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National Income Concepts


									National Income Concepts
      National income or national product
    National Income and Related Aggregates
o   Is defined as the total market value of all the final
    goods and services produced in an economy in a
    given period of time.
o   This suggests that labor and capital of a country,
    working on the natural resources produces certain
    net amount of goods and services, the aggregates
    of which as known as national income or national
o   There are many concepts of national income which
    are used by different economists and all of which
    are inter-related. These concepts are:
1. Gross National Product at Market Price (GNP mp)
o GNP mp refers to the total value of all the final goods
    and services produced during the period of one year
    plus the net factor incomes earned from abroad
    during the year.
o The word “gross” is used to indicate that the total
    national product includes in it that part of product
    which represents depreciation.
o Depreciation means the wear and tear of the
    machinery and other fixed capital during the process
    of production.
o GNP includes the economic activities of all the
    residents of a nation whether operating within the
    country or outside it.
     It takes into account the incomes which the residents get from
    rest of the world and at the same time it excludes those incomes
    which arise from the economic activities within the country but
    have to paid out to the non-residents

    GNP being the monetary measure of all final goods and services
    produced, is widely used as an index for judging the performance
    of an economy.

o 2. Net National Product at Marker Price (NNP
  mp): price is equal to GNP minus the charges of depreciation
    and replacements, where depreciation represents the values of
    fixed capital consumed during the process of production.

o   NNP mp = GNP mp – Depreciation. The concept of NNP is
    important because it gives an estimate of the net increase in the
    output of final goods and services.
3. Net National Product at Factor Cost (NNP fc) or
     National Income:
o    NNP fc or national income is equal to the sum total of factor
     incomes received by the factors of production during the
     year. It is equal to the sum of rent, wages, interests and
     profits in a given year.
o    The sum total of incomes of the factors of production is
     known as national income or net national product at factor
o    Thus, the national income is equal to the NNP at mp minus
     revenue of the government by way of indirect taxes plus
     subsidies provided by the government to the business
    NNP fc = NNP mp – {Indirect taxes + Subsidies}
     NNP fc = NNP mp – net Indirect taxes. taxes
4. National Income at Current Price and Constant Price:
o   When the value of goods and services is found out by multiplying the
    quantity produced during one year by the prices prevailing in that year, we
    call it National income at Current Prices.
o   On the other hand, when the value of goods and services is calculated by
    multiplying the quantity during one year with prices of the base year, we
    call it National Income at Constant Prices.
o    Example: (1) q1 is the quantity of final product in year 1980 and p1 is the
    price of that year.
o    Then, the value of the final product I = q1p1
o   Similarly, q2 is the quantity of final product II in year 1980 and p2 is the
    price of that year.
o   Then, the value of the final product II = q2p2
o   If we add up the value of all final goods and services produced, we get
    National Income at Current Prices.
o   So, National Income at Current Price will be: q1p1+q2p2+ …………….qnpn =
    NI at Current Prices. Prices
    (2) Suppose we want to compare the national income figures of
    1980 and 1990, we may find that the national income in 1990 is
    higher than that of 1980.
o This increase in income may be due to (a) increase in output (b)
    increase in prices may be higher in 1990 than 1980.
o To get the exact increase in real income, we need to multiply the
    quantity of goods produced in 1990 with the 1980 prices. This
    shows: National Income at Constant Prices: Quantity of Current
    period x Prices of Base period.
Formula for Real National Income:
Money National Income (Current year) x Price Index of Base year
                 Price Index of Current year
Measurement of National Income:
o The methods of estimating national income
  of a country depends upon the availability
  of proper statistics.
o This can be viewed from three interrelated
  angles, such as, in terms of production,
  income, and expenditure.
o These three terms are broadly related to
  GNP, GNI and GNE respectively.
o The ideal national income equation shows
  that National Income or NI
o    To measure the national income of a country, we use three
    different methods, such as:
    (a) The product method
    (b) The income method
    (c) The expenditure method
         The Product Method
o    The production method measures national income as the sum of
    net products produced by the production units in the given period.

o Therefore, the production method involves the following steps:
(i) Identifying the production unit
(ii) Estimating their net products
(iii) Valuing the goods and services
(iv) Estimation of net income from abroad
o    The next step in the production method is the
    estimation of net product of each sector.
o   This comes from the Gross products minus the
    intermediate products minus the depreciation during
    the process of production.
o   NNP = GNP – Intermediate products – Depreciation.
o   The total estimates would give us Net Domestic
    Product at factor cost.
o   The addition of net income from abroad to this total
    would give us net national income at factor cost or
    National Income.
The Income Method
o The income method measures national income as the sum
   total of factor income shares accruing to the factor owners.
o Factors of Production: Land, Labour, Capital and
o Factor incomes: Rent, Wage, Interest and Profit.
o One can easily aggregate all the factor incomes over a
   period of time and this aggregate figure is known as
   national income at factor cost.
o There are major additions and deductions to the national
   income accounting.
o Additions: Income from foreign sectors in the form of rent,
   profits etc.
o Deductions: Incomes from all illegal activities: theft,
   robbery, smuggling, child labor, etc.
o Incomes to the foreign sector acting in domestic sectors.
o     Comparison between Product method and Income method:
          NI fc = NI mp – Indirect tax + Subsidies.
o For the sake of convenience, economists suggests that the
      Product method is for Primary sector and the Income
      method is for tertiary sectors.
The Expenditure Method
o Because of identical relation the GNP=GNI=GNE, the
      expenditure of one becomes the income of other. Hence,
      the GNE is calculated which will be identical with GNI.
o The Expenditure in the Economy can be broadly divided into
      three types, such as,
(i) Consumption Expenditure
(ii) Investment Expenditure
(iii) The pure Govt. Expenditure
o Consumption expenditure provides direct satisfaction
   where investment expenditure is necessary to
   increase the productivity of the nation.
o Pure Govt. expenditure is necessary for maintenance
   of law and order situationØ and providing the
   infrastructural facilities to the nation.
o In detail, all expenses are again divided into five
   different categories:
1. Private Consumption Expenditure
2. Public Consumption Expenditure
3. Private Investment Expenditure
4. Public Investment Expenditure
5. Pure Government Expenditure
Comparison of three Methods:
o The product method is very suitable for the primary
  sector such as agriculture, industries etc.
o The income method is appropriate for the tertiary and
  service sectors.
o The Expenditure method is only for the calculation of
  identical relationship between three methods. It is
  because we may not get the details of all expenditure
  correctly. Neither it is possible nor it is desirable to
  reveal all types of expenditure.
o In fact, the expenditure method is only to complete
  the identical relationship i.e.
o   A price index (plural: “price indices” or “price indexes”) is a
    normalized average (typically a weighted average) of

o   prices for a given class of goods or services in a given region,
    during a given interval of time. It is a statistic designed to help to
    compare how these prices, taken as a whole, differ between time
    periods or geographical locations.

o   Price indices have several potential uses. For particularly broad
    indices, the index can be said to measure the economy's price
    level or a cost of living. More narrow price indices can help
    producers with business plans and pricing. Sometimes, they can be
    useful in helping to guide investment.

Some notable price indices include:
o Consumer price index
o Producer price index
o GDP deflator
Consumer Price Index
o A consumer price index (CPI) is a measure
  estimating the average price of consumer
  goods and services purchased by
  households. A consumer price index
  measures a price change for a constant
  market basket of goods and services from
  one period to the next within the same area
  (city, region, or nation).

o It is a price index determined by measuring
  the price of a standard group of goods
  meant to represent the typical market
  basket of a typical urban consumer.
Producer Price Index
o A Producer Price Index (PPI) measures
  average changes in prices received by
  domestic producers for their output. It is
  one of several price indices.
o Its importance is being undermined by the
  steady decline in manufactured goods as a
  share of spending.
o The Producer Price Index (PPI) program
  measures the average change over time in
  the selling prices received by domestic
  producers for their output.
GDP Deflator
o The GDP deflator (implicit price deflator for GDP) is a
  measure of the level of prices of all new, domestically
  produced, final goods and services in an economy.
  In most systems of national accounts the GDP deflator
  measures the ratio of nominal (or current-price) GDP
  to the real (or chain volume) measure of GDP.

The formula used to calculate the deflator is:
   Dividing the nominal GDP by the GDP deflator and
   multiplying it by 100 would then give the figure for
   real GDP, hence deflating the nominal GDP into a real
o GDP deflator for India in 2008 - 7.2%

o The GDP deflator is utilized as a measure of shifts in
  the prices of goods and services that are produced in
  a given country.
o It is understood that the GDP deflator can help
  provide a more accurate picture of the current status
  of the gross domestic product within the country.
  Because the GDP deflator is understood to be an
  example of an implicit price deflator for GDP,
  economists consider calculating this economic
  indicator as an essential component in ascertaining
  the current strength or weakness of the country’s
An INDEX NUMBER measures the variation in the time series in a
    period as a percentage of the time series in a base period.

o   LASPEYRES INDEX number measures the change in price for a
    fixed buying pattern.

The LASPEYRES INDEX for the n-th period is obtained by the following
        L=100 x Σ pni q0i
                Σ p0i q0i

o   PAASCHE INDEX number, measures the change in price for a fixed
    buying pattern, in the case the quantity change from the base year

The PAASCHE INDEX for the n-th period is obtained by the following
        P= 100 x Σ pni qni
                 Σ p0i qni
   INDEX number, measures the average
     change in price for a fixed buying
   The INDEX for the n-th period is obtained
     by the following formula:
For the above example, we have:
o L1:0 = 100 x (776.06x102.1 +
     3345.56x1.8)/(562.48x102.1+2677x1.8) = 136.9616
o P1:0 = 100 x (776.06x87.9 +
     3345.56x2.7)/(562.48x87.9.1+2677x2.7) = 136.3084

   I = (Square root of L * P)

o   In the past, National Accounts Statistics have been revised
    decennially changing the base to a year in which decennial
    Population Census has been
o   It was primarily because in the base year estimates, the
    information on working force has played an important role
    and working force estimates have been obtained from the
    population census which are conducted decennially. In this
    sequence, the base of the National Accounts Statistics
    should have been revised to 1990-91 from 1980-81.
o   It may be mentioned that any major changes in the choice
    of the alternative sets of data or methodologies are
    considered only along with the base year revision exercise.
o   It has been customary not to make changes every now and
    then and necessary major changes are kept for
    implementation at the time of base year revision exercise.
o In the present revision exercise, the CSO has mainly
  been guided by three considerations, namely;
o (i) revision of base year to a more recent year
  (for meaningful analysis of the structural changes in
  the economy),
o (ii) complete review of the existing data base and
  methodology employed in the estimation of various
  macro-economic aggregates including choice of the
  alternative databases on individual subjects, and
o (iii) to the extent feasible, implementing the
  recommendations of the 1993 System of National
  Accounts(1993 SNA).
Of the various methodological improvements/changes in
    databases effected in the new series mention may be made
    of the following:

o   Estimation of working force by economic activities using the
    worker population ratio and the workforce participation
    rates estimates based on the quinquennial survey on
    employment and unemployment conducted by the NSSO,
    1993-94 (50th round) and the total population as obtained
    from the 1991 population census;

o   Coverage of the agricultural production in the
    fore/backyard, floriculture, deep sea fishing, valuation of
    the output of prawns and shrimps separately, data on which
    is available from the Ministry of Agriculture;
o   Estimating GDP relating to trading activities in the private
    organised segment of the economy using the working force
    estimates available from DGE&T and inclusion of activities
    relating to National Industrial Classification, 1987 (NIC)
    codes 840 and 841 (lottery sales, services) for the first

o   Coverage of public services in the quasi-government bodies

o   Contribution of Employees Provident Fund Organisation in
    the GDP;

o   Estimation of the contribution of tailoring services (NIC
    964) separately;
Interpreting National Income in

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