Presented by- Shuvamay

Useful for UPSC/ State PSC / HS/ Graduate students only

 National Income
Definitions
• NI is the sum of all factor incomes earned by the
normal residents of a country in an accounting year

• NI is the value of all final goods and services produced

by the normal residents of a country in an accounting
year.

• NI is a flow concept. Stock is a variable which is

measured at a particular point of time and flow is
measured over a period of time.

• NI aggregates are either measured on factor costs or

on market price. Circular Flow of
Income
 History of National Income
• 1st attempt was made by Dadabhai Naoroji in 1868. Annual PCI (Per Capita Income) was Rs.20.

• 1st Scientific method was used by VKRV Rao in 1931-32. He divided the economy in 2 sectors- primary and
secondary. PCI was Rs. 62.

• 1st official attempt was made by National Income Committee (Chaired by PC Mahalanobis). NI of India for
1948-49 was Rs. 8710 Cr. and PCI was Rs. 225. During 1st Five year plan, NI was increased by 18%

• Later NI estimates were compiled by CSO based on the survey of NSSO since 1955

• In 2019 GOI merged CSO and NSSO and established NSO (National Statistical Office). NSO works under
MOSPI (Ministry of Statistics and Programme Implementation ).

• NSSO was formed was set up in 1950 and CSO was formed in 1951, 2nd May.
 Three Important Sectors
(As per Economic Survey Report)

• Primary Sector-
a) depends on nature
b) items are tangible
c) Main Stay/ backbone of Indian Economy
Example-Agriculture, Forestry, Fishing, Animal husbandry, Fuels, Metals, Minerals etc.
• Secondary Sector-
a)depends on primary sector
b)items are tangible
Example- Mining and quarrying, manufacturing, electricity, gas, water supply and other utility services,
construction.
• Tertiary Sector-
a) Items are intangible here
b) Highest amount of revenue comes from this sector (more than 50%)
Example- Trade, hotel, transport, storage, communication and services related to broadcasting, financial, real
estate and professional services, public administration, defence and other services.
 Current Data Related to Sectoral Growth
Rate
Figure I.10a: YoY growth of Real GVA components
Agriculture and allied Industry Services
activities
FY19 (3rd RE) 2.1 5.3 7.2
FY20 (2nd RE) 5.5 -1.4 6.3
FY21 (1st RE) 3.3 -3.3 -7.8

FY22 (PE) 3.0 10.3 8.4

FY23 (1st AE) 3.5 4.1 9.1
Source: NSO, MoSPI
 GDP and GNP
Gross Domestic Product (GDP) Gross National Product (GNP)

• Market value of all final goods and • Market value of all final goods and
services services
• Produced within the country • Produced by the normal residents of the
• In a particular time country
• Anybody can produce these items • In a particular time
• Production may happen anywhere

GDP where
GNP where
only
normal Indian
foreigners
residents have
have come to
GDP and GNP both. Here gone to abroad
India
Indians producing within
India
 Formulas
1. GNP= GDP + NFIA
• NFIA means Net Factor Income From Abroad
• NFIA = Factor income from rest of the world (inflow)- factor income to rest of the world (outflow)
• In case of India, inflow is less than outflow, so NFIA is negative and that’s why GDP is greater than
GNP for India.

2. GDP- Depreciation/CCA= NDP (Net Domestic Product)

3. GNP- Depreciation/CCA= NNP (Net National Product)
• Depreciation or CCA (Capital Consumption Allowance) means loss in the value of fixed assets, wear
and tear, accidental damages and obsolescence.

• FC or Factor cost means cost of factors incurred by a producer or a firm (producer’s side)
• MP or Market price means consumer pays for a good while purchasing from seller (Buyer’s side)
4. MP= FC + Indirect Tax – Subsidy
• MP= FC+ Net Indirect Tax (NIT)
• Net Indirect tax= Indirect tax - subsidy
 Three Methos of National Income
-Introduced by Simon Kuznets
1. Product Method/ Output Method/ Value-added Method-
• Here GVA or GDP at MP is computed.
• GVA = value of output - intermediate consumption of all three sectors
• In 2015, it was decided by CSO (now NSO) that sector wise estimates of GVA or GDP will now be given at basic
prices instead of factor cost.

2. Income Method/ Distribution Method-

a) = Rent+ Wage+ Interest+ Profit
b) = Compensation to Employees (wages, salaries, employer's contribution to social security schemes, dearness
allowances etc)+ Operating surplus ( Rent, royalty, profit- corporate tax, dividend and undistributed profit,
interest) + Mixed Income

3. Expenditure Method/ outlay Method-

= C+I+G+NX (C-Personal consumption expenditure, I- Investment expenditure, G-Government Expenditure and NX
means Net Export= Export- Import). For closed economy formula is only C+I+G.

• In India Income method and product method are used.

 Nominal/Real GDP and Deflator

• Nominal GDP is GDP at current prices(=

current MP*quantity produced) and Real
GDP means GDP at constant prices.
• Real GDP is an inflation adjusted measure
expressed in constant or base year prices. It
is computed using expenditure method of
NI.

• Implicit GDP Deflator= (Nominal GDP/Real

GDP)*100
• It is widest and best indicator of measuring
inflation in an economy
• The base year used at present is 2011-12
Items not included in national income accounting
• Transfer payments like- Gifts, donations, old age or disability pensions, scholarships, unemployment
compensation etc. These are included in personal income and taxable
• Illegal activities like smuggling gambling
• Non economic goods
• Second hand sale or purchase of goods, Sale of collector’s item
• Intermediate goods.
• Capital Gains

Items included in national income accounting

• Retirement pension
• Goods and services sold in market to earn profit
• Goods and services not sold but supplied free of cost like cost of government services
like free lunch to school children
• Own account production of fixed capital
• Market rent of self owned house or Imputed rent and imputed interest
• Addition to inventory, but not sale of the company’s products
 Some Important Concepts
• Personal Income:- (PI)
a)=Factor income+ transfer income
b)=NI-Undistributed corporate profits- Corporate tax- social security contributions-wage accruals less
disbursements+ transfer payments+ personal interest and dividend income

• Personal Disposable Income- (PDI)

= Personal Income- direct taxes- miscellaneous fees and fines paid by the households

• National Disposable Income- (NDI)

NDI= NI+ Net indirect taxes +Net current transfers
GDP Gap=Potential GDP- Real GDP
Potential GDP measures the highest level of GDP over a period of time at a constant inflation rate

• Per Capita Income = National Income/Total Population. As per Union Budget 2023, India has made significant
progress in many Sustainable Development Goals (SDGs) and the per capita income has increased to Rs 1.97
lakh, Finance Minister Nirmala Sitharaman said

• Green GDP or Green GNP= GDP after deducting net natural consumption (resource depletion, environmental
degradation, protective and restorative environmental activities)
 Role/ Merits of NI
• Formulation of NI quantifies the economic growth
• It gives idea about the potential of an economy and helps to set objectives
• It helps to reduce poverty, unemployment and inequality
• It gives idea about inflationary gap, deflationary gap, corporate investments,
it also helps to compare the standard of living of people in different countries

Limitations of NI
• NI measures domestic economic performance, not social welfare , but there should be a
strong positive correlation.
• Non market transactions are excluded from NI.
• NI does not consider qualitative aspects of life standards like leisure, satisfaction or
happiness etc.
• Negative externalities of growth like environmental degradation, pollution etc. are not
included on NI accounting
• There are problems of depreciation estimation, difficulties of getting information
especially related to underground economy.
 Some Important One Liners

• Gross Fixed Capital Formation (GFCF)- It refers to net additions of only fixed capital stock such as equipment,
building and other intermediate goods. Financial assets, stocks of inventories, land sales and purchases are
excluded from GFCF.

• Incremental Capital Output Ratio (ICOR)- It is used to assess a country’s level of production efficiency. Higher levels
of ICOR means that capital is not being used efficiently to increase production. Generally for most countries ICOR
is at around 3.

• Purchasing Power Parity (PPP) means- It compares the economic productivity and standards of living between
countries- compares different countries’ currencies through ‘basket of goods’ approach.

• According to GDP at PPP, India is 3rd largest economy in the world (after China and USA respectively)

• According to Nominal GDP rank, India is now 5th largest economy in the world after USA, China, Japan, Germany
respectively.

• According to GDP (Nominal) Per Capita, rank of India is 139th. Luxembourg, Ireland, Bermuda are top 3 countries.

• Bhutan has included Happiness in their GDP/NI calculation

• Real GDP or GDP at Constant (2011-12) Prices in the year 2022-23 is estimated at ₹159.71 lakh crore, as
against the First Revised Estimates of GDP for the year 2021-22 of ₹149.26 lakh crore. The growth in real
GDP during 2022-23 is estimated at 7.0 per cent as compared to 9.1 per cent in 2021-22.

• Nominal GDP or GDP at Current Prices in the year 2022-23 is estimated at ₹272.04 lakh crore, as against
the First Revised Estimates of GDP for the year 2021-22 of ₹234.71 lakh crore. The growth in nominal
GDP during 2022-23 is estimated at 15.9 per cent as compared to 18.4 per cent in 2021-22.

• Household sector has major contribution towards the Gross Domestic Saving in India recent times.