National Income
Presented by-
Sohini Mukherjee
Definition
National Income is the sum of all individual income (factor
income) due to their participation in the production process of
an economy in an financial year.
❑ In other words , national income is the monetary value of all
final goods and services produced by the citizens of an economy
during a financial year.
In India, National income estimates are related with the
financial year i.e 1st April to 31st March.
National Income is a flow concept , not a stock concept. Flow
concept has a time dimension while stock concept doesn’t have
any time dimension.
► Transfer Income:
Transfer income/payment refers to those income or payment
originates with no current goods and service produced. These are
not included in national income estimation.
❑ Example: Old age pension, Scholarship, Bonus, Prize money
etc.
Non Economic production:
Includes the production of goods and services that are not
meant to be sold , nor there is any market for them , nor do they
have a market price.
❑ Example: Services rendered to self. These are also not
included in national income accounting.
► Role of national Income:
National income is a symbol of economic growth.
National income is helpful to determine the living standard of the
people in an Economy etc.
Estimates of National Income in
India
In India the first attempt for national income estimation was made by
Dadabhai Nauroji in the year 1867-68.
Dadabhai Nauroji estimated Indian per capita income at a level of Rs20.
The famous book “Poverty and Un-British rule in India” was written by
Dadabhai Nauroji.
The “Drain of wealth theory” was developed by Dadabhai Nauroji.
In Independent India national income was first time estimated by “National Income
Committee”.
“National Income Committee” was appointed in 1949 under the chairmanship of
Prasanta Chandra Mahalanobis. Other members of the committee were Mr V.K.R.V
Rao and Prof D.R. Gadgil.
The 1st report of the national income committee was presented in 1951(According to
this committee the per capita income was Rs 225 in 1948-49)
Father of Indian Statistician is – Prasanta Chandra Mahalanobis.
The founder of Indian Statistical Institute (ISI) is PC Mahalanobis.
Birthday of PC Mahalanobis is celebrated as National Statistics
Day on 29th June in every year (world Statistics day 20th October).
CSO:
In India at present National income is estimated by
the CSO (Central Statistical office).
CSO was established on 2nd May 1951( On that time
the name of CSO was Central Statistical Institute).
The CSO is under the ministry of statistics and
Programme Implementation.
HQ- New Delhi.
Present base year of National accounts is 2017-18
(recently changed from 2011-12).
1st base year of CSO was 1948-49.
NSSO:
Another important statistical organization of our
country is NSSO.
NSSO ( National Sample Survey office) was
established in 1950.
Note:
Recently The Government has decided to merge
the CSO and NSSO into NSO (National Statistical
office).
Method of measuring National Income
► National Income of a country is calculated by the following alternative
methods: (By Simon Kuznets)
Product method (Output Method/Value added method/Inventory method)
Income Method (factor income method/ factor cost method)
Consumption method ( Expenditure method/ Total outlay method)
► Although in recent time “Social accounting method” of measuring
national income is developed by Richard Stone.
► Export import method, Input output, Investment method etc are not the
any method of National income estimation.
► In India National income is estimated by a combination of product and
income method.
► Combination of product method and income method was first time
utilized for national income estimation in 1931-32 by Mr V.K.R.V Rao.
► First Scientifically National income was estimated by Mr V.K.R.V Rao in
1931-32.
Estimation Method
Expenditure method:
► In this method, national income is the sum of expenditure on the purchase of final
goods and services in an economy during a financial year.
► So in expenditure method ,
National income = C+G+I+X-M
► C= Consumption expenditure
► G= Government's expenditure
► I= Investment expenditure
► X= export
► I= Import
► (Government spending on old age pension, scholarship, unemployment allowances , etc
are not to be included in expenditure method)
Income Method:
► In this method, national income is the sum of all factors income
earned by the citizens of an economy during a year , i.e by income
method , national income is obtained by adding receipts as total
rent, total wages, total interest and total profit.
► So it is also called factor income method.
Product Method:
In this method national income is measured as a flow of goods and
services , i.e in product method , we calculate money value of all final
goods and services produced by the citizen in an economy during a year.
► Final goods – refer to those goods which are directly consumed and not
used in further production processing.
► Double counting or multiple counting error problem which means
counting of the value of same product more than once, is arising at the
time of estimation of national income thorough product method.
► To avoid the error of double counting or multiple counting in the
calculating of the national income , we shall concentrate on value added
method (VAM) as employed in the product method.
► So , in national income estimation, the product method is also known as
value added method (VAM).
► GDP:
Gross domestic product is the money value of all final goods and services produced in a
domestic territory during a financial year or specified period of time (on quarter basis
sometimes)
Produced form – Internal territory/boundary
Produced by- Both own citizen and foreign citizen
► GNP:
Gross national product is the total money value of all final goods and services produced
by the nationals/own citizen during a financial year or specified period of time (on
quarter basis sometimes)
GNP = GDP + NFIA
Produced by – Own Citizen
Produced from - Internal territory/boundary and external territory
► GNP= GDP+ receipt from non residents – payment to
foreigners
► i.e GNP= GDP+ Net income from abroad (NFIA)
► Net export is alternatively known as net income
from abroad / net foreign income.
► GDP= GNP possible when 1) receipt= payment
2) receipt= payment= 0
► (It is possible in a closed economy)
Net Factor Income from Abroad (NFIA)
► Definition-
It refers to the difference between factor income received
from the rest of the world and factor income paid to the rest
of the world.
a) ‘Factor income from abroad’- the income earned by the
normal residents of a country from the rest of the world
(in the form of wages and salaries, rent, interest, dividend
and retained earnings.)
b) ‘Factor income to abroad’- the factor income paid to the
normal residents of other countries (i.e. non-residents) for
their factor services within the economic territory.
► NNP (Net National Product):
It is the difference between GNP and depreciation. NNP can
be derived after subtraction of depreciation from GNP.
i.e: NNP= GNP- Depreciation
► NDP( Net Domestic Product):
It is the difference between GDP and depreciation. NDP can
be derived after subtraction of depreciation from GDP.
i.e: NDP = GDP- depreciation
► Depreciation is the annual allowance for wear and tear of a
capital goods.
► Depreciation is alternatively known as capital consumption
allowance (CCA)
► Disposable Income:
The income which can be spent by individuals.
Disposable Income = Income – Direct taxes
Disposable Income = Consumption + savings
Concept of Market Price and Factor cost
► Market Price – is the price that consumer pays for the product while purchasing it from the
sellers.
► Factor cost - refers to the cost of factors of production that is incurred by a firm when
producing goods and services.
► Relation between Market Price and factor cost
Market Price = {Factor cost + Taxes (Indirect tax)} – Subsidies
or
Factor cost = Market Price – Taxes (Indirect tax) + Subsidies
1) GDP at factor cost= GDP at market price – indirect tax+ Subsidies
2) GNP at Market Price = GNP at factor cost+ indirect taxes – subsidies
3) GNP at market price – Depreciation = NNP at market price
4) NNP at market price- indirect taxes + Subsidies = NNP at factor cost
► Per Capita Income- is the average income of the people of an
economy in a specified year. It is calculated by dividing the national
income by its total population.
► I.e Per capita income = National income/population
Sample Question
► Which Ministry is responsible for calculating GDP in India?
(A) Ministry of Finance
(B) Ministry of Commerce and Industry
(C) Ministry of Central Statistical and Program Implementation
(D) Ministry of consumer Affairs
Answer- C
► What base year is used to calculate per capita income in India?
(A) 2004-05
(B) 2011-12
(C) 2001-2002
(D) 2014-15
Answer B
► Which state of India currently has the highest Per Capita Income?
(A) Goa
(B) Delhi
(C) Maharashtra
(D) Punjab
► Which sector contributes the most to India's economy?
(A) Service sector
(B) Manufacturing sector
(C) Agricultural sector
(D) Small scale industries
Answer A
► Which is not added in the calculation of national income of India?
(A) The value of goods and services
(B) The sold value of the old fridge
(C) Services rendered by the housewives
(D) Both b & c
Answer D
► Which Indian state gives highest income tax collection to the Government of India?
(A) Uttar Pradesh
(B) Kerala
(C) Maharashtra
(D) Goa
Answer C
