Basic Concepts and
National Income Calculation
Dr. Asok Das
Associate Professor in Economics
Prabhu Jagatbandhu College
First Year Economics General Class
What is basic idea of Economics
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Choice between alternatives out of scarce
means having alternative uses
Scarce means viz. Fixed income to
households or limited means to the firms,
give us a downward PPC curve to firms
and downward budget line to the
households
What are then the basic economic problems
arising out of scarcity of usable means
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What to produce?
For whom to produce?
How to produce?
Optimal use of resources
Problem of growth
Who or how these problems be
solved?
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Some reasonable answers are related to find
out what are the basic units of an economic
system
Household, firm and government are three basic
units who are to deliver something expected
from each of them to solve the problems
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Production and its distribution is the key to solve all
these problems
Production results from resources. It is pattern of
ownership of resources that finds whether it is
capitalistic, socialistic or mixed economic system.
Laissez faire or capitalistic system and how market forces
play the key role of allocating resources
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For example USA, UK and othe OECD
countries etc. Here state has also a roledevelopmental and planning and they adopt
indicative planning
As market forces are guiding force, trade cycles
often crop up ,and may obstruct the economy
for a long time. 1930s depression is an
example.
Socialist system crops as an antidote
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Here state plays the key role
The mixture of the two systems- mixed economy,
often plays a constructive role taking units of the two
systems. India is an example in this regard
National income calculation
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Production is the centre of all economic
activities, so its calculation is necessary
in order to assess
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Whether growth is taking place
What about the distribution of income
What about the uses of production
What is N.I.
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Income from various agents of production spreading across
different parts of world in a particular fiscal year.
To define it from various aspectsOn the basis of one angle, there is one way of defining
National Income. There are three angles:Production Method
To value final products of all sources in terms of market prices
called by GDP during that year.
Income Method
To define it in terms of summation of factor incomes less transfer
earnings give an income angle
Expenditure Method
Income or production is used up either by consumption or by
forming capital
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Accuracy in measuring production or income needed some
caution
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Avoidance of multiple counting
Exclusion of transfer income in income method
Depreciation of capital or CCA to be deducted from GDP
to calculate NDP or from GNP to get NNP
NNP at factor cost gives N.I.
Difference between NNP at market price and factor cost
results due to appearance of indirect taxes and/or subsidies
GNP indicates production of a particular year, whether sold
or not in that year.
The part which is not sold called inventory accumulation
and becomes a part of capital accumulation
Resale value, lottery value or prices of company shares do
not become a part of N.I. Brokerage value of agents
involved in above activities are part of N.I.
Tabular framework
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GNP less depreciation = NNP
NNP less indirect taxes = National
Income
N.I. Less (i) corporate profit taxes
(ii) Personal Tax
❑ (iii) contributions for social insurance
Plus
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(i)
(ii)
(iii)
Government transfer payments
Net government interest payments
=Disposable income
Contd.
Disposable income
Less undistributed corporate profit
Plus business transfer payments
= Personal disposable income
Personal disposable income may be spent in following ways
Personal consumption expenditure
Personal Savings
Personal transfer to foreigners
Difference between GDP and GNP is defined as
GDP + Net income from abroad = GNP = GDP + Export
value- Import value