Chapter II

National Income Analysis

Dr. GOPALAKRISHNA B.V.

Faculty in MBA,
SDM, Mangalore
 National Income Analysis……

• The national income statistics are one of the

important indicators of economic development and
trends in the economy.
• They give us information about the progress and
performance of the economy.
• The study of national income helps us to identifying
• Standard of living of the people.
• Income per head available.
• extent of economic growth and
• Vital importance to Planning Commission
 National Income Analysis……
The study of national income measures the aggregate
level of income and output of the economy.
It tells about relationship between total output and
total income of a country.
It tells about the level of economic development of a
country.
National income estimated only final goods and
services – excluded intermediate commodities.
The level of national income determines the level of
aggregate demand for goods and services.
 Definition of National Income
• Alfred Marshall – The labour and capital of the
country acting on its natural resources and produce
annually a certain net aggregate of commodities,
material and immaterial including services of all
kinds. This is the true net annual income.
• National Income Committee (1951) measures the
value of commodities and services turned out
during given period of time without duplication.
• Simon Kuznets – national income as “the net
output of commodities and services flowing during
the year from the countries productive system in
the hands of the ultimate consumers”
 Definition of National Income
• “National Income” – the aggregate economic
performance of the whole economy is measured by
the national income. Infact, national income data
provide a summary statement of a country’s
aggregate economic activity.
• In real terms, national income is the flow of goods and
service produced in an economy in a year or particular
period of time
• Modern economy is a money economy. Thus, national
income of the country is expressed in money term.
 Definition of National Income
• National Sample Survey (NSS) – national income as “Money
measures of the net aggregates of all commodities and
services accruing to the inhabitants of a community during a
specific period.
• In Short, national income is the value of goods and service
produced during a given period counted without duplication.
• National Income – money measure or value of net aggregate
of goods and services becoming available annually to the
nation as a result of the economic activities of the community
at large consisting of –
Households/individuals.
Business firms and
Social and Political Institutions
 Estimates of National Income

• In the pre-independence days, a number of

estimates were made about India’s national
income.
• Dadabhoy Naoroji, Findlay Shirras Wadia,
joshi, Shah & Khambatta, V.K.R.V . Roa, &
Natarajan etc.
• Some of the estimates of NI and per capita
income in the pre-independence period have
been given in the following table.
 National income and Per capita income estimates
– before independence
Estimated by Year of estimated National income Rs. Per capita income
In crores (Rs.)

Dadabhoy Naoroji 1868 370 20

Findley Shirras 1911 1942 80

Wadia & Joshi 1913-14 1067 44

Shah & Khambatt 1921-22 2364 74

VKRV Rao 1931-32 1689 62

B. Natarajan 1938-39 623.4 198

 Measuring National Income
• The national income of a country can be
computed by various methods – generally three
methods are used –
1. Product Method
2. Income Method
3. Expenditure Method
 1. Product Method
• The product method is also known as
Value Added Method/Simple Output Method.
• This method consists of finding out the Net value of all
commodities and service produced in various sectors
of the economy during a year.
• The economy of a country is divided into different
sectors such as – agriculture, manufacturing, trade,
transport, communication, mining, construction,
banking and insurance, electricity, gas and water
supply so on.
• In this method estimated only final goods and services
are included and intermediate goods are excluded to
avoid double counting
 2. Income Method
• This method is also called Factor Income Method.
Factor Share Method. Income Distributed Method or
National Income by Distributive Shares Method.
• This method, we calculate national income from
distribution side. In other words, this method
measures the national income after it has been
distributed and appears as income earned or received
by individuals of the country.
• Various factors of production received rewards in
terms of rent to land, wages and salaries of
employees, profit of entrepreneurs, interest on
capital.
 3. Expenditure Method
• National income under this method by adding up
all the expenditure made on the goods and
services during the specific period.
1. Personal Consumption Expenditure (C)
2. Domestic Private Investment (I) – plant and
machinery
3. Net Export of Goods and Service (X – M)
Foreign Investment
4. Government Expenditure (G) – Money spend by
govt on purchase of G/S.
GNP = C + I + (X – M) + G
 Component of National Income

1. Gross National Product (GNP)

2. Gross Domestic Product (GDP)
3. GDP at factor cost
4. Net National Product (NNP)
5. Personal Income (PI)
6. Private Income
7. Per capita Income
8. Disposable Personal Income
1. Gross National Product (GNP)
– GNP is defined as the money value at market prices of all
final goods and service produced by an economy during a
given year.
– This is the most comprehensive measure of national
income and the best known measure of business activity.
– Three point noted here –
1. Exclude Intermediate Product
2. Exclude non-market output (Housewives services)
3. Include imputed value of goods (former produce
goods and kept for self- consumption)
GNP = C + I + G + (X – M) + (R – P)
GNP = Gross National Product
C = Consumption Goods
I = Capital goods or Gross Investment
G = Government Services
X = Export M = Imports
R = Income receipts from abroad
P = Income paid abroad
 2. Gross Domestic Product (GDP)
 GDP is the total value of goods and services
produced within the country during a year.
 This is calculated at market prices goods and services
produced in the given period of time, therefore it is
known as GDP at market prices.
 It has been three different ways to measure GDP –
product method, income method and expenditure
method.
 GDP = National product = National income = National
expenditure
3. GDP at Factor cost (payments to factors)
 GDP at factor cost is the sum of net value
added by all producers within the country.
 Since the net value added gets distributed as
income to all owners of factors of production.
 Thus GDP at factor cost = Net value added +
Depreciation.
 GDP at factor cost includes – compensation of
employees (wages and salaries) –
entrepreneurs profits etc.
 4. Net National Product
 Net National Product refers to the net production of
goods and services in a country during the year.
 It is GNP minus value of capital consumed or
depreciation during the year.
NNP = GNP – Depreciation
 NNP is also called National Income at Market Prices.
 It tells about net increase in the total production of
the country.
 NNP is a better and a highly useful concept in the
study of growth of economies as it takes into
consideration of net increase in the total production
of the country.
 5. Private Income
 Private income is income of the private sector obtained from
various private sources - such as private sectors or private
firms from any source
 Private income generated from domestic product, transfer
payments such as (pensions, unemployment allowances,
sickness and other social security benefits, gifts and
remittances from aboard) undistributed profits & net factors
income from abroad.
 It includes both factors income as well as transfer payments.
 It can be arrived at from NNP at Factor Cost by making
certain additions and deductions.
 Private Income = NNP at factor cost + transfer payments from
the Govt + from abroad + interest on public debt.
 6. Personal Income
 PI is the total income received by the households of a country
from all possible sources before direct taxes.
 It is also called as spendable income at current prices before
personal taxes are deducted.
 Its differs from private income in that it excludes
undistributed profits of companies, cooperatives and similar
organisation.
 This is the actual income received by the individuals and
households in the country from all sources.
 It denotes aggregate money payments received by the people
by way of wages, interest, profit and rents.
 PI = NNP = Transfer Payments (R)
 PI = NI = R = U
 PI = Personal Income NNP = Net National Product
 R = Transfer Payments U = Undistributed Profit
 7. Disposable Personal Income
 Disposable Income means the actual income which
can be spent on consumption by individuals and
families.
 The whole of personal income can’t be spent on
consumption because it is the income that occurs
before direct taxes have actually been paid.
 Thus Disposable Personal Income = Personal
Income – direct taxes.
 The whole of disposable income is not spent on
consumption and a part of it is saved.
 DPI = NI – Business Savings - indirect taxes +
subsidies – direct taxes – direct taxes on business –
social security payments + transfer Payments + Net
Income from abroad.
 7. Per capita income
 The average income of the people of a country in a
particular year is called per capital income.
National Income
PCI ______________
Population
Real National Income 2009
PCI _______________________
Population in 2009
 The per capita income distributed unequal among
the people.
 A major portion of it goes to the richer sections of
the society and thus income received by the
common man is lower than PCI.
Difficulties in measurement of National Income
 There are a number of difficulties in the measurement of
national income.
 Broadly speaking, they are grouped into two ways –
conceptual/theoretical and practical difficulties.
A. Conceptual Problems – Symon Kuznut

1. Definition about National income

 NI of a country does not mean only the income generated
within the geographical area.
 It is also includes the income generated from aboard/other
countries.
2. Choice of method for measuring the NI
 A nation can adopt either any one method or a combination
of different methods to measure the national income.
3. The items to be included in the NI
 NI not only included material aspects like
commodities/goods but also included services
rendered by banking, insurance, financial companies
etc.
 Marxist approach – material output
 Capitalistic economies – both material output and
non material output should be included.
 Services rendered by Housewives – tailoring,
washing, cooking, cleaning house, teaching to their
children etc.
4. The stages of economic activities
 Production stage – distribution stage and
consumption stage
B. Practical problems
1. Non-availability of reliable data
 Inadequate, unreliable and incomplete statistical data one of
the major hindrance of estimation of national income.
 Most of agricultural and small enterprises sectors are in the
unorganized sectors and most of farmers, laborers & workers
are illiterate, ignorant not able to maintained data about their
economic activities.
2. Existence of Barter system
 A well developed marketing system in the economy would help
in the computation of national income.
 But in India, agricultural sector and industrial sector
particularly small/tiny/unit industry are in the unorganized
sector and most of the product do not reach the market for
sale – they are kept for self consumption only
3. Double counting
 Double counting is also a major problem in the calculation of
national income.
 It refers to a commodity being included in national income
estimate more than once (intermediate commodities).
 To solve this problem, only value of final goods and services
should be considered.
4. Regional disparities
 Unequal development of region one of the major hurdles to
measurement of national income.
 Some regions may have highly developed others are
backward in the country.
5. Absence of occupational specialization
 It makes calculation of national income difficult.
 Many people work as part-time workers and as such they do
not give complete information about all sources of their
income.
 National Income and Manager

• Business Managers want to get an overview of how

total economic activities is faring, they turn to gross
domestic product or GDP.
• The broadest measure of economic activity.
• GDP is one of the most often cited economic
indicators by business managers.
• It recognisition that GDP growth is a summary of
the economic condition of a nation.
• Basically, increasing real GDP suggests an
expanding economy while, declining real GDP
signifies recession
 National Income and Manager…….
• Business entrepreneurs also changes of his business
policies as a result of changes in the economy.
• Marketing Managers – personal income taxes and
consumer spending.
• Advertising Agency Managers – advertising gear their
business plans to the expected sales of their customers.
• Consumer Banking Managers – consumer banking manager
would be extremely interested in recent income and
expenditure trends (outdated banking with modern banking
business such as Credit Card, Debt Card, ATM etc) – this
leads to more demand for consumer goods.
 National Income and Manager…….
Financial Managers –
• A financial manager is sensitive to the
implications of the pace of economic activity
on inflation and interest rates.
• Changes in economic fluctuation results to
changing of Money Supply and interest rate
for example –
1. when Inflation increases – GDP increases – MS
increases – interest rate increases
2. Deflation/slowing growth – GDP falling – MS falls –
interest rate also falls.