2. NATIONAL INCOME
National income is defined as the value of
all final goods and services produced by
the normal residents of a
country, whether operating within the
domestic territory of the country or
outside, in a year.
3. Needs for the study of National Income :
1. To measure the size of the economy and level of
country’s economic performance
2. To trace the trend or speed of the economic
growth in relation to previous year(s) as well as
to other countries
3. To know the structure and composition of the
national income in terms of various sectors and
the periodical variations in them
4. To make projection about the future development
trend of the economy
4. Needs…
5. To help Govt. to formulate suitable development plans
and policies to increase growth rates.
6. To fix various development targets for different sectors
of economy on the basis of there performance.
7. To help business firms in forecasting future demand for
there products
8. To make international comparison of people’s living
standards.
5. NATIONAL INCOME
AGGREGATES
• National Income at Current Price
Current Prices refer to the prices
prevailing in the market during the year
for which estimates are made.
• National Income at Constant Price
Constant Prices refer to the prices
prevailing in the market in the base year.
National income is measured at both the
levels in order to enable a comparison
6. PER CAPITA INCOME
This refers to an individual's share of the national income.
It is calculated to understand the economic growth and
development of a country.
• India has one of the largest economies in the world in
terms of its gross domestic product (GDP).
• However, India has such a large population that we have
has an extremely low per capita GDP.
• This figure is determined by dividing a nation's GDP by its
population.
• As a result of its low per capita GDP, India is considered a
developing country
7. MARKET PRICE V/S FACTOR
COST
A commodity when goes to the
market, indirect taxes are
imposed on it. This is the
market price. When we deduct
the net indirect taxes we get
factor cost.
8. DOMESTIC V/S NATIONAL
• A concept which includes the
contribution of the domestic sector
alone and not of the foreign sector
is the domestic concept
• When we add the contribution of
the foreign sector we get national
concept.
9. CIRCULAR FLOW OF INCOME
Supply of Factors of Production
(Land, Labour, Capital & Organization)
Payment for Commodities
Supply of Commodities
Payment for Factor Services
(Rent, Wages, Interest and Profit)
(Goods & Services)
(Commodity Price)
Firms / Producers
Households /
Consumers
Public Business
moneyflow
realflow
Circular Flow
of Income
12. Production method
In this method
• The total products produced in the economy are
calculated for the year and the value is added
without double counting
• The economy is classified into sectors like
Agricultural, industrial, fisheries, forest, direct
services and foreign transactions etc
• In each sector, we can find the value of final
goods and services 12
13. Production Method
• In the international transactions, net
foreign income is calculated by
subtracting the total imports from the total
exports and added to the national income
• The results of these sectors, when
combined, gives the national income or
national product
• The census or product method can be
expressed through the formula
13
14. Production Method
• O = C + I
• Where O stands for output,
• C stands for consumption of goods
• I stands for investment goods
14
15. Income Method
• According to this method
Net incomes of individuals and business houses during
a year are added to know the national income
• Only those incomes earned and received for producing
goods and for rendering services are to be counted
• Transfer payments such as old age pensions , widow
pensions and unemployment benefits etc should not
be counted as these are the incomes received without
contributing to the production 15
16. Income Method
• People get incomes in the form of
• Rents, wages or salaries, interest and profit
• The formula is
• Y = C + S
• Here Y stands for Total Income
• C stands for consumption and S stands for Savings
16
17. Expenditure Method
• One man’s income is another man’s expenditure
• Therefore national income can be arrived at by
adding the total expenditure of individual and
business firms during a year
• Expenditure or outlay on final products takes
place in three ways
17
18. Expenditure Method
• Expenditure or outlay on final products takes
place in three ways
• Expenditure by consumers on goods and
services
• Expenditure by entrepreneurs on capital or
investment goods
• Expenditure by government on consumption
and capital goods
18
19. Expenditure Method
• The formula for this method is
• Y = C + I
• Here Y stands for total expenditure
• C stands for consumption expenditure
• I stands for investment expenditure
19
20. COMPARISON OF THE THREE
METHODS
The Product method is very suitable for
primary sector such as agriculture industries
etc.
The income method is suitable for service
sectors.
The Expenditure method is only for the
calculation of identical relationship between
three methods. It is because we may not get
the details of all the expenditure correctly.
21. Black Money : It has created a parallel
economy - unreported economy which is
equivalent to the size of officially estimated
size of the economy
Non-Monetization : In most of the rural
economy, considerable portion of transactions
occurs informally
Growing Service Sector : growing faster than
Agricultural and Industrial sectors… value
addition in legal consultancy, health service
,financial and business services is not based on
accurate reporting.
Problems In Calculating National
Income
22. Problems…
House Hold Services : It ignores domestic work
and house keeping services
Social Services : It ignores volunteer and
unpaid social services. (Mother Teresa’s social
service)
Environment Cost : It does not distinguish
between environmental-friendly and
environmental-hazardous industries … cost of
polluting industries is not included in the
estimate.
24. DIFFICULTIES IN MEASUREMENT OF
NATIONAL INCOME
Practical
• Lack of occupational
specialization
• Non-monetized sector
• Unreported illegal income
• Non-availability of reliable
statistical data
Conceptual
• Inclusion of Services
• Indentifying intermediate goods
• Identifying factor incomes
• Valuation of inventory changes
• Income of foreign companies
25. Trends In National Income
Growth of National Income in India
(in percentage)
7.4%
9%9.2%
8.4%
6.2%
8.3%
4.3%
26. Trends Of National Income Of
India
• During the plan periods, national income and per capita
income are increasing steadily
• But the rise in the per capita income is rather slow due
to population growth
• Agricultural sector is the most important sector as it is
the single largest contributor to the national income
• In the recent years, the share of the government sector
in national income is steadily increasing indicating the
increased efficiency of the public sector
26
28. IS NATIONAL INCOME THE REFLECTION
OF HUMAN DEVELOPMENT?
1.) Doesn't measure per capita to determine the most accurate
standard of living
2.) Doesn't measure how the goods are distributed to the
population
3.) Doesn't include unpaid household work
4.) Doesn't include the barter system, which is still used by
many undeveloped countries
5.) Doesn't measure the quality of items produced
6.) GDP counts remedial and defensive expenditures (such as
the costs of security, police, pollution clean up, etc.) as
positive contributions to commerce.
29. IMPORTANCE OF NATIONAL
INCOME
Measures inflationary or deflationary pressure
Contribution of various sectors
Distribution of national income in an economy
Shapes the Budgetary policy of the Government
Planning of an Economy
