Estimation of National Income and its related Aggregates

Basic Concepts.
(A) Domestic Income: Money value of all the final goods and services which are produced by all
the producing units in domestic territory of a country in one year
(B) Net Foreign Income: Income earned by resident factors from abroad less income earned by
foreign factors from resident country in one year, is known as Net Foreign Income
(C) National Income: Money value of all the final goods and services which are produced by all
the producing units in domestic territory of a country + Net Foreign Income earned in one
year Or Income earned by all the normal residents of a country in one year is national
Income.
(D) Domestic Territory/Economic Territory of India: It means and include: -
• The political boundaries of a country with territorial waters up to 12 nautical miles
from the base coastline excluding foreign embassies, consulates, and military
establishments in Indian territories.
• Fishing vessels, Oil and Natural gas rigs operating in international waters with a
special right
• Military establishments located in rest of the world.
• Indian embassies and consulates located abroad.
• Airlines operated by Indian resident companies anywhere in the world
(E) Investment: Additions made in capital assets in one year is known as investment.
Gross Investment: The total addition of the capital goods to the existing stock of capital is
known as Gross Investment. It includes both addition to fixed assets and addition to
inventories.
Addition to fixed assets means addition of new machines and equipment and construction of
new buildings and business premises. It is also known Fixed Capital Formation.
Addition to inventories means increase in the stock of raw materials, semi-finished goods,
and finished goods in one year.
Thus, Inventory Investment = Closing Inventory - Opening Inventory.
Net-Investment: Net addition of the capital goods to the existing stock of capital is known as
Net Investment. It includes both net addition to fixed assets and net addition to inventories.
Depreciation/Capital Consumption Allowance/Consumption of Fixed Capital: It refers to
the gradual reduction in the value of fixed assets during a year. It includes: -
(a) Depreciation of Fixed Assets
(b) Expected Obsolescence of Technology
Reasons for depreciation: -
• Regular use of asset
• General wear and tear
• Passage of time
• Outdated technology
Conversion of Gross Investment into Net Investment: -
To obtain net investment out of the gross investment, value of depreciation is to be subtracted
from gross investment. Thus, symbolically
• Net Investment =Gross Investment – Depreciation or
• Gross Investment = Net Investment + Depreciation or
• Gross – Net = Depreciation
Same procedure shall be applied to find any of gross variable from net variable and vice versa.
For example, find out value of Net Domestic Product (NDP) if value of Gross Domestic Product (GDP)
is Rs.1050 crores and value of Consumption of Fixed Capital (Depreciation) is Rs.350 crores.
Answer: - NDP = GDP – Depreciation
Page 1 of 3
 NDP = 1050 – 350 = 700 crores
Similarly, If Net Investment is 9,000 crores and Depreciation is 1,000 crores,
Gross Investment=?
Answer: - Gross Investment = Net Investment + Depreciation
Gross Investment = 9,000 + 1,000 = 10,000 crores
Net Indirect Taxes: - It is net value of indirect taxes over and above the value of subsidies
Thus Symbolically, Net Indirect Taxes (NIT) = Indirect Taxes (IT) – Subsidies.
NIT = IT - Subsidies

Components of NIT: -
Indirect Taxes- Taxes which are levied on goods and services like G.S.T, Sales Tax. V.A.T. etc.
Such taxes are borne by the consumers but are collected and paid by the
sellers of the goods or service providers to the tax authorities.
Subsidies- These are economic grants given to consumers or producers for various purposes
(a) Subsidy on L.P.G. given to consumers to make it affordable for needy people
(b) Given to manufactures to operate in rural areas for its development.
(c) Given to producers to sale their product at a price fixed by government.
(d) To the exporters for export promotion to increase inflow of foreign currency.
National or domestic income may be estimated in 2 different values.
(A) Gross domestic income (product) at factor cost: - It refers to the money value of all the final
goods and services which have been produced in the domestic territory of the country in
one year
(B) Gross domestic income (product) at market price: -
National income or domestic income at factor cost: -It refers to market price of all the final
goods and services produced in domestic territory of a country in one year. Since goods
which have been produced in the factory, when brought into the market the indirect taxes
added to it and value of subsidies given is reduced. Therefore, market price of the product
would be different than that of the factor cost. As we know indirect taxes are added and
subsidies are reduced to find out market price out of the factor cost, we add indirect taxes in
the factor cost value, and subtract the subsidies from this value.
Thus, GDP at market price (m p) = GDP at factor cost (fc) + Indirect taxes – Subsidies
Or GDP m p = GDP fc + I.T. - Subsidies
As we know the value of IT- Subsidies = NIT
Thus,
• GDP fc + NIT = GDP m p
• GDP m p – NIT = GDP fc
• GDP m p – GDP fc + NIT
(C) Net Factor Income Earned from Abroad: - It refers to factor income earned from abroad by
the domestic factors reduced by the similar income earned by the foreign factors from
resident country therefore NFIA is the difference between factor income from abroad (FIFA)
and factor income to abroad (FITA) to the foreign factors
Thus, NFIA = FIFA – FITA
Components of NFIA: -
• Net Operating Surplus (Net OS): - It refers to the difference between income like rent
interest and dividend etc. earned by the domestic factors from abroad and similar income
paid to foreign factors from resident country
• Net Compensation of Employees (Net COE): - It is the difference between salaries and
wages earned by the domestic factors from foreign countries and the similar income paid to
foreign factors from resident country.

Page 2 of 3
 • Net Retained Earnings (Net RE): -It refers to the difference between the retained earnings of
the domestic companies abroad and the similar retained earnings of the foreign companies
in resident country. Thus,
NFIA = Net OS + Net COE + Net RE
Since we know that if NFIA is added to Domestic Income (Product) we get National Income
(Product) Thus,
• GDP + NFIA = GNP
• GNP – NFIA = GDP and
• GNP – GDP = NFIA
Value Output and Value Added
(A) Value Output: - It refers to the value of all the goods and services which are produced within
the domestic territory of a country, by all the producing units in one year. It includes both of
goods & services, which are either sold or added to closing stock. Therefore, Value output =
Sales + Increase in stock. Where,
Sales = Number of units sold x Price per unit
Increase in stock = Closing stock – Opening Stock
REMEMBER- Value output, calculated with above formula is always Gross and at Market
price. It is so, because we consider market price of every unit for calculation of sales and we
do not subtract the depreciation from it therefore, Value output is always Gross Value
Output at Market price (GVO m p)
(B) Value Added: - It refers to the value addition made to anything by adding any utility or
usefulness to it.
Value of Intermediate Consumption: - It refers to value of intermediate goods, consumables used,
electricity, power etc. which is used up in production process. It includes the cost of major raw
material and cost of consumables, hiring charges of professionals for smooth operation of
production activity. Such value of intermediate consumption (IC) is subtracted from Value Output
(VO) to estimate the Value Added (VA). Thus,
• GVO m p – IC = GVA m p
• GVA m p + IC = GVO m p and
• GVO m p – GVA = IC
All Conversions briefly
(A) Conversion of Value Output and Value Added
• GVO m p – IC = GVA m p
• GVA m p + IC = GVO m p and
• GVO m p – GVA = IC
(B) Conversion of Gross Value and Net Value
• Net Investment =Gross Investment – Depreciation or
• Gross Investment = Net Investment + Depreciation or
• Gross – Net = Depreciation
(C) Conversion of Market Price and Factor Cost
• GDP fc + NIT = GDP m p
• GDP m p – NIT = GDP fc
• GDP m p – GDP fc + NIT
(D) Conversion of Domestic Product and National Product
• GDP + NFIA = NDP
• NDP – NFIA = GDP and
• NDP – GDP = NFIA

Page 3 of 3