PREVIEW
PART I:
MEANING OF NATIONAL INCOME
PART II: PHASES OF CIRCULAR FLOW OF INCOME
PART III: METHODS OF CALCULATING NATIONAL
INCOME
PART-I
National income is the sum
total of factor incomes earned
by normal residents of a
country during the period of an
accounting year.
PART-II
CIRCULAR FLOW CHART
EXPENDITURE
PRODUCTION
TRIPLE
IDENTITY
INCOME
PART-III
METHODS OF CALCULATING
NATIONAL INCOME
PRODUCT METHOD/
VALUE ADDED METHOD
INCOME METHOD
EXPENDITURE METHOD
PRODUCT METHOD/
VALUE ADDED METHOD
This method is also known as Net
output Method or Industrial origin
method.
Under value added method national
income is estimated by taking the
contribution [ or value added ] made by
each
producing
enterprise
to
production in the domestic territory of
a country in an accounting year.
CLASSIFICATION OF PRODUCTIVE ENTERPRISES
First of all, productive enterprises
are identified and classified into :
Secondary sector
Tertiary sector
Primary sector
ESTIMATION OF VALUE ADDED
Value Added = Value of Output – Intermediate
Consumption
Value of Output = Sales + ∆ Stock
∆ Stock = C/S – O/S
This value added is known as GDPmp
VALUE ADDED = Valued Added by Primary sector +
Value added by Secondary sector + Value added by
Tertiary sector.
CALCULATION OF NATIONAL
INCOME (NNPFC)
NNPFC
= GDPmp - Depreciation + Net Factor Income
from Abroad – Net Indirect Taxes.
Net Indirect Taxes = Indirect taxes – Subsidies.
PRECAUTIONS
The sale and purchase of secondhand goods should not be
included in national income. But commission , if any , earned by
brokers of such goods should be included.
The value of retained goods foRself – consumption should be
included.
Imputed value of owner – occupied houses should be included.
Own account production of fixed capital by households , firms
and the government should be included.
Domestic services are not included in national income .
However , production of services by paid employees will be
included.
Although leisure is one of the important determinants of
economic welfare but it is not included in national income.
Because its valuation is not possible.
EXAMPLE
Calculated value added by firm X from the following
data :
Rs [in lakh]
[a]
Sales
600
[b]
Purchase of raw material
200
[c]
Import of raw material
100
[d]
Import of machines
200
[e] Closing stock
40
[f]
10
Opening stock
Solution :INTERMEDIATE CONSUMPTION
Purchase of raw
material
Import of raw
material
Total
VALUE OF OUTPUT
Rs.
200
100
300
Sales
{+} Change in
Stock [40 – 10]
Rs.
600
30
630
Value Added = Value of output – Intermediate Consumption
= Rs.630 – Rs. 330 = Rs. 330 Lakh .
VALUE ADDED METHOD
ITEM
TREATMENT
REMARKS
Production for self consumption
Included in National
income.
Part of National income.
Hence, its imputed value
to be included.
Services of House -wives
Not included.
These services are
rendered free of cost.
Free meals to workers
Included in National
Income.
Profits earned by foreign
banks in India.
Not included in National
Income.
Part of factor income
accruing to the rest of the
world.
Free services by the
government.
Included in National
Income.
These are productive
services.Value estimated
on basis of cost.
A wage in kind.
INCOME METHOD
ACCORDING TO THE INCOME METHOD,
NATIONAL INCOME IS MEASURED IN TERMS
OF PAYMENTS MADE TO THE PRIMARY
FACTORS OF PRODUCTION
VIZ, LAND,
LABOUR, CAPITAL AND ENTREPRENEURSHIP
FOR THEIR PRODUCTIVE SERVICES.
NATIONAL INCOME = SUM TOTAL OF FACTOR
INCOME EARNED BY THE
NORMAL RESIDENTS OF A
COUNTRY (NDPFC) + NET
FACTOR INCOME FROM
ABROAD.
NDPFC is also known as Domestic Income.
CLASSIFICATION OF FACTOR INCOME
Factor income is grouped into following heads :
Compensation of employees
Rent
Interest
Profits
Mixed Income
ESTIMATION OF FACTOR INCOMES OR
PAYMENTS
Domestic Factor Income [or NDPFC]
= Compensation of employees + Rent + Interest
+ Profits +Mixed Income
National income [ or NNPFC ]
= NDPFC + Net Factor Income from abroad
COMPONENTS OF DOMESTIC FACTOR INCOME
COMPENSATION OF EMPLOYEES
OPERATING SURPLUS
MIXED INCOME OF THE SELF – EMPLOYED
COMPENSATION OF EMPLOYEES 1. WAGES AND SALARIES IN CASH
[ i ] Basic pay
[ vi ] Bonus and commissions
[ ii ] Dearness allowance
[ vii] Leave travel concessions
[ iii ] House rent allowance
[ viii] Sick leave allowance
[ iv ] Overtime allowance
[ ix ]
[ v ] Cost of travel
C.C.A.
2. COMPENSATION IN KIND
[i] Free housing and Education
[ii] Medical facilities
[iii] Free food and Uniforms
[iv] Conveyance facilities
[v] Creches for children of employees
[vi] Value of interest foregone on loans to employees
3. EMPLOYER’S CONTRIBUTION TO SOCIAL
SECURITY SCHEMES
[i] Provident fund
[ii] Life insurance
[iii] Casualty insurance
4. PENSION ON RETIREMENT
OPERATING SURPLUS
1. INCOME FROM PROPERTY
[ i ] Rent
[ ii ] Interest
[ iii ] Royalty
2. INCOME FROM ENTREPRENEURSHIP
[ i ] Profit
COMPONENTS OF PROFIT
1. Dividends
2. Corporate Profit Tax
3. Undistributed Profits
MIXED INCOME
Refers to the income of selfemployed persons using their own
labour, land, capital and
entrepreneurship to produce goods
and services.
PRECAUTIONS
TRANSFER PAYMENTS OR INCOMES - TRANSFER PAYMENTS
SHOULD NOT BE INCLUDED IN THE NATIONAL INCOME.
ILLEGAL INCOME – INCOME THROUGH ILLEGAL ACTIVITIES ,
LIKE SMUGGLING , BLACK MARKETING , THEFT , DACOITY,
ETC., IS NOT INCLUDED IN THE NATIONAL INCOME.
INCOME FROM THE SALE OF SECOND HAND GOODS – INCOME
OR MONEY RECEIVED BY WAY OF SELLING SECONDHAND
GOODS [ E.G. , OLD HOUSE , OLD TV SETS , ETC.] IS NOT
INCLUDED IN THE NATIONAL INCOME.
MONEY RECEIVED BY SELLING SHARES AND BONDS [ BOTH
OLD AND NEW ] IN THE MARKET IS NOT TREATED AS INCOME.
WINDFALL GAINS LIKE INCOME FROM LOTTERIES ARE NOT
INCLUDED.
INDIRECT TAXES TEND TO RAISE THE MARKET PRICE OF
GOODS AND SERVICES. THESE ARE INCLUDED IN THE
NATIONAL INCOME AT MARKET PRICE.
CORPORATION TAX AND INCOME TAX - CORPORATION TAX IS
A PROFIT, IT SHOULD NOT BE SEPARATELY INCLUDED IN THE
NATIONAL INCOME . PROFITS BEFORE DEDUCTION OF
CORPORATION TAX IS TO BE INCLUDED . COMPENSATION OF
EMPLOYEES INCLUDES INCOME TAX PAID BY THE EMPLOYEES
AND SHOULD NOT BE INCLUDED SEPARATELY.
PRODUCTION FOR SELF – CONSUMPTION - IT
SHOULD BE INCLUDED. DOMESTIC SERVICES FOR
SELF – CONSUMPTION ARE NOT INCLUDED. BUT IF
THE SAME ARE PRODUCED BY THE PAID EMPLOYED
STAFF SUCH AS COOKS , GARDENERS , GUARDS ,
WILL DE INCLUDED IN THE NATIONAL INCOME.
IMPUTED RENT OF OWNER OCCUPIED HOUSES,
SHOULD BE IMPUTED ON THE BASIS OF PREVAILING
MARKET PRICE AND INCLUDED IN THE NATIONAL
INCOME.
DEATH DUTIES ,GIFT TAX , WEALTH TAX , DEATH
DUTIES , ARE PAID OUT OF THE WEALTH OR PAST
SAVINGS OF THE TAX – PAYERS.
EXAMPLE
Calculate [ i ] Gross domestic product at market prices ,and [ ii ]
Net national product at factor cost from the following data : Rs. [in Crore]
[ i]
Consumption of fixed capital
34
[ii ]
Employer’s contribution to social
30
Security schemes
[ iii ]
Rent
10
[ iv]
Interest
20
[ v]
Profits
25
[ vi]
Royalty
[ vii] Wages and Salaries
[ viii] Net indirect taxes
[ix] Net factor income from abroad
5
170
38
(-) 3
Solution : [ i] GDPMP = Rent + Interest + Profits + Royalty +
Wages and salaries +Consumption of fixed capital +
Employer’s contribution to social Security schemes +
Net indirect taxes
=
10 + 20 + 25 + 5 + 170 + 34 + 30 + 38
=
Rs. 332 crore.
[ ii] NNPFC = GDPMP - Consumption of fixed capital +
Net factor income from Abroad – Net indirect taxes
= 332 – 34 + (-3) – 38
= Rs. 257 crore.
INCOME METHOD
ITEM
Rent received by
Indian residents on
building rented out to
foreign embassies in
India.
TREATMENT
REMARKS
Included in National
Income
It is a factor
income.
Not included in
National Income
No corresponding
increase in
production
Money received from
a relative working in a
foreign country.
Not included in National
Income.
It is a transfer
payment.
Profit earned by
Indian companies
abroad.
Included in National
Income
Windfall gains
Part of NFIA.
EXPENDITURE METHOD
UNDER
EXPENDITURE
METHOD,
NATIONAL INCOME IS ESTIMATED BY
AGGREGATING
ALL
THE
FINAL
EXPENDITURES
IN
AN
ECONOMY
DURING A YEAR .
Classification of Final Expenditure
The final Expenditure is classified in the
following five main categories :
Private final consumption Expenditure
Government final consumption Expenditure
Gross fixed capital formation [ or gross
domestic fixed investment Expenditure ]
Change in stocks [ or inventories ]
Net Exports
COMPONENTS OF FINAL EXPENDITURE
FINAL CONSUMPTION
EXPENDITURE
PRIVATE FINAL
CONSUMPTION EXPENDITURE
+
GOVT. FINAL CONSUMPTION
EXPENDITURE
GROSS
DOMESTIC CAPITAL
FORMATION
GROSS DOMESTIC
FIXED CAPITAL
FORMATION
+
NET
EXPORTS
EXPORTS
-
IMPORTS
CHANGE IN STOCK
CLOSING
STOCK
----
OPENING
STOCK
SUM TOTAL OF EXPENDITURE ON THE
DOMESTICALLY PRODUCED GOODS
AND SERVICES DURING AN
ACCOUNTING YEAR IS CALLED GDPMP
GDP = C+ I + G + ( X- M)
MP
NNPFC = GDPMP – Dep + Net factor income from abroad
–indirect taxes + Subsidies
PRECAUTIONS
ALL EXPENDITURES ON SECONDHAND GOODS SHOULD NOT BE
TAKEN INTO ACCOUNT.
EXPENDITURE ON SHARES AND BONDS [ BOTH OLD AND NEW ]
SHOULD BE EXCLUDED BECAUSE THEY ARE SIMPLY PAPER
CLAIMS.
EXPENDITURE ON TRANSFER PAYMENTS BY THE
GOVERNMENT SHOULD BE EXCLUDED.
EXPENDITURE INCURRED BY THE PRODUCERS ON
INTERMEDIATE GOODS HAS TO BE EXCLUDED.
EXAMPLE
On the basis of information given below , calculate net
national product at factor cost [ NNPFC ]
Rs. [ in crore ]
1. Consumption of fixed capital
2,200
2. Indirect taxes less subsidies
3,500
3. Imports
2,000
4. Exports
1,000
5. Change in stocks
1,500
6. Gross fixed capital formation
5,000
7. Govt. final consumption expenditure
3,000
8. Private final consumption expenditure
25,000
SOLUTION
NNPFC= PRIVATE FINAL CONSUMPTION
EXPENDITURE + GOVT FINAL CONSUMPTION
EXPENDITURE +GROSS FIXED CAPITAL `
FORMATION + CHANGE IN STOCKS+
EXPORTS – IMPORTS – CONSUMPTION OF
FIXED CAPITAL – INDIRECT TAXES +
SUBSIDIES
= 25,000 + 3,000 + 5,000+ 1,500 + 1,000 –
2,000 – 2,200 – 3,500
= 35,500 – 7,700
= Rs. 27, 800 crore .
EXPENDITURE METHOD
ITEM
Govt. Expenditure
on street - lighting
TREATMENT
Included in
National Income.
REMARKS
It is a part of govt.
final consumption.
Purchase of
Not Included in
vegetables by a hotel . National Income.
It is an Intermediate
consumption.
Expenses of foreign
visitors in India.
Included in National
Income.
It is a part of Net
Exports.
Payment of pocket
money by a father
to his son.
Not Included in
National Income.
It is not a reward
for any productive
services.
SHIVALI SHARMA (PGT-ECONOMICS)
KENDRIYA VIDYALAYA NO.1
GANDHINAGAR, JAMMU