NATIONAL INCOME
FINANCIAL AWARENESS
IBPS-PO
National Income
1949- National Income Committee (P. C. Maharan Obis)
1954- Total Income –Re. 8000 Crore.
The monetary value of all goods and services during an FY is National Income
Money
Income Method
Expenditure Method
Value Added Method (Product Method)
Primary Sector -Agriculture
Secondary - Manufacturing
Tertiary – Services
1. Gross-Depreciation NET
2. Factory Cost + Income Tax –Subsidiary = Market Cost
3. Domestic + NFIA = National
4. NFIA ( Net Factor Income From Abroad)
NFIA = Factor Income from Abroad – Factor Income paid to NRI
GDP = NDP ( if Depreciation = 0)
GDP = GNP ( if NFIA =0)
GDPfc = GDPmp ( if IT= Subsidy)
GDP -Gross Domestic Production – is money value of all the final goods and services produces in domestic territory of a country during a year.
GDPmp = NNPfc
GDPmp – Depreciation + NFIA –IT + Subsidy
NDP (Net Domestic Product)
NDP = NNP ( Net National Product)
NDP +NFIA = NNP
GDP-Depreciation = NDP
NNPfc + IT – Subsidy = NNPmp
National IncomeThere are three methods of measuring National Income.
Value Added Method (Product Method)
Income Method
Expenditure Method
Value Added Method: Value added method measures the contribution of each producing enterprise in the domestic territory of the country.
This method involves the following steps:
(a) Identifying the producing enterprise and classifying them into industrial sectors according to their activities.
(b) Estimating net value added by each producing enterprise as well as each industrial sector and adding up the net value added by all the sectors.
All the producing enterprises are broadly classified into three main sectors namely:
(1) Primary sector-Agriculture and Allied Activities
(2) Secondary sector- Manufacturing Units
(3) Tertiary sector -Services like banking, insurance, transport and communications, trade and professions.
Income Method: Different factors of production pool their services for carrying out production activities. These factors of production, in return, are paid for their services in the form of factor incomes.
Thus labour gets wages, land gets rent, capital gets interest and entrepreneur gets profits. In other words, whatever is produced by a producing unit is distributed among the factors of production for their services and aggregate of factor incomes of all the factors of production of all the producing units form the subject matter of calculation of national income by income method.
Expenditure Method:
The various sectors - household sector, business sector and government sector either spend their incomes on consumer goods and services or save a part of their incomes or we can say that they spend a part of their incomes on non-consumption goods (or capital goods). Total expenditure in an economy consists of expenditure on financial assets, on goods produced in preceding periods, on raw materials and intermediate goods and services and on final goods and services produced in the current period.
Gross national expenditure = Consumption expenditure + net domestic investment + net foreign investment + replacement expenditure (i.e., expenditure on replacement investment).
Net national expenditure = Consumption expenditure + net domestic investment + net foreign investment.
The income of a nation can be calculated by four different ways.
GDP – Gross Domestic Product
NDP – Net Domestic Product
GNP – Gross National Product
NNP – Net National Product
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. The concept of domestic territory has a special meaning in national income accounting. Domestic Territory is defined to include the following:
Territory lying within the political frontiers, including territorial waters of the country.
Ships and aircrafts operated by the residents of the country between two or more countries.
Embassies, consulates and military establishments of the country located abroad.
GDP at Factor Cost and GDP at Market Price:
The contribution of each producing unit to the current flow of goods and services is known as the net value added. GDP at factor cost is estimated as the sum of net value added by the different producing units and the consumption of fixed capital. Since the net value added gets distributed as income to the owners of factors of production, we can also estimate GDP as the sum of domestic factor incomes and consumption of fixed capital.
In brief GDPFC = GDPMP – IT + S
where IT = Indirect Taxes
S = Subsidies
Net Domestic Product:
While calculating GDP no provision is made for depreciation allowance (also called capital consumption allowance). In such a situation gross domestic product will not reveal the complete flow of goods and services through various sectors. It is a matter of common knowledge that capital goods like machines, equipment, tools, buildings, tractors etc., get depreciated during the process of production. After some time these capital goods need replacement.
NDP = GDP - depreciation
Gross National Product (GNP):It has already been seen that whatever is produced within the domestic territory of a country in a year is its gross domestic product. It, however, includes, the contribution made by non-resident producers by way of wages, rent, interest and profits. The non-residents work in the domestic territory of some other country and earn factor incomes. For example, Indian residents go abroad to work. Indian banks are functioning abroad. Indians own property in foreign countries.
GNP = GDP + NFIA (where NFIA is the net factor income from abroad)
NFIA (Net Factor Income from Abroad) = Income from Abroad – Income of Foreigners inside the country
Net National Product (NNP): It can be derived by subtracting depreciation allowance from GNP. It can also be found out by adding the net factor income from abroad to the net domestic product.
Symbolically, NNP = GNP –Depreciation
NNP = NDP + NFIA
NFIA (Net Factor Income from Abroad) = Income from Abroad – Income of Foreigners inside the country
If NFIA is positive i.e., the inflow of factor income from abroad is more than the outflow, NNP will be more than NDP
If NFIA is negative, NNP will be less than NDP and it would be equal to NDP in case the net factor income from abroad is zero.
Important Points:
1st National Income estimation in 1886 by Dadabhai Nauroji.
After independence for the period of 1948-51, National Income estimate was provided by National Income committee headed by P.C Mahalanobis.
Since 1951, N.I estimation is done by Central Statistical Organisation (CSO) Established in 1950.
CSO presents N.I estimation every year which is also known as National Accounts Statistics (NAS).
For this purpose, CSO divides the economy is several parts.
GDPFC = GDPMP – IT + S
NDP = GDP - depreciation
GNP = GDP + NFIA (where NFIA is the net factor income from abroad)
NFIA (Net Factor Income from Abroad) = Income from Abroad – Income of Foreigners inside the country
NNP = GNP –Depreciation
NNP = NDP + NFIA
