumption, e.g., bread, butter, consumed by the end-user.
• Intermediate Goods: Used as raw materials in production, e.g., wheat flour in bread production.

Reason for Measuring Final Goods Only:

• Intermediate goods not included in national income calculation.
• Avoids double counting, as the value of intermediate goods is already included in the value of final goods.

Gross Value Added (GVA):

• Total value of goods and services produced, minus the value of intermediate goods.
• Prevents double counting by excluding intermediate goods from the calculation.

Example of GVA:

• Farmer sells cotton worth Rs 500 to a cloth mill.
• Cloth mill produces cloth worth Rs 1,500 (300 meters at Rs 5 per meter).
• GVA = Rs 1,500 - Rs 500 (value of cotton) = Rs 1,000.

Indirect Taxes:

• Taxes levied by the government on sales, production, and imports (e.g., GST, customs duties).
• Included in GDP calculation as part of the market price.

Subsidies:

• Financial assistance from the government to encourage production or lower prices.
• Deducted from GDP calculation to avoid overestimation.

Export and Import in GVA:

• Export and import values are already included in GVA at the basic price.
• Total industry sales/turnover include both domestic and export sales, while imports are part of intermediate goods/raw materials consumed.

Nominal and Real GDP

Nominal GDP vs. Real GDP:

• Nominal GDP is GDP at current prices, while real GDP is GDP at constant/base prices.
• Nominal GDP can be misleading due to price level changes, making real GDP, adjusted for inflation, a more accurate measure of economic growth.

Purpose of Real GDP:

• Real GDP eliminates the impact of price changes, providing a true reflection of changes in physical output.
• Increase in real GDP signifies genuine growth in the production of goods and services.

Deflating Nominal GDP:

• Deflation of Nominal GDP is done using a price index to calculate GDP at constant/base prices.
• Wholesale Price Index (WPI) and Consumer Price Index (CPI) are commonly used, with CPI preferred due to its inclusion of services.

Importance of Economic Growth Measurement:

• Economic growth indicators (GDP, GVA) are crucial for assessing a country's economic performance.
• Growth in economic output, whether measured by GDP or GVA, serves as a key metric.

Comparing Economic Growth:

• Economic growth comparison is significant for understanding the stage of development of an economy.
• Developed economies exhibit slower year-over-year growth compared to emerging or developing economies.
• Accurate comparisons should consider economies in the same stage of development, preferably within the same geographic region.

Key Indicator for Development Stage:

• Stage of development is critical for comparing economies.
• Developed economies have slower growth rates, making comparisons with emerging economies inaccurate.
• Comparing economic growth within the same development stage or geographic region provides a more meaningful perspective.
  

National income data have the following importance:

Economic Significance:

• National income data are crucial for understanding the economic health of a country.
• Considered as social accounts, these data include net national income and net national expenditure, which ultimately balance each other.

National Policies:

• Serve as the foundation for national policies, such as employment policy.
• Enable the identification of trends in industrial output, investment, and savings, guiding the formulation of appropriate measures to steer the economy in the right direction.

Economic Planning:

• National data are indispensable for economic planning in the modern age.
• Essential information about a country’s gross income, output, savings, and consumption is required for effective planning.

Economic Models:

• National income data play a central role in the creation of short-run and long-run economic models.
• Economists develop investment models using this data to analyze various aspects of the economy.

Research:

• Utilized by research scholars in economics to study input, output, income, saving, consumption, investment, and employment data from social accounts.

Per Capita Income:

• Significance in calculating and understanding a country’s per capita income, reflecting its economic welfare.
• Higher per capita income correlates with a higher level of economic welfare.

Distribution of Income:

• National income statistics reveal information about the distribution of income within a country.
• Details on wages, rent, interest, and profits highlight income disparities among different sections of society, as well as regional income distribution.

Various Types Of Economic Indicators Or Concepts Related To Measuring Economic Growth

Key Economic Indicators Compilation:

• Compiled and released by the Office of Economic Adviser, Department for Promotion of Industry and Internal Trade, Ministry of Commerce & Industry.
• Includes data from various sources covering macroeconomic, industrial, price, monetary and financial, external sector, and world indicators.

Macro Economic Indicators:

• Examples include GDP, savings, investments, agriculture production, unemployment rate, etc.

Industrial Statistics:

• Encompass growth rates of core industries, growth rates of the Index of Industrial Production (IIP), etc.

Price Statistics:

• Includes Consumer Price Index (CPI), Wholesale Price Index (WPI), etc.

Monetary and Financial Statistics:

• Covers Cash Reserve Ratio (CRR), Repo rate, Bank rate, Bank Credit.

External Sector Statistics:

• Involves FPI/FII Net Investment, FDI/FII Inflows, Nominal Exchange Rate of Rupee per USD.

World Indicators:

• Provides a comparative analysis of GDP, IIP, consumer prices, export and import with other countries.

Net Domestic Product (NDP):

• Calculated by subtracting the depreciation of plant and machinery from GDP.
• Formula: NDP = Gross Domestic Product – Depreciation.

Gross National Product (GNP):

• Represents the value of all final goods and services produced by a country's residents in a financial year.
• Excludes income of foreigners in the country but includes income of residents abroad.
• Formula: GNP = GDP + X – M, where X is income of expatriates and M is income of foreigners.

Net National Product (NNP):

• NNP is the GNP after deducting depreciation.
• Formula: NNP = GNP – Depreciation.

NNP at Factor Cost:

• Represents the value of NNP when goods and services are priced at production cost.

NNP at Market Price:

• Represents the value of NNP at consumer cost.
• Formula: NNP at market cost = NNP at factor cost + Indirect taxes – Subsidies.

Domestic Income

Private Income

• Private income refers to income acquired by private individuals from any source, whether productive or otherwise, and includes the retained income of corporations.

Derivation from NNP at Factor Cost:

• Calculated from Net National Product (NNP) at Factor Cost by incorporating specific additions and deductions.

Additions to Private Income:

• Transfer payments, including pensions, unemployment allowances, sickness benefits, and other social security benefits.
• Gifts and remittances from abroad.
• Windfall gains from activities such as lotteries or horse racing.
• Interest on public debt.

Deductions from Private Income:

• Income from government departments.
• Surpluses from public undertakings.
• Employees’ contributions to social security schemes like provident funds and life insurance.

Formula for Private Income:

• Private Income = National Secondary or Industry Sector Income (or NNP at Factor Cost) + Transfer Payments + Interest on Public Debt — Social Security — Profits and Surpluses of Public Undertakings.

Understanding the Components:

• Transfer payments and interest on public debt contribute positively to private income.
• Deductions involve income from government departments, social security contributions, and surpluses from public undertakings.

Significance of Social Security Deductions:

• Reflects the impact of employees' contributions to social security schemes on private income.
• Illustrates the comprehensive nature of private income calculation, accounting for various economic activities and financial transactions.

Personal Income

Definition of Real Income:

• Real income refers to national income expressed in terms of a general level of prices from a specific base year, providing a more accurate reflection of the economy's actual state.

National Income at Current Prices:

• National income represents the value of goods and services produced, expressed in monetary terms at current prices.
• However, it may not accurately portray the real economic situation.

Calculation of Real NNP:

• Real NNP (Net National Product) is derived using the formula: Real NNP = NNP for the Current Year x (Base Year Index / Current Year Index).

Example Illustration:

• If 2000-11 is the base year and the national income for 2009-2010 is Rs. 20,000 crores with an index number of 250, then the Real National Income for 2009-2010 is calculated as: 20000 x 100/250 = Rs. 8000 crores.

Alternative Term:

• The Real National Income at constant prices is an alternative term used for real income, emphasizing the constant price level from the base year.

Purpose of Real NNP Calculation:

• Provides a more accurate representation of economic growth by adjusting for changes in the general price level.
• Allows for a meaningful comparison of national income across different years.

Significance of Base Year:

• The choice of the base year influences the calculation, as it serves as a reference point for assessing changes in real income over time.
• Helps in understanding the actual purchasing power and economic performance.

Personal Income(PI)

Personal Income (PI) Definition:

• PI is the segment of National Income (NI) allocated to households.

Calculation of Personal Income:

• Formula: Personal Income (PI) = National Income – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms.

Explanation of Components:

• Undistributed Profits (UP):

  • Represent savings of firms, not distributed among factors of production.
  • Deducted from NI to obtain PI as it does not accrue to households.

• Corporate Tax:

  • Deducted from NI as it is imposed on firm earnings and does not accrue to households.

• Net Interest Payments:

  • Households receive interest payments from firms or government on past loans.
  • Net interest paid by households to firms and government is deducted.

• Transfer Payments:

  • Include pensions, scholarships, prizes, etc., received by households.
  • Added to calculate PI.

Personal Disposable Income (PDI):

• Formula: PDI = PI – Personal tax payments – Non-tax payments.
• Represents the income over which households have control after deducting taxes and non-tax payments.

Explanation of PDI Components:

• Personal Tax Payments:

  • Includes income tax, deducted from PI.

• Non-tax Payments:

  • Encompass fines and similar deductions from PI.

Significance of PDI:

• Personal Disposable Income is the portion of aggregate income available to households.
• Allows households the flexibility to decide on consumption and savings based on their preferences.

Classification of Productive Enterprises

Primary Sector:

• Involves direct utilization of natural resources.
  • Agriculture and allied activities
  • Forestry
  • Fishing
• Transformation of inputs into outputs.
  • Mining and Quarrying (Note: In India, classified under Secondary or Industry Sector)
  • Manufacturing
  • Construction
  • Electricity, Gas, and Water Supply, and other utility services

Secondary or Industry Sector:

• Mining and Quarrying is generally considered a part of this sector in India.
• Involves the transformation of natural resources into finished products.
  • Manufacturing
  • Construction
  • Electricity, Gas, and Water Supply, and other utility services

Tertiary or Service Sector:

• Drives India's GDP growth significantly.

• Key services provided include:

  • Trade, repair, hotels, transport, communication, and services related to broadcasting
  • Financial, real estate, and professional services
  • Public Administration, defense, and other services

• The services sector remains the primary driver of India's economic growth.

Methods Of Estimating National Income

Output Method

Definition:

• The output method, also known as the product or value-added method, calculates a country's national income by aggregating the output of all firms in the economy during a specific period.

Calculation:

• National income is determined by considering the final goods and services produced in the economy.
• Final goods are those available for consumption or that contribute to national wealth through investment.

Product Method:

• Estimates national income by measuring the contribution of final output and services by each producing enterprise in the country during a specific accounting period.

Classification of Output:

1. Consumer Goods:

   • Goods facilitating further production of consumer goods.
   • Also called capital goods.

2. Producer Goods:

   • Goods aiding in the further production of consumer goods.
   • Also referred to as capital goods.

3. Govt. Produced Goods:

   • Includes defense, police, education, health care, infrastructure, etc.

4. Net Exports:

   • Value of goods and services exported minus the value of imports during an accounting year.

Expenditure Method

Definition:

• Final expenditure on goods is considered as expenditure method.
• The economy's total product is used for final consumption and further production.

Components of Expenditure:

1. Private Final Consumption Expenditure:

   • Consumption of final goods by households.

2. Government Final Consumption Expenditure:

   • Consumption of final goods by the government.

3. Gross Investment/Capital Formation:

   • Consumption of final goods by firms for further production.

4. Net Exports (exports – imports):

   • Consumption of final goods by the rest of the world.

Calculation:

• Total of the above expenditures gives GDP at market price.
• Indirect taxes and subsidies are already included in expenditures.

Details of Expenditure Components:

1. Private Final Consumption Expenditure:

   • Involves individuals, families, and non-profit organizations serving households.
   • Includes demand for goods and services to serve the household sector.

2. Government Final Consumption Expenditure:

   • Government purchases goods and services for public benefit.
   • Involves spending on salaries, office maintenance, and necessary equipment.

3. Gross Investment/Capital Formation:

   • Firms demand goods and services for further production, termed as "Investment."
   • Includes capital goods like machinery and intermediate goods.

4. Gross Capital Formation (GCF):

   • Aggregate of gross additions to fixed assets, increase in stocks, and valuables.
   • Net capital formation is GCF minus consumption of fixed capital.

5. Increase in Stocks of Inventories (CIS):

   • Reflects production in the current period and is included in GDP.

6. Valuables:

   • Expenditures on assets like gold, jewelry, diamonds, held for investment purposes.
   • Not used primarily for production or consumption.

Income in Production Process:

• Four forms: rent, wages, interest, and profit.
• National income is the total of these earned during a given period by all citizens, known as factor payments total.

Income Method

Definition:

• Measures national income by considering payments made to primary factors of production (rent, wages, interest, and profit) for their productive services during an accounting year.

Calculation:

• National income is derived by summing up factor incomes generated by all producing units within the domestic economy during a specific period.

Result:

• The total obtained is termed Domestic Income or Net Domestic Product at FC (NDPFC).
• Adding net factor income from abroad to domestic income yields National Income (NNPFC).
• In the income method, national income is gauged at the stage when factor incomes are disbursed by enterprises to owners of production factors—land, labor, capital, and enterprise.

Determinants of National Income:

• Factors influencing the calculation of national income.

Issues Associated with National Income Accounting in India:

• Challenges or problems faced in the process of national income accounting.

Possible Solutions to Issues with National Accounting:

• Resolutions or ways to address the challenges encountered in national income accounting.

Determinants of National Income

Factors Determining National Income:

• Labor and Capital: Quantity and quality of labor and capital influence output levels and, consequently, national income.

• Natural Resources: Availability and quality of natural resources (land, water, minerals) play a crucial role in determining national income.

• Technology: Technological advancements and innovations enhance productivity, efficiency, and contribute to higher output and income.

• Infrastructure: Adequate infrastructure, including transportation and communication networks, is vital for economic growth and development.

• Political Stability: Government policies and political stability impact economic growth and investment in an economy.

Issues Associated with National Income Accounting in India:

• Informal Sector: The substantial contribution of the informal sector in India is often excluded from national income estimates.

• Poor Data Quality: Inaccurate estimates result from the inadequate quality and accuracy of data used in calculating national income.

• Non-Monetized Sectors: Sectors like agriculture, not fully monetized, are sometimes not considered, leading to an underestimation of output.

• Unrecorded Transactions: Transactions in the black economy or other unrecorded activities are not reflected in national income accounting, leading to underestimation.

Possible Solutions to Issues with National Accounting:

• Include the Informal Sector: Efforts should be made to account for the informal sector by conducting surveys and collecting data on informal economic activities.

• Improve Data Quality: Investment in statistical infrastructure and capacity building is necessary to enhance the quality and accuracy of national income data.

• Include Non-Monetized Sectors: Non-monetized sectors like agriculture should be considered in national income estimates by valuing output based on input costs.

• Capture Unrecorded Transactions: Conduct surveys or use alternative data sources to capture unrecorded transactions, providing a more accurate estimate of national income.