UNDERSTANDING NATIONAL INCOME

DR. RAKESH SINGH

INTRODUCTION : The most commonly quoted yardstick of economic performance is National Income. Study of National Income is important in order to understand, (1) Why is one nation doing better than another, (2) Which sectors of economy contributes what shares to the total National Income and (3) The rate at which the economy is growing.

In order to understand the constituent of National Income, the economy can be broadly divided into five sectors, namely:
The Household Sector: Households provide the resources (factors of production) and in return buys goods and services from the firm sector. The Firm Sector: Provides household with goods and services and buys factors of production from households. The Financial Services Sector: This sector of economy comprises the full range of financial intermediariesbanks, financial institutions, insurance companies, pension funds, mutual funds, etc. The Government Sector: The Government performs a number of functions in an economy.

The Foreign Sector: Foreigners make a direct contribution to the economy by buying exports and selling inputs. With the increasing globalization of the economy and flow of capital, the foreign sector has acquired an important dimension.

BASIC CONCEPTS OF NATIONAL INCOME National Income is the money value of all the goods and services by the residents of the country. There are two concepts of National Income. a) Gross Domestic Product (GDP), and b) Gross National Product (GNP)

The term Gross Domestic Product (GDP) refers to the monetary value of the gross output produced by the nationals of a country in the domestic economy. GDP measures the output produced by factors of production located in the domestic economy, using domestic resources. GDP = (C+I+G) + (X-M) C = Total consumption expenditure in an economy.

I = Total investment expenditure on buildings, machinery, equipment and other capital assets.
G = Total Government expenditure. This component represents the Government spending on goods and services. (X-M) = Export Surplus or net income from the foreign trade of the country. It is obtained by taking the difference between total exports (X) and total imports (M). Thus, Exports surplus / deficit = (X-M) NDP = GDP - Depreciation

In an open economy, Gross National Product (GNP) is obtained from GDP by adding net income from abroad to the value of GDP. Therefore,
GNP (in an open economy) = GDP + (RP)

= (C+I+G) + (X-M)+ (R-P)

Net income from abroad. It is the difference between the receipts from abroad (R) and payments made abroad (P). Receipts from abroad consist of income received by nationals from their foreign investments and remittances sent by NRIs. Payments made abroad are the payments made to foreigners for their investments in our country. Thus, Net income from abroad is the payments made to foreigners for their investments in our country. Thus, Net income from abroad (R-P). NNP = GNP - Depreciation

MEASUREMENT OF NATIONAL INCOME AT MARKET PRICE AND FACTOR COST

GDP at Factor Cost = GDP at Market Prices Indirect taxes + Subsidies GDP at Factor Cost = GDP at Market Prices (Indirect Taxes Subsidies)

GDP at Factor Cost = GNP at Market Prices Indirect Taxes + Subsidies

CALCULATION OF NATIONAL INCOME

Sr. No. 1. 2. 3. 4. 5. 6. 7. Items Value of all final consumption and capital goods Depreciation allowances Value of import Subsidies Value of exports Commodity Taxation Net income from abroad (Rs. in Crores) 24,27,210 4,52,190 2,40,199 50,094 5,09,018 1,16,221 76,146

Since values of imports, exports and income from abroad are given, it is an open economy. 1. GDP at market prices = (C + I + G) + X - M = (24,26,410 + 2,09,018 - 2,45,199) Crores = 23,90,229 Crores
GDP at factor prices = GDP at market prices indirect taxes + subsidies

2.

3.

= (3,950 300 + 150) Crores = 3,800 Crores GNP at market prices = (C + I + G) + (X - M) + (R - P) = (23,90,229 + 67,146) Crores = 24,57,375 Crores
GNP at factor prices = GNP at market prices indirect taxes + subsidies

4.

5.

= (3,975 300 + 150) Crores = 3,825 Crores NNP at market prices = (GNP at market prices - Depreciation) = (24,57,375 - 3,52,190) Crores = 21,05,185 Crores
NNP at factor cost = (NNP at market prices + subsidies - indirect taxes)

6.

= (21,05,185 + 30,094 = 1,16,221) = 20,19,058 Crores

REAL V/S NOMINAL GDP

Real GNP = Nominal GNP GNP deflator
SAMPLE CALCULATION OF REAL GNP

DATE

(1) NOMINAL GNP (billions of current dollars)

(2) INDEX NUMBER OF PRICES (GNP DEFLATOR)

(3) REAL (billion dollars, 1929 prices) (3)=1/2 X 100

1929 1933

104 56

100 77

(104/100) X 100 = 104 (56/77) X 100 = 73