National Income:

National income is the total market value of all

final goods and services produced in an economy
including net factor income from abroad during an
accounting year.
National income also refers to the aggregate of
factor income earned by the normal residents of a
nation during a given period as a result of their
productive services.

12/15/2017 BBA 112 1

 Definitions
According to Marshall’s “ the labor and capital of a
country, acting on its natural resources, produce
annually a certain net aggregate of commodities,
materials and immaterial, including services of all
kinds….and net income due on account of foreign
investment must be added in. this is true net
national income or revenue of the country or
national dividends.”
Marshal’s concept of national income or national
dividends is technically sound, simple and quite
comprehensive.

12/15/2017 BBA 112 2

Concepts of National Income:

The major concepts used in the national income

calculation are Gross Domestic Product (GDP), Gross
National Product (GNP), Net National Product (NNP),
personal income and Disposable income.

Gross Domestic Product is the total market value of all

final goods and services currently produced within the
domestic territory of a country in a year. It measures the
market value of annual output of goods and services
currently produced and counted only once to avoid
double counting. It includes only final goods and services.
It includes the value of goods and services produced
within the domestic territory of a country by nationals
and non nationals.

12/15/2017 BBA 112 3

 Gross National Product
Gross National Product is the market value of all
final goods and services produced in a year. GNP
includes net factor income from abroad.

GNP = GDP + Net factor income from abroad

(income received by Indian’s abroad – income
paid to foreign nationals working in India).

12/15/2017 BBA 112 4

 Net National Product
Net National Product at market price is the
market value of all final goods and services after
providing for depreciation.

NNP = GNP – Depreciation Depreciation means

fall in the value of fixed capital due to wear and
tear.

NNP at factor cost is called as National Income.

12/15/2017 BBA 112 5
National income is the sum of the wages, rent,
interest and profits paid to factors for their
contribution to the production of goods and services in
a year.

NNP = NNP (Market Price) – Indirect Tax + Subsidies

Personal income (PI) is the sum of all incomes earned
by all individuals / households during a given year.
Certain incomes are received but not earned such as
old age pension etc.,

PI = NI – Social Security Contribution – Corporate

Income Tax – Undistributed Corporate Profits +
Transfer Payments.
12/15/2017 BBA 112 6
Disposable income is calculated by deducting the
personal taxes like income tax, personal property
tax from the personal income (PI).

Disposable Income = Personal Income – Personal

Taxes = Consumption + Saving

12/15/2017 BBA 112 7

Supernumerary income: the expenditure to meet
necessary living costs deducted from disposable
consumer income is called as supernumerary
income.

The economy is divided into different sectors such

as agriculture, fisheries, mining, construction,
manufacturing, trade, transport, communication
and other services. The gross production is found
out by adding up the net values of all the
production that has taken place in these sectors
during a given year. This method helps to
understand the importance of various sectors of
the economy.
12/15/2017 BBA 112 8
Methods of Measurement:

The Income Approach:

The income of individuals from employment and business,

the profits of the firms and public sector earnings are taken
into consideration.

National Income is the income of individuals + self

employment + profits of firms and public corporate bodies +
rent + interest (transfer payments, scholarships, pensions are
not included) this includes the sum of the income earned by
individuals from various input factors such as rent of land,
wages and salaries of employees, interest on capital, profits
of entrepreneurs and income of self employed people. This
method indicates the income distribution among various
income groups of people.
12/15/2017 BBA 112 9
The Expenditure Approach:
In this approach national income is calculated by
using the expenditure of individuals, private,
government and foreign sectors. i.e. the sum of all
the expenditure made on goods and services
during a year. i.e.
National Income = Expenditure Of Individuals +
Govt. + Private Firms + Foreigners
GDP = C + I + G + (X-M)

12/15/2017 BBA 112 10

Where,
C = expenditure on consumer goods and services by individuals
and households
I = expenditure by private business enterprises on capital goods
G = government expenditure on goods and services (government
purchase)
X-M = exports – imports

The Output Approach:

In this approach we measure the value of output produced by

firms and other organization in a particular time period. i.e. the
National Income = income from agriculture + fishery + forestry +
construction + transportation + manufacturing + tourism + water
+ energy …

GDP At Market Price + Subsidies –Taxes GNP At Factor Cost + Net

Income From Abroad
12/15/2017 BBA 112 11
Factors Determining National Income:

1. Quantity of goods and services produced by the

country. Higher the quantity of production,
higher shall be the national income.
2. Quality of products and services produced in the
country will also determine the national income
of a country.
3. Innovation of more technical skills will improve
the productivity which will reflect on national
income of the country.
4. Political stability strengthens the national
income of an economy.
12/15/2017 BBA 112 12
Difficulties In The Calculation Of National Income:

• Any income earned abroad have to be included

• To avoid double counting, value added method
should be considered
• Services rendered free of charges are not to be
included
• Capital gains, transfer payments are not to be
included
• Changes in price level will also affect the calculation
• Value of military services will not be taken into
consideration.
12/15/2017 BBA 112 13
Problems In Measuring National Income In India:

1. Non monetized sector: there are number of sectors in which

the wages and salaries are provided in kind, not in monetary
measures.
2. Illiteracy: due to higher illiteracy rate the results may be
biased.
3. Lack of occupational specification: we have difficulty in
classifying the nature of the job existing in India.
4. Unorganized productive activities: people involved in
unorganized productive activities are not fully covered in the
calculation of national income.
5. Lack of adequate statistical data: Inadequate data leads to
approximation of the calculation.
6. Self consumption: Farm products kept for self consumption
are not considered for the national income calculation.
7. Unpaid Services: services of house wives are not reckoned as
national income.
12/15/2017 BBA 112 14
Uses Of National Income Estimates:

1. National income is a measure of economic growth

2. National income is an indicator of success or failure of
planning
3. Useful in estimating per capita income
4. Useful in assessing the performance of different
production sectors
5. Useful in measuring inequalities in the distribution of
income
6. Useful in measuring standard of living
7. Useful in revealing the consumption behaviour of the
society
8. Useful in measuring the level and pattern of investment
9. 12/15/2017
Makes international comparisons
BBA 112
possible 15