Concept and meaning of National income Methods of measuring National income Circular flow of income

1. Prof. Padmavati Patil

2.  Meaning and Importance of National
Income
 Concepts of National Income
 Measurement of National Income
Methods and difficulties
 Circular flow of Income- two sector model

3. Needs or Importance for the study of National
Income
 To measure Economic Welfare (Living Standard)
 To assess the effectiveness of macroeconomic policies.
 To trace the trend or speed of the economic growth in relation to
previous years as well as to other countries.
 To know the structure and composition of the national income
in terms of various sectors and the periodical variation in them.
 To help business firm in forecasting future demand for there
product.

4. Simon Kuznets

5. Meaning
National Income is the flow of goods and services which became
available to a nation during an accounting period generally one
year.
National Income is the money value of all finale goods and
services produced by a country during a period of one year.
 Goods are measured in different physical units like cloth in
meters, milk in liters, wheat in kilo grams,
 For all these goods common measuring term is money

6. According Marshall
“National Income is the net aggregates of the commodities and
services produced annually in a country. ”
According National Income committee of India
“A national income estimate measures the volume of commodities
and services turned out during a given period, without duplication.”
Definition

7. Features of National Income
 National Income is the value of all final goods and services
produced in a country.
 It refer to a the money income of a country.
 It presents the income of a country for a particular period of
time (1 year)
 The value of intermediate goods are not included in the
estimation of national income.
 There should be no duplication or double counting o the
income produced.
 Depreciation should be deducted from national income

8. Concepts of National Income
 GDP - Gross Domestic Product
 NDP - Net Domestic Product
 GNP - Gross National Product
 NNP - Net National Product
 PCI - Per Capita Income
 Personal Income
 Disposable Personal Income

9. W
X

10. GDP- Gross Domestic Product
GDP is the money value of all final goods and services produced
in the domestic territory of a country during an accounting year.
 Territory lying within the political frontiers, including territorial
waters of the country.
 Goods and services produced by resident as well as non-
residents in the domestic territory but does not include net
factor income earned from abroad.
GDP= C+I+G+(X-M)
C- Consumption I- Investment
G- Government expenditure (X-M)-Export- Imports

11.  GDP at Current Price
If the domestic product is estimated on the basis of the
prevailing prices it is called gross domestic product at current price.
 GDP at Constant Price
If GDP is measured on the basis of some fixed price, that is
prices prevailing at a point of time or in some base year it is known as
GDP at constant prices or real gross domestic product.
 GDP at Market Price.
It includes the indirect taxes and subsidies. GDP at market
price is arrived at by adding net indirect taxes to GDP at Factor cost.
GDP MP = GNP MP – net factor income from abroad
 GDP at Factor Cost
It includes only the compensation to the factors used in the
production of goods.
GDP FC = GDP MP - Indirect taxes + Subsidies.

12. NDP- Net Domestic Product
NDPMP = GDPMP – Depreciation Cost of fixed assets
In the production of gross national product of a year,
we consume or use up some fixed capital i.e., equipment,
machinery, etc. The capital goods, like machinery, wear out
or fall in values as result of its consumption or use in the
production process. This consumption of fixed capital or fall
in the value of fixed capital to wear and tear is called
depreciation.

13. GNP is defined as the total money value of the final
goods and services produced by the nation not only within the
country but even outside the country.
GNP = C+I+G+(X-M)+(R-P)
 (R-P) – The net income earned in abroad by the nation i.e.
difference between income received and income paid.
GNPMP = GDPMP + Net Factor Income from Abroad(NFIA)

14. NNP- Net National Product
It can be derived by subtracting depreciation allowance
from GNP.
NNPMP = GNPMP – Depreciation cost
NNPFC = NNPMP – Indirect taxes + Subsidies

16. Per capita income or average income measures the average
income earned per person in a given area in a specified year. It is
calculated by dividing the area's total income by its total population.
Per capita income = National income
Total population
Per capita income can be used to determine the standard of living
and quality of life of the population.

17. Personal Income (PI)
Personal Income is the sum of all incomes actually
received by all individuals or households during a given year.
Personal Income= National income – Social Security
Contributions – Corporate Income Taxes – Undistributed
Corporate Profits + Transfer Payments.
 Social Security Contributions are payment made towards
provident fund, insurance etc.
 Transfer Payments are old-age pensions, unemployment
compensation relief payments, interest payments on the public
debts etc.

18. DI - Disposable Income
Whole personal Income actually received by the people are
not available to them for consumption. Because government impose
some personal taxes such as income tax, person property taxes. After
a part of personal income is paid to the government in the form of
tax what ever remains of personal income is called disposable
income. Which can be either saved or consumed.
Disposable Income = Personal Income – Personal Taxes
Disposable Income = Consumption + Savings

19. Measurement of National Income
Factor incomes arise from the production of goods and services
and since income are spent on goods and services produced,
three alternative methods of measuring national income are
possible.
 Value Added Method (Output or Production Method)
 Income Method (Distribution Method)
 Expenditure Methods

20. Value Added Method (Output or Production Method)
Gross value added
=
Value of Output
_
Value of Intermediate product

22. GVA = Value of Output
Agriculture Sector – Value of agricultural output
Industrial Sector – Value of Industrial Output
Services Sector – Value of services Output

23. Measurement of N.I. (value-added method)
GDP at M.P (Gross value added in Primary
sector + Secondary sector + Tertiary sector)
– Depreciation = NDP at MP – Net Indirect
Taxes = NDP at F.C + NFIA = NNP at
F.C(National Income)

24. Precautions:
 Purchase or sale of any second hand goods
 Value of self- Consumed products
 Avoid double counting
 Imputed rent values of self occupying houses

25. Income Method (Distribution Method)
National Income = Rent + Wages + Interest + Profit
Under Income method, National Income is measured by
summing up the incomes od all individual units of they
economy.
 Transfer Payments are old-age pensions, unemployment
compensation relief payments which is unearned income.
 Profit (Divided + Corporation Tax +Savings of
enterprises or Undistributed Profit)

26. Measurement of National Income (Income method)
NDP at F.C (compensation of employees + Operating
Surplus + mixed income) + NFIA = NNP at F.C
 Compensation of employees- wages in cash, or
payment in kind, employees contribution to social
security schemes
 Operating Surplus – income from property or
entrepreneurship, rent, interest and profit
 Mixed Income – Self employed persons

27. Precautions
 Transfer incomes should not be included
 Income from illegal activates not to be included
 sale of any second hand goods not to included
 Sales proceeds of shares and bonds are not included in NI
because such transaction are not related to flow of goods
 Windfall gains such as lottery, prizes, etc. should be
excluded
 Goods for self consumption should be included.

28. Expenditure Methods
Expenditure method arrives at national income by
adding up all expenditures made on goods and
services during a year.
 Final private and households consumption (C )
 Governments final consumption (G)
1) Compensation of employees
2) Intermediate consumption expenditure
3) Consumption of fixed capital
 Gross Domestic Capital formation
1) Gross fixed capital formation
2) Addition to the Stocks or inventories of goods
 Net Export

29. GDP at MP= C+G+I+(X-M)-Depreciation=NDP at MP-Net
Indirect Tax = NDP at FC + NFIA = NNP at FC
NNP at FC = GDP at MP- Consumption of Fixed Capital
+Net Factor Income from Abroad.

30. Precautions
 Second-Hand goods
Purchase of shares and bonds
Expenditure on transfer payments
Expenditure on intermediate goods

31. Difficulties in the Measurement of National
Income
 Treatment of Non-monetary transactions.
 Treatment of Government activates in national income
accounts.
 Treatment of income generated by foreign firms.
 Statistical Difficulties
 Unorganized Sector

32.  Lack of Reliable Information
 Illiteracy
 Occupational specialization is still incomplete
 Error in Double counting

33. Circular flow of Income- two sector model
 Households – owners of all factors of production
 Business firms – they uses factors of production
and produce and sell goods and services to the
households.
Assumptions:
 Households spend their total income on consumer and
capital goods produced by the firms.
 Firms produce goods and services only as much as
demanded by the households.
 Firms make factor payment to the households as rent,
wages, interest and profit
 There is no inflow or outflow of income.

36. Importance of the Circular Flow of Income
1. Link between Producers and Consumers
2. Creates a Network of Markets
3. Inflationary and Deflationary Tendencies
4. Basis of the Multiplier
5. Importance of Monetary
6. Importance of Fiscal Policy
7. Importance of Trade policies