1. By: Vikram.G.B
Faculty, P.G Dept of Commerce
Vivekananda Degree College
Bangalore-55

2. Meaning & Definition:
 National income is the flow of goods and
services which becomes available to a nation
during a year.
 National income is the aggregate money value
of all goods and services produced in a country
during one year, account being taken of the
deductions made due to wear and tear, and
depreciation of plants and machinery used in
the production of goods and services.
 The money value of the goods and services produced in
a country during a year is called national income.A
country is high national income is said to be a
prosperous country.

3.  According to Alfred Marshall -:The labor and
capital a country acting upon natural resources
produce annually a certain net aggregate of
commodities, material and immaterial including
service of all kinds. This is the net annual
income or revenue of country or the national
dividend.
 In the word of A.C. Pigou -"The national
dividend is that part of the objective income of
the community including of course, income
dividend from aboard, which can be measured
in money.
 According to Irving fisher -"The true national
income is that part of annual net produce which
is directly consumed during that year".

4. Basic concepts in National
Income:-
 Gross Domestic Product (GDP).
 GDP at Constant Prices and Current Prices.
 GDP at Factor Cost and GDP at Market Price.
 Net Domestic Product (NDP).
 Gross National Product (GNP).
 Net National Product (NNP).
 NNP at Factor cost or National Income
 Personal Income (PI).

5. Gross Domestic Product (GDP):-
 Gross Domestic Product is the money value of all final
goods and services produced within the domestic
territory of a country during a year inclusive of
depreciation.
Domestic territory is defined to include:
(i) Territory lying within the political frontiers, incl.
territorial water of the country.
(ii) Ships and aircrafts operated by the residents of the
country between two or countries.
(iii) Fishing vessels, oil and natural gas rigs, and
floating platform operated by the residents of the
country in the international waters,
(iv) Embassies consulates and military establishments
of the country located abroad.

6. GDP at Constant Prices and
Current Prices
 If the domestic product is estimated on the
basis of the prevailing prices, it is called GDP
at current prices.
 If the GDP is measured on the basis of some
fixed prices, that is prices prevailing at a point
of time or in some base year, it is known as
GDP at constant or real gross domestic
product.

7. GDP at Factor Cost and GDP at
Market Price
 GDP at factor cost is estimated as the sum of net
value added by different producing units and the
consumption of fixed capital, we can also estimate
GDP as the sum of domestic factor incomes and
consumption of fixed capital.
 GDP at Market Price is estimated by deducting the
value of intermediate consumption from the value
of output produced by all the producers within the
domestic territory of a country. In other words, it is
estimated as the sum total of gross value added at
the market price.
 Thus, GDPFC = GDPMP – IT + S
Where IT = indirect taxes and S = subsidies.

8. Net Domestic Product at Market
Price
 Net Domestic Product at market price is
the market value of final goods and
services produced by all the producers
in the domestic territory of a country
during an accounting year exclusive of
consumption of fixed capital. It is equal
to the net value added at market price.

9. Net Domestic Product
 When depreciation allowance is
subtracted from GDP, we get net
domestic product.
Thus, NDP = GDP – depreciation.

10. Gross National Product
 GNP at market price is sum total of all
the goods and services produced in a
country during a year and net income
from abroad.
 GNP is the sum of Gross Domestic
Product at Market Price and Net Factor
Income from abroad.
Thus, GNP = GDP + NIFA

11. Net National Product
 In the process of production of goods
and services, there will be some
depreciation of fixed capital also called
as consumption of fixed capital, if the
value of depreciation is deducted from
the value of gross national product in a
year, we obtain the value of net national
product.
Thus, NNP = GNP - depreciation

12. Net National Product at Factor
Cost
 Net National Product at factor cost is also
called as national income.
 Net National Product at factor cost is equal
to sum total of value added at factor cost
or net domestic product at factor cost and
net factor income from abroad.
Thus, NI = NNP – Indirect Taxes + subsidies
- Profits accruing to the govt.

13. Personal Income
 Personal income is that income which is actually
received by the individuals or households in a
country during the year from all sources.
 In order to derive PI from NI, we have to deduct
from NI those amounts which are not available
for distribution among the factors of production.
Thus, PI = NI – corporate income taxes –
undistributed corporate profits – social
security contribution + transfer payments.

14. Disposable Personal
Income
 It is the that part of personal income left
behind payment of personal direct taxes.
 It is the disposable income which is
spent by the individual or the household
on consumption.
DPI = Personal Income- Personal Direct
taxes
DPI = Consumption + savings.

15. Items included in the National
Income:-
 Income of the individual which he has earned
as a result of economic activity on his part.
 Capital gains made by an individual have also
to be excluded from the national income of the
country.
 Income accruing to an individual from illegal
activities.

16. Methods to avoid Double
Counting:-
 Final product method:- adding up the value
of final products only. i.e., taking total value of
the final consumer goods produced in the
country during the year and adding total value
of durable producer goods. Again to this
collective and govt. services are also added
then we will arrive at total product of the
country.
 Value added method:- under this method we
do not take the value of the final goods and
services produced in the country. But, we go
on adding the values created at each stage in
the manufacture of a commodity.

17.  The difference between the value of output
and input at each stage of production is
called value added. By summing such
value added for all industries in the
economy, GNP can be found out.

18. Measurement of National Income
 Interpretations of the National Income:-
 It represents the monetary value of aggregate annual
production in the economy.
 It represents aggregate income of the country.
 It represents aggregate expenditure of the country.
 Methods of measuring National Income:-
 Census of Production Method.
 Census of Income Method.
 Census of Expenditure Method.

19. i. Census of Production Method:-
 It is also referred to as the Inventory Method.
 The aggregate production of the final goods and
services in an economy in any one year is
evaluated in terms of money.
 The entire output of final goods and services is
multiplied by their respective market prices to find
out gross national product or GNP may be arrived
at by adding up the values imparted to the
intermediate goods and services during the
different process of production.
 From the GNP estimated gross depreciation on
machinery involved in the process of production
should be deducted.

20.  Difficulties Production Method:-
 Large areas of production activities are excluded for
varying reasons.
 It is difficult to ascertain actual amount of
depreciation.
 Lack of adequate and reliable data is the major
problem particularly in under-developed countries.

21. ii. Census of Income Method:-
 Acc. to this method, the incomes accruing to all
the factors of production during the process of
production are aggregated together to arrive at
national income of the country.
 This is known as National Income at factor
cost.
 Thus, under this method national product is
obtained by adding up the factor-incomes
accruing to the concerned factors during the
process of production.

22. iii. Census of Expenditure Method:-
 Prof. samuelson calls this method as “flow of
product approach”.
 In India it is known as Outlay method.
 GNP is the sum of expenditure incurred on
goods and services during one year in a
country.
 Under this method we sum up the flow of
expenditure in an to arrive at national income
estimates.

23. Factors Determining National
Income:-
 Quantity and Quality of Factors of Production.
 The State of Technical Know-how.
 Political Stability.

24. Difficulties in the calculation of
National Income:-
1. Problem of Definition:-
One of the greatest difficulties while calculating
national income is that what should be included
and what excluded with respect to the goods and
services produced. As a general rule only those
goods and services which are bought and sold i.e.
enter into exchange must be only considered.
2. Calculation of Depreciation:-
Another problem is the calculation of depreciation.
The main reason behind it is that both the amount
and the composition of capital change from time to
time. There are no standard or concept rules of
depreciation that can be applied.

25. 3. Treatment of the Government:-
Government expenditures: Defiance and
administration expenditure, social welfare
expenditure, payment of interest on national
debts, miscellaneous development expenditure.
The real problem that is faced relates to which
of the above should be included in the national
income.
4. Income from Foreign Firms:-
One of the major problem relates to the fact
that weather the income arising from the
activities of the foreign firms operating in a
country should be included in the countries
national income or not .With the growing trend
of doing business globally has increased this
problem to a great extant.

26. 5. Danger of Double Counting:-
Proper care is required for calculating national
income so that double counting may not take
place. This problem usually arises in those
countries where proper documentation or
statistics are not available.
6. Value of Inventories
Since it is not easy to calculate the value of
raw materials, semi finished and finished
goods in the custody of producers there fore it
creates problems.

27. Problems in Developing and
Underdeveloped Countries:-
 Inadequate and unreliable statistics.
 Existence of non-monetized sector.
 Overwhelming majority of Illiterate and
ignorant small producers.
 Little occupational Specalisation.