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National Income

Category : Banking


National Income



National Income


·            National income is the flow of with in goods and services produced in an economy in a particular period-a year National Income is denned as money measures of the net aggregates of all commodities and services accruing to the inhabitants of a community during a specific period.

·            The concept of National income has been interpreted in three ways ?

(a) National product

(b) National Dividend

(c) National expenditure


(a) National product: It consists of all the goods and services produced by the community and exchanged for money during a year. It does not include goods and service which are not paid for such as hobbies, housewives services, charitable work etc.


(b) National Dividend:  It consists of all the incomes in cash and kind, accruing to the factors of production in the course of generating the national product. It represents the total of income flow which will exactly equal the value of the nation product turned out by the community during the year.


(c) National Expenditure: This represents the total spending or outlay of the community on the goods and services produced during a given year.


·         Since income is the source of expenditure, national expenditure constitutes the disposal of national income which is evidently equal to it in value.


·         Modern economists consider national income as a flow in three forms income, output and expenditure. When goods are produced by the firms factors of production comprising households are paid income, these income receipts are spent by the house hold sector on consumption and their savings are mobilized by the producers for investment spending.


Gross Domestic Product (GDP)


Gross domestic product is the money value of all final goods and services produced in the domestic territory of a country during an accounting year.


·            GDP is the total value of output produced by the factors of production located within the country's boundary in a year. The factor of production may be owned by any one citizen or foreigner.

GDP = GNP - Net income earned from abroad.

GDP -C+I+G+(X-M)


Where C = consumption goods,

I = Gross investment

G = Government services

This is measured at market prices


GDP at factor cost =GDP at market price +(S-T)

S = Government subsidies

T = indirect taxes


Gross National Product (GNP)


·         GDP can be denned as whatever is produced within the domestic territory of a country in a year is its gross domestic product. It includes the contribution made by nonresident?s producers by way of wages, rent, interest etc.


Hence Gross National product is denned as the sum of the gross domestic product and net factor incomes from abroad.

GNP = GDP + (X - M)

Where, X == Export, M = import

When X - M = 0

Then GNP = GDP


1. In an open economy GNP may be obtained by adding up ?


(i) The value of all consumption goods which are currently produced.

(ii) The value of government services which are measured in terms of governmental expenditure on various goods and services for rendering certain services to the benefit of the entire community

(iii) The value of net product i.e. the difference between total exports and total imports of the nation. This value may be positive or negative.

(iv) The value of all capital goods produced which is denned as gross investment.

(v) The net amount earned abroad. This represents the difference between the incomes received by the nationals abroad on their foreign investment, minus the income paid by them abroad on the foreigner's investment.


GNP at market price = C + I + G + (X - M) + (R - P)

At market price   

X = export, R = Income receipts from abroad

M = import, P = Income paid abroad



Net National Product (NNP)


·                     Net National product is obtained by subtracting depreciation value from GNP


NNP =GNP \[-\]Depreciation


·                     Net national product is the value of total consumption plus the value of net investment of community.


Personal Income: Personal income is the total money income received by individuals in the community personal income is the aggregate earned and unearned income. Undistributed profits of the corporations reduce the personal income of individuals to that extent.

PI = NI - undistributed profit

PI = NNP + transfer payment (R)

\[\therefore \,\,PI=NI+R-U\]

Disposable personal income:  Disposable personal income is the sum of the consumption and saving of individuals.

DI = C + S


·                     Disposable personal income: (DPI) rather than National income is the determinant of consumption because the consumption of a person depends on his take home pay.


Personal savings: Personal savings refer to the difference between disposable personal income and personal consumption expenditure.


National income Account:


·                  National Income accounts are the systematic records and presentation of national income statistics. Thus, national income accounting also known as "economic accounting" or social accounting transcends the mere compilation and publication of statistical information.

·                  Its purpose is to present data in such a form that interrelations among items are most easily discerned from the structure of statements.


Per Capita Income: Per capita income is an indicator to show the living standards of people in a country. If real PCI increases, it is considered to be an improvement in the overall living standard of people.



National, Income:

NNP can be calculated in two ways

(a) At market price of goods and services

(b) At factor cost

When NNP is obtained at factor cost it is called National Income


·               NNP at factor cost is the volume of commodities and services turned out during an accounting year, counted without duplication.


NNP at factor cost = National Income

NNP at factor cost=NNP at market price - Indirect Tax + Subsidy




\[GNP{{\text{ }}_{at\text{ }market\text{ }price}}\]


\[NN{{P}_{at\text{ }market\text{ }price}}\]

\[GN{{P}_{\text{ }at\text{ }market\text{ }price}}\]

Net Income from abroad

\[GD{{P}_{\text{ }at\text{ }market\text{ }price}}\]

\[GN{{P}_{\text{ }at\text{ }market\text{ }price}}\]

Net indirect taxes 

\[GN{{P}_{at\text{ }factor\text{ }cost}}\]

\[NN{{P}_{\text{ }at\text{ }market\text{ }price}}\]

Net indirect taxes

\[NN{{P}_{at\,factor\text{ }cost}}\]

\[GD{{P}_{\text{ }at\text{ }market\text{ }price}}\]

Net indirect taxes

\[GD{{P}_{at\text{ }factor\text{ }cost}}\]

\[GDP{{\text{ }}_{at\text{ }factor\text{ }cost}}\]


\[NN{{P}_{at\text{ }factor\text{ }cost}}\]

\[GD{{P}_{\text{ }at\text{ }factor\text{ }cost}}\]


\[ND{{P}_{at\text{ }factor\text{ }cost}}\]





Methods of Measuring National Income


There are three methods of calculating National Income:

(i) Product or Output Method

(ii) Income Method

(iii) Expenditure Method


(i) Product or Output Method: in the product method, the measures of GDP are calculated by adding the total value of the output (of goods and services) produced by all activities during any time period, such as a year. The major challenges of this method is the problem of double counting.                                 

(ii) Income Method: In the income method, the measures of GDP are calculated which are engaged in the production of output. The various incomes included to compute the gross national income are


·               Wages and salaries

·               Interest and surplus of government enterprise

·               Rents

·               Net flow of income from abroad

·               Income of self employed

·               Profit and dividends of business operation


The sum of all these factor incomes provide us the measure of national income.


(iii) Expenditure Method: in the expenditure method, the measures of GDP are calculated by adding all the expenditure made in the economy. These

Components are?

C ? Consumption expenditure

I ? Domestic investment

G ? Government expenditures

X ? Exports of goods and services

M ? Imports of goods and services

NR ? Net income receipts from assets abroad


The sum of all these aggregate expenditure provides us the measure of national income.

\[\mathbf{GDP}=\mathbf{E}=\mathbf{C}+\mathbf{I}+\mathbf{G}+\left( \mathbf{X}-\mathbf{M} \right)\]

Where, E = Aggregate expenditure





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