National Income

National Income
Introduction
National Income provides a comprehensive measure of the economic activities of
a nation. It denotes the country’s purchasing power. The growth of an economy is
measured by the rate at which its real national income grows over time. National
income thus serves as an instrument of economic planning. Further, national
income is one of the most significant macroeconomic variables. Thus, a clear
understanding of the meaning, concepts, measurement and uses of national
income is essential.
Meaning of National Income
In common parlance, National Income means the total money value of all final
goods and services produced in a country during a particular period of time (one
year).
Definitions
“The labour and capital of a country acting on its natural resources produce
annually a certain net aggregate of commodities, material and immaterial
including services of all kinds. This is the true net annual income or revenue of the
country or national dividend”.
-Alfred Marshall.
Basic concepts of national income
The following are some of the concepts used in measuring national income.
1. GDP
2. GNP
3. NNP
4. NNP at factor cost
5. Personal Income
6. Disposable Income
7. Per capita Income
8. Real Income
9. GDP deflator
1. Gross Domestic Product (GDP)

GDP is the total market value of final goods and services produced within the
country during a year. This is calculated at market prices and is known as GDP at
market prices.
GDP by expenditure method at market prices = C + I + G + (X – M)
Where C – consumption goods; I – Investment goods;
G – Government purchases;
X – Exports; M – Imports
(X – M) is net export which can be positive or negative.

a) Net Domestic Product (NDP)
NDP is the value of net output of the economy during the year. Some of the
country’s capital equipment wears out or becomes outdated each year during the
production process. husT
Net Domestic Product = GDP - Depreciation.
2. Gross National Product (GNP)

GNP is the total measure of the flow of final goods and services at market value
resulting from current production in a country during a year, including net income
from abroad. GNP includes five types of final goods and services :
(1) value of final consumer goods and services produced in a year to satisfy the
immediate wants of the people which is referred to as consumption (C);
(2) gross private domestic investment in capital goods consisting of fixed capital
formation, residential construction and inventories of finished and unfinished
goods which is called as gross investment (I) ;
(3) goods and services produced or purchased by the government which is

denoted by (G) ; and
(4) net exports of goods and services, i.e., the difference between value of exports
and imports of goods and services, known as (X-M) ; Net factor incomes from
abroad which refers to the difference between factor incomes (wage, interest,
profits ) received from abroad by normal residents of India and factor incomes
paid to the foreign residents for factor services rendered by them in the domestic
territory in India (R-P);
(5) GNP at market prices means the gross value of final goods and services
produced annually in a country plus net factor income from abroad (C + I + G + (X-
M) + (R-P)).
GNP at Market Prices = GDP at Market Prices + Net Factor income from Abroad.
3. Net National Product (NNP) (at Market price)
Net National Product refers to the value of the net output of the economy during
the year. NNP is obtained by deducting the value of depreciation, or replacement
allowance of the capital assets from the GNP. It is expressed as,
NNP = GNP – depreciation allowance.
(depreciation is also called as Capital Consumption Allowance)
4. NNP at Factor cost

NNP refers to the market value of output. Whereas NNP at factor cost is the total
of income payment made to factors of production. Thus from the money value of
NNP at market price, we deduct the amount of indirect taxes and add subsidies to
arrive at the net national income at factor cost.
NNP at factor cost = NNP at Market prices – Indirect taxes + Subsidies.
5. Personal Income
Personal income is the total income received by the individuals of a country from
all sources before payment of direct taxes in a year. Personal income is never
equal to the national income, because the former includes the transfer payments
whereas they are not included in national income. Personal income is derived
from national income by deducting undistributed corporate profit, and
employees’ contributions to social security schemes and adding transfer payment.
Personal Income = National Income – (Social Security Contribution and

undistributed corporate profits) + Transfer payments
6. Disposable Income
Disposable Income is also known as Disposable personal income. It is the
individuals income after the payment of income tax. This is the amount available
for households for consumption.
Disposable Income = Personal income – Direct Tax.
As the entire disposable income is not spent on consumption,
Disposal income = consumption + saving.
7. Per Capita Income

The average income of a person of a country in a particular year is called Per
Capita Income. Per capita income is obtained by dividing national income by
population.
8. Real Income
Nominal income is national income expressed in terms of a general price level of a
particular year in other words, real income is the buying power of nominal
income. National income is the final value of goods and services produced and
expressed in terms of money at current prices. But it does not indicate the real
state of the economy. The real income is derived as follows:
National Income at constant price = National Income at current price ÷ P / P

1 0
9. GDP deflator
GDP deflator is an index of price changes of goods and services included in GDP. It
is a price index which is calculated by dividing the nominal GDP in a given year by
the real GDP for the same year and multiplying it by 100.
GDP deflator = [Nominal GDP/Real GDP] x100
GDP at Factor Cost and Market Price

Check out the details about GDP at Factor Cost and Market Price.
Factor Cost
 Factor cost is the cost incurred on the factor of production. It can be defined as the actual
cost incurred on goods and services produced by industries and firms is known as factor
costs.
 Factor costs include all the costs of the factors of production to produce a given product in an
economy. It includes the costs of land, labour, capital and raw material, transportation etc.
They are used to produce a given quantity of output in an economy.
 The factor cost does not include the profits made by the producing firms or industries or the
tax which they incur on producing those goods and services.
GDP at Factor Cost
 The factor cost does not include the taxes that are paid to the government since taxes are
not directly involved in the production process and, therefore, are not a part of the direct
production cost.
 However, subsidies received are included in the factor cost as subsidies are direct inputs into
production.
Factor Cost = Cost of Production + Subsidies – Taxes
GDP at Factor Cost= Sum of all Gross Value Added (GVA) at factor cost
Market Price
 It refers to the amount of money for which an asset can be sold in a market.
 The market price of a commodity is closely linked with the demand and supply factors of the
commodity.
GDP at Market Price
 GDP at market price is the price which is set after all the levels of value additions and at
which goods and services are sold or offered in the marketplace.
 Conventionally, the market price is the sum of the cost of production and indirect taxes.
Market Price (MP) = Cost of Production or factor cost + Net Indirect Taxes
Net Indirect Taxes = Indirect Taxes – Subsidy

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National Income

Basic concepts of national income

4. NNP at factor cost

7. Per capita Income

1. Gross Domestic Product (GDP)

GDP by expenditure method at market prices = C + I + G + (X – M)

Where C – consumption goods; I – Investment goods;

(X – M) is net export which can be positive or negative.

Net Domestic Product = GDP - Depreciation.

2. Gross National Product (GNP)

(3) goods and services produced or purchased by the government which is

NNP = GNP – depreciation allowance.

(depreciation is also called as Capital Consumption Allowance)

4. NNP at Factor cost

NNP at factor cost = NNP at Market prices – Indirect taxes + Subsidies.

Personal Income = National Income – (Social Security Contribution and

As the entire disposable income is not spent on consumption,

Disposal income = consumption + saving.

7. Per Capita Income

National Income at constant price = National Income at current price ÷ P / P

GDP deflator = [Nominal GDP/Real GDP] x100

GDP at Factor Cost and Market Price

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